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There’s an Insatiable Urge to Burn Crypto — A Look at Why Projects Burn Tokens and the Benefits

There’s an Insatiable Urge to Burn Crypto — A Look at Why Projects Burn Tokens and the Benefits

In recent times, cryptocurrencies that burn tokens have been very popular and a number of well known blockchain projects have destroyed large sums of digital assets. While a number of crypto projects have different burn schemes, the overall effect is usually the same, as destroying tokens reduces the circulating supply.

Blockchain Projects Burn Tokens for Specific Benefits and Objectives

Burning tokens has been a popular trend and articles often highlight specific projects like Ethereum, Terra, Shiba Inu, and many more that have destroyed large sums of native tokens.

Six days ago, Bitcoin.com News reported on the Shiba Inu (SHIB) developers launching a burn portal, which allows shiba inu holders to burn their stash of SHIB. In that particular case, SHIB burners are rewarded for destroying their tokens. SHIB currently has a burn rate of around 180.18% during the past 24 hours.

During the first week of November 2021, the Terra (LUNA) team of developers burned 88.7 million LUNA and projects like Ethereum (ETH) burn native tokens every minute of the day. For instance, after the implementation of the Ethereum Improvement Proposal (EIP) 1559, more than 2.17 million ether has been destroyed forever.

Just like SHIB, Ethereum has a burn rate as well, as metrics show over the last 60 minutes, 135 ether was burned, and during the last 24 hours, 4,477 ETH has been destroyed. The Binance digital asset BNB has a scheduled burn process and the project has destroyed coins to reduce the overall supply.

Burning Crypto Simply Means Sending Tokens to a Null Address

The process has been leveraged by a number of cryptocurrency network developers and the community has grown fond of the process. Burning tokens, however, does not mean the tokens get engulfed in flames in the literal sense.

Most projects burn tokens by simply sending the digital currencies to a dead address. The address is simply a black hole of funds as no one has the private keys to the addresses used in the destruction process, which is simply sending coins to the null address.

Once the tokens are sent to the null address, the coins are unretrievable and will never be used again. Digital currency burn schemes have been around for years and the project Counterparty is one of the oldest to deploy the burn mechanism idea.

Counterparty’s Proof-of-Burn

In fact, Counterparty burned bitcoin (BTC) to bootstrap the project. “All XCP that will ever exist were given out proportionally to those who recognized Counterparty’s value and were ready to “burn” their bitcoins to participate in Counterparty,” the project explains in a blog post about the proof-of-burn process.

Burning tokens includes a number of benefits, and some algorithmic stablecoin protocols leverage the burn process to distribute stablecoin assets in an autonomous fashion. While Counterparty used a proof-of-burn to bootstrap XCP, most blockchain projects burn coins to reduce the token’s overall supply.

In a way, burning tokens is similar to a share buyback in traditional equity markets. Removing coins from the circulating supply makes the crypto asset scarce and the scarcity aims to make the rest of the coins in circulation more valuable.

What do you think about crypto asset projects that employ the proof-of-burn process or burn tokens to reduce the coin’s overall circulating supply? Let us know what you think about this subject in the comments section below.

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