Boardroom breaks down the act of burning crypto assets and why the process is necessary for sustaining a token’s value on the blockchain.
In the cryptocurrency industry, investors often use the term “burn” to describe a token that has been taken out of circulation on the blockchain, but burning crypto tokens is a much more tedious process to understand.
When a token is burned, it’s sent to a crypto wallet that was created only to retrieve cryptocurrencies. These wallets are linked to burner addresses that don’t have private keys — also known as the “seed phrase” you need to access a wallet — and can never send cryptocurrencies sent to them. Tokens sent to these wallets take cryptocurrencies out of circulation forever.
Burning crypto is necessary for various reasons, but it’s most beneficial in maintaining a token’s value. Let’s explore some more benefits below.
Benefits of burning crypto
The value of tokens could go up when some are removed from circulation because there is less supply. Not all cryptocurrencies have a maximum amount, so crypto burning may affect values differently. For coins like Bitcoin, there can only be 21 million ever created. For this reason, burning crypto could help boost a coin’s price when some are sent to the graveyard. The Ethereum blockchain uses the burn mechanism to merge miners to its new proof-of-stake network.
Check out Boardroom’s explainer on Bitcoin halving to explain what happens as the coin reaches its max supply.
Additionally, removing tokens from circulation adjusts availability naturally. Some blockchains use crypto burning as a consensus mechanism, which requires crypto miners to burn coins to mine new blocks on a blockchain. Another way to put it is miners have to spend a little money to make more money. Some blockchains leverage crypto burning to take other tokens out of circulation. For example, mining a new specific coin may require a miner to burn Bitcoin.
One of the most significant use cases for crypto burning is to keep algorithmic stablecoins actually stable. Stablecoins often burn tokens to maintain their dollar-pegged value. When a stablecoin’s demand rises and the price begins to fall below the dollar amount, the protocol’s smart contract automatically will either burn coins to drive the price up or release new tokens to attempt to balance out the price.
Sometimes burning crypto has little or no impact on a token’s value, and scammers have often used masked burning events to attempt to steal crypto from investors.
Burning crypto x NFTs
Burning tokens can happen for various reasons, and the NFT market has leveraged the process to create rewards for holders. For instance, when Yuga Labs first launched the Mutant Ape Yacht Club collection, the Web3 brand airdropped Mutant Serums to every Bored Ape holder to transform their apes into Mutant Apes. Mutant Serums came in the form of NFTs, which are still crypto tokens, that remained in circulation until holders burned them to create Mutant Apes. In order to use the serum to create Mutant Apes separate from the original Bored Apes, Mutant Serums had to be sent to the abyss and taken out of circulation forever.
NFT projects have often used the process of burning crypto when doing revel drops, which requires holders to purchase assets before learning what they look like and burning the token they purchased to find out.
All told, the process of burning crypto can be a bit confusing on its face. If you’re interested in getting into the game, however, it’s a necessary one to understand when investing in certain assets.
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