Burning cryptocurrency can be a quick way to get rich for its founders. Sending cryptocurrency to an account that can only handle them is referred to as “burning” it. Burner or eater addresses are used for burning cryptocurrencies. The act of burning destroys tokens from the overall supply, lowering the amount in circulation.
What are the reasons for burning cryptocurrency?
- To create value for the token holders by reducing supply. If you have a fixed amount of something and reduce the available quantities, then its value will increase. This is known as the “value law”, more commonly known in economics as an inflation-driven decrease in purchasing power.
- To raise awareness of your cryptocurrency to achieve larger goals beyond just trading it on an exchange. Attracting attention to an altcoin project which does not trade regularly can be challenging unless that coin has some sort of novel new feature or use case that sets it apart from other coins like bitcoin and Ethereum. To convince users to hold tokens by putting a portion of supply into their hands. If they are holding something, then they are much less likely to sell it for next to nothing since there is no market available.
- The ultimate goal is to make your token gain value over time as the total number of tokens goes down.
This Twitter thread explains the concept of burning cryptocurrency in detail:
Ever wondered how #burn rate affects a #cryptocurrency ?
*Read to the end*
"Burning" #Crypto means permanently removing a number of tokens from circulation. This is done by transferring the toke in question to a burn address i.e a wallet at which they can't ever be retrieved.
— man_of_steel🔱 (@Engr_Steel) February 3, 2022
How does burning cryptocurrency work?
When implementing the burning process, the first thing you must do is set up a way to deal with tokens. In terms of blockchain development and tokenization, this step can be as simple as creating a contract that does not allow for transfers by any account other than the owner’s address. This prevents users from calling transfer on your token and increasing its total number available in circulation.
After that, the easiest way to implement burning is just sending all of it to an unspendable address. This only costs the transaction fee associated with sending ether to another user or contract without moving any funds around. By setting up your wallet software properly, those fees will go straight into your own pocket since they are paid in your own token.
Burning is a simple way to reduce total available tokens and increase the price without requiring massive changes within your codebase or forking off from another blockchain entirely. Most cryptocurrencies can be burned with ease, so these processes are usually trivial compared to other options such as atomic swaps.
Are there any downsides to burning cryptocurrency?
There’s only one thing you need to worry about: even if users lose access to their tokens, others will still hold them and use them as normal until they’re gone forever. There could be some wallet software out there that already does this with certain coins just by falling back on regular transfer transactions when the user lacks permission to directly burn tokens sent to their addresses.
It is impossible to burn cryptocurrencies that have inflationary issuance models, which are basically all coins except for a few scarce ones.
If you’re interested in burning your crypto tokens then the best idea would be to contact an expert blockchain developer. Getting advice from other cryptocurrency developers can also help put together a sound token economy model before developing the foundation of your entire project around it.
A Share Market parallel for cryptocurrency
What if a share market company burned 50% of its supply to increase the price?
Let’s take this example from the share market: Apple is worth around $200bn and has 4.2 billion shares in circulation. If they were to burn (also called as buy-back of share) around 50% of their shares, then each one would be worth double what it was before. Apple will become much more valuable after such a move. The PE reduces and EPS increases.
Ethereum Founder Vitalik Buterin burned 90% of his holdings of Shiba Inu worth $6.7 billion. Developers like Binance also undertake burning as a way to keep the value and price of their tokens up.