Why burning tokens and does that make sense for crypto projects?

Coin burning is when a certain number of coins is removed from circulation by the owner's decision or according to a specific algorithm. Particular addresses and smart contracts are used to burn coins, or in some cases, it is done automatically during transactions.

During the burning process, coins can be removed from different sources. For example, they can be part of the profits of a custodian or decentralized exchange, or they may be taken from commissions for transactions - such a burning mechanism is implemented in some cryptocurrencies. There is also a Proof-of-Burn (PoB) consensus mechanism, implying removing part of the validators' assets from circulation.

The procedure of burning is aimed at creating deflationary currencies. Burning can be used to distribute profits among the owners of an asset. Besides, the burning assets method helps reduce the network load, protect against spam, and implement a special consensus mechanism.

Coin burning – Technically speaking

When transferring coins to an address with no private key, they are burned. In addition, coins can be sent to an erroneous or intentionally generated address, which is easy to do.

So far, no technology allows picking up a private key from a known recipient's address. This ensures that the coins sent to such accounts will be irretrievably lost. Many use this method to destroy digital assets. Such addresses and burning transactions can be found when analyzing various blockchains.

Ethereum has a burn function that allows withdrawal of ETH from circulation and tokens of various standards. When burning, it is necessary to indicate the number of coins to be taken out of circulation. Then, if the user's balance has enough funds, the smart contract will block the specified number of tokens, removing them forever.

Check out such an operation on Etherscan. The transaction data contains information about the coins removed from circulation.

Projects that burn coins regularly

The Binance platform burns coins quarterly. As mentioned in the Binance whitepaper, every quarter, Binance uses its profits to buy back and burn Binance Coins, destroying them completely. Burning will continue until the total supply decreases to 100 million coins.

Bitfinex, owned by iFinex, also burns coins. In 2019, the management company issued the UNUS SED LEO (LEO) token, emission - 1 billion coins. According to the whitepaper, iFinex pledges to buy back and burn LEO tokens every month using over 27% of profit.

The non-custodial platform PancakeSwap also burns coins periodically. They destroy CAKE tokens from different sources.

Various projects burn coins regularly, providing detailed information. To keep abreast of the planned coins burning, you can follow one of the crypto calendars and search for the asset of your interest. For example, you may find up-to-date information on Coindar (choosing the tag burning).

How asset burning affects the price?

Depending on the goals and the algorithm underlying the coins burning, the process can affect the asset's price in the short and long term differently.

Exchanges and other projects that use part of their income to buy an asset on the market and then destroy it cause the most significant impact on its price. Price is susceptible to fluctuations between supply and demand. Thus, the regular large purchases of coins stimulate price growth.

When a significant amount of funds is bought or burned, the asset's rate may sharply increase. In the long term, such actions form an additional increase in price. Such events affect the market like foreign exchange intervention.

The functioning of PoW cryptocurrencies is connected with the reward for miners, taken from block rewards and transaction fees. The process of removing commissions or validator funds from circulation cannot be separated. Under these conditions, burning occurs simultaneously with emission. As a result, the number of coins may rise or drop. It is also possible that the burned tokens are returned to circulation after a while.

The impact of such actions on price is indirect. As a rule, destroying the number of coins and taking them off the circulation is good news, causing the asset’s popularity and price growth. For a better understanding, it is better to analyze the dynamics of supply changes and the number of deflationary blocks. This information can be found on specialized analytical resources.

The GMT Token project that uses renewable energy for data centers operation has a unique token burning mechanism. Its native token GMT is backed by computing power, enabling its holders to mine Bitcoin daily. It is rumored that in 2022 the company will attract miners to place their equipment in GMT data centers. In return, miners will receive GMT tokens in an amount proportional to the power security. The GMT team regularly burns tokens and the burn strategy will continue in the future. Here is how GMT does it. Part of the new tokens will be burned, and the released power will be distributed among all tokens in circulation. In such a way, the supply capacity of each token and its mining potential will grow.  

As more third-party miners connect to GMT data centers, the GMT token will become the bond between all the participants in the GMT mining ecosystem.

Conclusion

Coin burning is the mechanism used by many cryptocurrency projects to reduce the supply and make tokens scarce, which causes price increase, bringing benefits for investors. Technologically, it is removing some part of coins from circulation, such as sending them to an unusable wallet address.

Companies like Binance and Bitfinex regularly spend a part of their profit on burning coins. 

The GMT Token project has developed a unique way to burn their tokens which will potentially affect the price of the token as well as the mining rewards.

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