March 29, 2024

What is Token Burning?

What is Token Burning?

The mechanism of burning coins or Token Burning has several unique uses and serves different purposes.

Token Burningis the process of permanently removing coins from circulation, which reducestheir total supply, lowers the inflation rate and increases the value of the asset.

How does the process of burning tokens take place?

This mechanism worksthanks to a smart contract feature known as the burn function.Do not confuse burning with the complete removal of coins.Token burning is the redemption or withdrawal of a certain number of coinsThe wallet is completely transparent, but permanently blocked.Records of such transactions are public, irreversible, and permanently recorded on the blockchain.

Why burn tokens?

The combustion mechanism reduces the supplywith a stable demand for coins. Many projects use consensus mechanisms on a deflationary strategy or use a Proof-of-Burn (POB), which burns a specified portion of the coins with each transaction.

In addition, coin burning works as a natural defense mechanism againstDDOS and prevents spam from blocking the network.Instead of paying users to verify the transaction, some projects have integrated a mechanism whereby a portion of the amount sent is automatically burned.Ripple (XRP) is a project that uses this economic model.

Burning is often used by altcoins andexchanges that have issued their own native tokens. So, Binance burns its native BNB token every quarter, depending on the number of transactions made on the exchange over a 3-month period.

The burn mechanism is unique to cryptocurrencies.demand for coins, making them unique and more valuable. 

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