June 14, 2021

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 Burning Is the process of irrevocably removing coins from circulation, which reduces their total supply, lowers inflation and increases the value of an asset.

How does the process of burning tokens take place?

This mechanism works thanks to the functionsmart contract known as the burn function. Burning should not be confused with completely removing coins. Burning tokens is the redemption or withdrawal of a certain number of coins and transferring them to a special wallet. The wallet is completely transparent, but permanently locked. The records of such transactions are publicly available, 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.

Also, burning coins works likea natural defense mechanism against DDOS and prevents spam from blocking the network. Burning cryptocurrencies incurs transaction costs. Instead of paying users to verify a 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 burning mechanism is unique to cryptocurrencies. It slows down inflation and increases the demand for coins, making them unique and more valuable.

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