Probably we are wondering about the price increase when recently it is struggling to climb up to $10. I even got worried because I bought some cake at $12.28 the one I staked in beefy finance, and $13 to stake at PancakeSwap with this good bounce of price after numerous cake was burned I hope it will continue to climb up.
https://twitter.com/PancakeSwap/status/1374044246001426432?s=19
But the other day March 23, 2021, Pancakeswap announced that they burned 4, 231, 937 cake which cost approximately $50 million. This might be one of the reasons the cake price climbs to $12 plus again. So what is burning of token mechanism? Let's find out.
What is Burning Token Mechanism?
The burning token mechanism is the process that involves the permanent removal of existing cryptocurrency coins from circulation. This practice is quite common in the crypto space and is very simple. This burning mechanism is an action taken by the creators to remove certain numbers of available tokens from circulation.
The burning mechanism is very unique to cryptocurrencies since the regular fiduciary is not literally “burned”. Anyhow, the traditional currency supply is regulated in different ways. Burning tokens is particularly similar to a buyback of share mechanism by public companies that reduce the amount of the share available in circulation.
There are various reasons why tokens are burned, which is usually done to cause deflation. Larger blockchains like Bitcoin, Ethereum, and Bitcoin Cash do not need to use this mechanism because they have limited supply in circulation. This mechanism is often used by altcoins and smaller exchanges to control the number of tokens in circulation. This will provide greater benefits to all investors.
What are the reasons for burning tokens?
There are several reasons why they burn cryptocurrency tokens will give you some examples.
? To have an effective consensus mechanism
This applies to coins that adopt Proof-of-Burn (POB) as a consensus mechanism. This POB is a way to achieve consensus in a distributed network uniquely, which requires users to burn some parts of the coins to achieve it.
? To increase token value
In cryptocurrency, demand is the central economic concept that gives value to a specific asset. Unlike fiat currency, crypto is deflationary. This means the supply of the coins is constant without creating additional coins once the total supply is reached. The best example of this is Bitcoin and Bitcoin Cash, which has a 21 million coins supply only. If the demand will increase, the price also increases as there is limited supply in circulation.
While the burning mechanism reduces the total coin supply in circulation because they are deliberately destroyed, it is an effective method of increasing and stabilizing the token price. This clearly states that reducing quantity in the market makes a good value when it comes to economic rules.
? Spam protection
The burning coin also works as a natural security mechanism against DDOS (Distributed Denial of Service Attack) that prevents spam from blocking the network. Burning a cryptocurrency token generates a transaction execution cost, rather than paying users to verify transactions some projects have integrated a mechanism where part of the sent amount is automatically burned. Ripple or XRP is using this economic model.
How does the process of the burning token being done?
This concept is very simple which has the goal to reduce existing numbers of tokens available. Burning tokens is not destroying them but instead making them impossible to be used in the future.
It involves the redemption or withdrawal of available currency by the project developers to remove it from circulation. To be done, those token signatures were placed in a special public wallet known as the “eater address” which is visible to all nodes but permanently blocked. The status of it will be published on the blockchain.
There are several ways of burning tokens and varies depending on the purpose and process. Some will remove unsold tokens from circulation after the end of ICO (initial coin offer). While others burn tokens periodically at variable intervals or at fixed.
Sources; Panckeswap Twitter post, and Tokeneo
Closing Thoughts
So what do you think about burning tokens? It can really help making the token price value increases right? I hope they will burn more soon, so the price of cake will rise again until $20 plus or more, so I can harvest my farming yield with a big smile ????
In coming days there have been news that they will burn token again. Price will be sent to the moon ??
