There’s lots of jargon in the world of crypto, and one of the phrases you often hear is related to people “burning tokens”.
But what does it mean to burn crypto?
As dramatic as it sounds, you can probably guess that there’s actually no fire involved in this process.
Today, we’re going to explain the burning tokens meaning. We’ll take a quick look at how crypto and DeFi work, before detailing exactly what’s involved in burning tokens, as well as the possible pros and cons of burning crypto. We’ll also answer the question “does burning crypto increase value?”
So without further ado, let’s dive into the world of burning tokens in crypto.
A Brief Look at Crypto and DeFi
What does it mean when crypto is burned? To answer this, you first need to know a little about cryptocurrencies and decentralized finance, also known as
DeFi is an alternative to the centralized financial systems and institutions that we've all grown up with. These include banks and lenders, usually backed and/or run by governments.
By contrast, DeFi does not rely on these age-old institutions and their rules. The whole idea behind DeFi is to eliminate the middleman and transfer money between users, without the need for an intermediary, such as a bank.
That means quicker processing times and fewer fees, giving users a cheaper, more efficient experience.
To use DeFi, you generally need to use cryptocurrencies, such as Bitcoin, or Dogecoin. You first need to open a wallet in which to store your currencies. You can then buy, sell and trade crypto on exchanges, such as BINANCE and Coinbase.
Crypto Coins vs Tokens
Cryptocurrencies come in two forms: coins and tokens. While the two are similar, there are some major differences that you should be aware of.
With that in mind, let’s take a look at both types of crypto.
Crypto Coins
When we refer to crypto coins, we mean the native coin produced by a crypto network.
For instance, BTC is the coin associated with Bitcoin; Ether (ETH) is Ethereum’s coin; DOGE belongs to Dogecoin, and so on.
Coins are the primary currency and also help to manage and maintain the blockchain. Some coins have more functions than others, with BTC being heralded as the first, but coins like ETH are more dynamic than their predecessors.
Crypto Tokens
Although they operate in more or less the same way as coins, the major difference with tokens is that they are not native to a crypto network, and therefore do not maintain the blockchain.
As such, they are connected to crypto networks but are not a native coin.
For example, Shiba Inu is a token that runs on the Ethereum blockchain. This means that it can be bought, sold, exchanged and lent, without needing to uphold the blockchain.
This gives tokens a lot more freedom and more real-world uses than a lot of coins.
Some examples include XRP, which uses the Ripple network to send and receive funds overseas, reducing transaction times and slashing international currency exchange rates to a minimum.
Also, you can spend tokens like SHIB from Shiba Inu at outlets such as PetCo, Whole Foods and Bed, Bath & Beyond etc.
Therefore, it’s easy to see that tokens are a good choice for those looking to spend crypto as they would fiat currencies.
What Does It Mean To Burn Crypto?
You came here for token burning explained, right? Well, burning tokens is actually a very straightforward concept
Burning tokens in crypto is the process of removing coins from the supply chain by sending them to a wallet that doesn’t have any known public keys.
That means nobody can access the wallet to retrieve the coins so, effectively, they are taken out of circulation forever.
Although generally referred to as “burning tokens”, the fact is that you can burn any type of cryptocurrency, including native coins as well.
Pros and Cons of Burning Tokens
So why would anyone want to burn their crypto? After all, you’re essentially destroying your own money. What sane person would do that?
In fact, there are many reasons why it may be beneficial to burn crypto.
With that in mind, let’s take a look at the pros and cons of burning tokens in crypto.
Pros of Token Burning
- Many believe that taking coins and tokens out of circulation may increase their value in the long run
- Burning tokens can help stabilize the inflation rate of certain cryptos, like Stablecoins, which are pegged to fiat currencies like USD
- You can get rewarded for token burning with Proof-of-Burn
- PoB can help protect the network from being hacked
- Burning a large amount of crypto can be a good marketing tactic, as seen when the Ethereum founder, Vitalik Buterin, burned 410 trillion SHIB tokens in one go
Cons of Token Burning
- There isn’t much evidence to support the claim that burning tokens increases their value
- Burning tokens in crypto can be faked
- Investors may be put off by one or more large burning
Does Burning Tokens Increase Value?
There is a lot of hype surrounding token burning, with most people asking one question: “does burning crypto increase value?” and the answer is: possibly.
Basic economics teaches us that if you reduce the supply of something, the demand will increase. But unfortunately, it isn’t as black and white when it comes to cryptocurrencies, and burning coins and tokens to drive up the price depends on which crypto you’re dealing with.
For example, token burning is pretty pointless if a cryptocurrency only has a small number of accounts holding a large percentage of a coin. For the value of a count to increase after a burn, you need a large number of accounts holding a smaller portion of the coin.
Burning tokens is also meaningless if the token code allows developers to create more tokens at any time. For instance, you might burn 20% of a coin, only for a developer to create a further 20% a few days later, in order to plug the gap.
Therefore, the only solid argument for burning tokens in the hope of increasing their value is when the coins or tokens have many holders, and low pre-mined distribution.
However, it’s still not guaranteed that the coin value will increase, even after a large burn.
Reducing the supply of a coin will only increase the value of it if there is a demand for that coin.
It’s clear that burning tokens in crypto has its uses. While the term sounds very dramatic, token burning takes place every day, and helps to maintain the careful crypto ecosystems and their processes.
While it’s true that burning tokens in crypto may increase a coin’s value, the main purpose of burning tokens is a lot more to do with stability, security and PoBs than anything else.
Join our community of fun crypto brains and grow yours too!
Instagram Facebook Crypto Guides
Find this article and more at our website below.
