Why tokens burn

22 November 2022
Why tokens burn

Token Burning - is a function aimed at correcting the emission of cryptocurrency. When tokens are burned, a certain number of tokens are irrevocably withdrawn from circulation: it happens by the owner's decision or as a result of the algorithm's work. It will be told how the process of token burning affects their value and whether it is dangerous for cryptocurrency owners.

Reasons for token burning

Token burning is the process of destroying a certain number of cryptocurrency units, which reduces the total number of tokens on the market. It is one of the most effective methods of inflation fight, further regulating the final price of each token.

The burning procedure has the following objectives:

  1. Fight against emission. Token burning corrects developers' mistakes that lead to an uncontrolled and rapid increase in the number of tokens in circulation.
  2. Increasing the value of the cryptocurrency asset. This is where the general law of the market comes into play: the fewer assets, the higher the value of each asset.
  3. Fulfillment of the conditions of a smart ICO contract. In this case, all tokens are burned to eliminate additional contract liability.
  4. Indirect payment of dividends to cryptocurrency owners. It will serve as an additional source of income (apart from staking) for those users who just keep tokens in their wallets and do not resort to exchange transactions.

Tokens can be burned at various stages: for example, after the ICO ends, burning rid the network of unsold coins. Periodic burning at variable or fixed intervals maintains the balance of supply and demand, regulating the price of the token.

The implementation of AKRA's token burning tool has one goal - to protect investors' funds from depreciation. This mechanism is embedded in the whitelist and affects free assets, and every member of the network can read the burn conditions.

How tokens are burned

The mechanism of token burning is the impossibility of further use of the "burned" cryptocurrency units. This is achieved in several ways:

  1. Transferring tokens to a wallet with a missing private key. It is impossible to crack or pick a key to a crypto-wallet, so all tokens transferred to it are irrevocably withdrawn from circulation.
  2. Execution of a special smart-contract, the terms of which stipulate tokens burning. For example, the Ethereum blockchain network has a burn function, which withdraws ETH cryptocurrency and tokens of various standards from circulation.
  3. Commission burning. Transaction fees can be sent to special "dummy" wallets. In this case, validators get their income from stacking cryptocurrencies, but all transaction fees are eliminated.

Cryptocurrency burning is recorded on the blockchain as a transaction. The record allows anyone in the network to check: by whom, when, and how many tokens were destroyed. This makes the procedure of burning them completely transparent.

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