What Token Burns Are, Why Crypto Projects Do It and Why It Benefits Token Prices

What Are Token Burns?

Token burning is a process in which tokens or coins are purposely and permanently removed from circulation. These cryptocurrencies are sent to a special address known as a "burn address" or "burn wallets," designed only for receiving assets. The private keys to these wallet addresses are usually inaccessible and irretrievable. 

The primary purpose of burning tokens is to reduce the total circulating supply, creating a scarcity of the cryptocurrency. This can trigger an increase in the token's value based on basic supply and demand dynamics. That said, projects may also execute periodic token burns to demonstrate commitment to the long-term growth of the cryptocurrency.

Purpose of Token Burns

Token burning is not fundamentally a new concept, as traditional institutions have used similar strategies in their operations. For example, publicly traded companies buy back their stocks to remove them from circulation when they have excess cashflows.

Nevertheless, the purpose of token burns is multifaceted and serves several strategic objectives within a cryptocurrency ecosystem.  Here are some of the most common purposes of burning tokens in crypto.

Supply Control of Bridged Assets

In bridged assets, token burns are used to manage the token supply between two blockchains. When an asset is transferred from one chain to another, the original token is often locked on its native chain and a corresponding token is minted on the destination chain. When the asset is transferred back, the minted token is burned, ensuring the overall supply remains consistent across both chains and preventing inflation or duplication. This burn-mint mechanism maintains balance and security in cross-chain transactions.

Inflation Control and Value Accrual

Token burns are deflationary events. They help manage inflation by preventing an oversupply that could devalue the token. By reducing the total supply, token burns can create a scarcity of an asset, which can potentially increase the value of the remaining tokens. This benefits existing token holders, as the value of their holdings may appreciate over time.

Enhancing Network Security

Token burns can be used to enhance network security by preventing spam and malicious activities. By requiring a small number of tokens to be burned as part of transaction fees, blockchains can deter unnecessary or harmful transactions, making it costly for attackers to spam the network. This approach not only discourages malicious behavior but also improves network efficiency and security.