Token Burning — What It Is and Why It’s Done
The crypto space is full of jargon and difficult terms which you might have never heard before. That’s why it takes quite a while for someone new to crypto to get used to the jargon and language used in the crypto space.
Token burning is also a similar type of concept, not many know about it or understand it. So today, we’ll be talking all about this much-important crypto concept that you ought to know in the crypto space.
Let’s begin from the start. The concept of token burning has its basis from the infamous law of “Supply and Demand”. Like every other market, the crypto market also applies this law according to which if something’s supply is less and demand is more, the more will be the value of that thing and vice versa.
This is where token-burning comes in. It is actually marked by the process where a certain number of crypto tokens or coins are burned or removed from circulation in the market. In simple words, the burned tokens are made useless, eventually reducing the supply or the total number of available tokens in order to enhance their value.
Why Is It Done?
Although different projects might use Token Burning methods for different reasons, the major reason for the burnout is evident and that is “to increase value”. And how is this goal achieved, you might ask?
Well, remember the law of supply and demand. The less the supply, the more the demand, and hence, the more is the value, simple as this. The burnout basically lessens the number of tokens or coins available, this way the supply’s less, and the demand increases. This turns out to be profiting for the token owners who were hoping for an increased value of their token.
Big cryptocurrencies like Bitcoin and Ethereum are already high in value so they need not perform such practices. However, small and young crypto projects, looking for an increased value, need to use the Token-Burning mechanism sometimes. One major time when it’s used is after the end of Initial Coin Offering (ICO) or Token Generation Event (TGE) to remove access tokens from the market.
Apart from being a value-increasing weapon, token burning is also regularly used in some projects employing Proof-of-Burn (PoB) consensus mechanism where investors need to burn their coins regularly.
So, What’s the Bottom Line?
Now we know that token burning is not an actual burning process of the tokens including fire and all that, rather it is a very crafty way to add on value to a new or young crypto project by burning or in actuality, reducing the number of tokens or coins.
The token-burning processes are not only advantageous for the owners but also for the investors since they’re informed beforehand so that they can prepare for the incoming burnout and the resulting price surge as well.