In this article, we will try to understand the impact of token-burning events on coins tokenomics and also check if Burning crypto Good or Bad.
Burning a cryptocurrency means permanently removing the fixed amount of crypto from circulation. This is mainly achieved by transferring cryptos to a dead address also known as the “Eater Address”.
It’s an irreversible public crypto address that doesn’t take part in the transactions and any crypto sent here is lost forever.
Why do projects Burn their Tokens?
A project burns its crypto to decrease the circulation supply and increase its token value, as it becomes scarce. This is done to maintain the tokenomics of the crypto project and prevent deflation of its price, thus maintaining the trust of its investors.
Use Cases of Burning?
One classic use case of token Burning is to maintain the price of algorithmically generated stablecoins (USDT) ( cryptocurrency whose value match that of real-world assets like USD).
When there is a huge demand for a stablecoin (USDT) its price tends to shoot up, this generally happens when there is a sudden DUMP in the market and people are trying to buy cryptos at discounted prices. The algorithm in the smart contract kicks in to start the minting of new tokens and bring it closer to the 1 USD peg value.
On the other hand when the stablecoin (USDT) starts to lose its 1 USD peg value and its price goes down, generally during a sudden PUMP in the market when people book profits and more USDT is added to the circulation. The algorithm starts burning tokens to bring it closer to the 1 USD peg value.
History of Token Burning?
The Terra Project burned 88.7 Million of its Luna tokens in November 2021, it was one of the largest Layer1 token burn events to date with a token value of around $4.5 Billion at the time of the burn. Luna’s price jumped to a record new high in the following days after this event.
To reduce the impact of Covid, Vitalik Buterin donated 50 Trillion SHIB (Shiba Inu) in what can be called the largest crypto donation in history. He then burned 40% of its total supply to a dead wallet.
Conclusion: Is Burning Crypto Good or Bad?
Burning crypto totally depends on the use case of the Project it is part of. Stablecoins have an inbuilt mechanism to burn and mint tokens to maintain their peg value to US Dollar.