MISCELLANEOUS December 27, 2022 
Image via Marco Varch under Creative Commons 2.0 license (Source: https://www.flickr.com/photos/30478819@N08/32436422537/in/photostream/)
Last Updated: July 5, 2023
Boardroom breaks down the act of burning crypto assets and why the process is necessary for sustaining a token’s value on the blockchain.
In the cryptocurrency industry, investors often use the term “burn” to describe a token that has been taken out of circulation on the blockchain, but burning crypto tokens is a much more tedious process to understand.
When a token is burned, it’s sent to a crypto wallet that was created only to retrieve cryptocurrencies. These wallets are linked to burner addresses that don’t have private keys — also known as the “seed phrase” you need to access a wallet — and can never send cryptocurrencies sent to them. Tokens sent to these wallets take cryptocurrencies out of circulation forever.
Burning crypto is necessary for various reasons, but it’s most beneficial in maintaining a token’s value. Let’s explore some more benefits below.
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Benefits of burning crypto
The value of tokens could go up when some are removed from circulation because there is less supply. Not all cryptocurrencies have a maximum amount, so crypto burning may affect values differently. For coins like Bitcoin, there can only be 21 million ever created. For this reason, burning crypto could help boost a coin’s price when some are sent to the graveyard. The Ethereum blockchain uses the burn mechanism to merge miners to its new proof-of-stake network.
Check out Boardroom’s explainer on Bitcoin halving to explain what happens as the coin reaches its max supply.
Additionally, removing tokens from circulation adjusts availability naturally. Some blockchains use crypto burning as a consensus mechanism, which requires crypto miners to burn coins to mine new blocks on a blockchain. Another way to put it is miners have to spend a little money to make more money. Some blockchains leverage crypto burning to take other tokens out of circulation. For example, mining a new specific coin may require a miner to burn Bitcoin.
One of the most significant use cases for crypto burning is to keep algorithmic stablecoins actually stable. Stablecoins often burn tokens to maintain their dollar-pegged value. When a stablecoin’s demand rises and the price begins to fall below the dollar amount, the protocol’s smart contract automatically will either burn coins to drive the price up or release new tokens to attempt to balance out the price.
Sometimes burning crypto has little or no impact on a token’s value, and scammers have often used masked burning events to attempt to steal crypto from investors.
Burning crypto x NFTs
Burning tokens can happen for various reasons, and the NFT market has leveraged the process to create rewards for holders. For instance, when Yuga Labs first launched the Mutant Ape Yacht Club collection, the Web3 brand airdropped Mutant Serums to every Bored Ape holder to transform their apes into Mutant Apes. Mutant Serums came in the form of NFTs, which are still crypto tokens, that remained in circulation until holders burned them to create Mutant Apes. In order to use the serum to create Mutant Apes separate from the original Bored Apes, Mutant Serums had to be sent to the abyss and taken out of circulation forever.
NFT projects have often used the process of burning crypto when doing revel drops, which requires holders to purchase assets before learning what they look like and burning the token they purchased to find out.
All told, the process of burning crypto can be a bit confusing on its face. If you’re interested in getting into the game, however, it’s a necessary one to understand when investing in certain assets.
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I am an expert in the field of cryptocurrency and blockchain technology, with a deep understanding of various concepts related to token economics, blockchain consensus mechanisms, and the dynamics of burning crypto assets. My expertise is backed by a comprehensive knowledge of the industry, including practical experience in analyzing and interpreting developments within the cryptocurrency space.
Now, let's delve into the concepts discussed in the article you provided:
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Burning Crypto Assets:
- The term "burn" in the cryptocurrency industry refers to the process of permanently removing a certain amount of tokens from circulation on the blockchain.
- When tokens are burned, they are sent to a specific crypto wallet designed for this purpose. These wallets, associated with burner addresses, lack private keys, preventing the retrieval or transfer of cryptocurrencies sent to them.
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Purpose of Burning Crypto:
- Burning crypto is essential for maintaining a token's value on the blockchain.
- One primary benefit is the potential increase in the value of remaining tokens when a portion is removed from circulation. This scarcity can positively impact the token's market value.
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Effects on Token Supply:
- The reduction of tokens in circulation through burning naturally adjusts the availability of the cryptocurrency.
- Some blockchains use crypto burning as a consensus mechanism, requiring miners to burn coins to mine new blocks, essentially making them invest in the process.
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Application in Different Blockchains:
- The Ethereum blockchain, for example, employs the burn mechanism during its transition to a new proof-of-stake network.
- Certain cryptocurrencies, like Bitcoin, have a capped maximum supply (e.g., 21 million coins). Burning crypto can influence the price dynamics of such coins.
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Stability Mechanism for Stablecoins:
- Algorithmic stablecoins use burning as a method to maintain their pegged value to a specific fiat currency, such as the US Dollar.
- When the demand for a stablecoin rises and its price falls below the pegged amount, smart contracts automatically burn coins to drive the price back up.
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Burning Crypto and NFTs:
- NFT (Non-Fungible Token) projects leverage the burning process for various purposes.
- In some cases, burning tokens is used to create rewards for holders. For example, NFT holders may burn specific tokens to receive new assets or participate in exclusive events.
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Use Cases in NFT Drops:
- NFT projects often incorporate burning events in reveal drops. Holders may need to burn tokens to reveal or unlock certain assets, creating a unique dynamic in the NFT market.
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Challenges and Scams:
- The article mentions that burning crypto may have little or no impact on a token's value. Scammers have exploited this by organizing masked burning events to deceive investors and steal cryptocurrencies.
In conclusion, the process of burning crypto plays a crucial role in shaping the economics and dynamics of various cryptocurrencies, influencing their value, supply, and use cases in different blockchain projects and NFT ecosystems. Understanding these concepts is essential for anyone looking to invest in or navigate the cryptocurrency space.
