It is possible to mine cryptocurrency. This boosts the overall supply (i.e. the number of coins in circulation). Some of these digital currencies have a limit that is determined at the time of their creation. This is the situation with Bitcoin, which has a limit of 21 million coins (there are currently 17 million bitcoins in circulation and we should expect 20 million in 2030). Other assets can be mined as well, and there is no limit. In the case of Ethereum, this is the case. Every year, about 10 million new ethers are mined. In 2018, there were over 100 million Ether in circulation, and this figure is expected to grow by about 10 million every year.
>> Please note that at the time of the article, EIP 1559 was in place, and even though the supply of ETH is unlimited, the burn mechanism in EIP 1559 makes the supply of ETH almost deflationary.
We’ve just discussed the notion of mining, which entails the creation of new currencies. We’ll see now that the number of pieces might decrease over time as well.
There are two ways for the total number of units of a cryptocurrency to decline over time:
- Because of the user :
- By sending cryptocurrency to the incorrect address
- By losing access to its exchanges, physical storage media, and even the addresses where its coins are stored, it has become vulnerable (in these cases, the number of tokens in circulation will not decrease since they still exist, but they will be unusable because no one will be able to move or use them).
- When a crypto-issuing currency’s corporation decides to burn its coins, it is known as a burn.
A cryptocurrency’s total number of tokens in circulation might be lowered as a result of a user mistake or a choice taken by the firm issuing the token via a burn. Both will reduce the overall supply, but according to coinmarketcap, tokens lost by users will still be deemed outstanding.
In French, burn translates to “brûlage,” which means “to be consumed by fire.” The English phrase has a different meaning, implying that something is simply annihilated.
The burning of tokens by firms that administer specific crypto-currencies will be the subject of our essay. We’ll discuss the various factors that might lead to a firm acting in this manner. We’ll also look at the implications for users and crypto-asset pricing.
The different types of burns
There are 3 main types of token burn :
- The one determined in advance in the project’s white paper. This can be done on a specific day or if certain criteria are satisfied.
- When a user uses their tokens to do a certain activity, this occurs. For instance, by purchasing a thing using tokens. It’s possible that the corporation opted to burn X percent of the tokens after each purchase.
- The one that was not planned and will take place once the issuing firm makes a choice. For instance, to call attention to the project, or when the entire supply is regarded as excessive.
The total amount of tokens in circulation will be reduced in each of these ways. When the overall supply data is validated, the Coinmarkercap site will take this into consideration.
The interest of token burns
A cryptocurrency issuing company’s total supply might be reduced for a variety of reasons. Here are a few examples:
- To adhere to their white paper’s guidelines. If it was part of their overall strategy, they must stick to it. They risk losing the trust of consumers who have invested based on this document if they do not do so.
- When team members own an excessive amount of the supply. Many individuals will be hesitant to invest in a project if the team behind it owns a substantial share of the tokens. The team can unilaterally decide to burn a portion of its tokens in order to attract cash.
- In order to make its tokens more valuable. The traditional supply and demand law applies in this case. The greater the worth of a thing, the rarer it is and the higher the demand.
Here are a few reasons why leaders may be tempted to burn tokens.
Evolution of prices following a burn of tokens
Economic law applied to the scarcity of a token
The token of a cryptocurrency will become increasingly uncommon as the overall supply of the coin falls. A fundamental law of economics is that the rarer a good is, the higher its value rises given a constant demand. As a result, the lesser a cryptocurrency’s overall supply is, the higher its price should be.
We may deduce from the economic rule that we just applied to crypto-currencies that a token burn should logically result in a rise in the price of this crypto asset. Is this, however, true in practice?
The issue with the bitcoin market is that it is quite volatile. So, if a token burn occurs, it must be big and/or expected by the community in order for it to have an impact on the crypto-trajectory. asset’s Nothing will be discovered if it happens gradually.
Let’s look at the impact of token burning on the price of a crypto-asset using two examples:
- Binance burns tokens with 20% of its income by purchasing BNB at market pricing.
- Each time a token is used for one of Request Network’s services, it gets burned.
Binance Coin (BNB) Case Study
Binance’s tokens have been burnt four times: on October 18, 2017, January 18, 2018, April 18, 2018, and July 18, 2018. Let’s have a look at what happened on the chart around these times (the announcements were made around the 15th each time). If you want to buy the Binance token, the easiest would be to create a Binance account.
Chart analysis :
- We saw that the market reacted strongly to the announced burn in October 2017 and that the token acquired a lot of value in a short amount of time.
- Despite the significant bear market at the time, we find a similar pattern during the January 2018 burn.
- Things are a little different during the April 2018 fire. During this time, bitcoin recovered after a period of fall. We’ve noticed a general fall in all cryptocurrencies throughout the growth of Bitcoin (in satoshi value ). During this time, the BNB remained quite steady (in satoshi). In comparison to other currencies, this is a favorable indicator.
- The market was heavily negative in July 2018, and we witnessed a modest uptick amid the burn. This proves once again that it is beneficial for the valuation of an asset.
By looking at the instance of Binance and considering the current situation of the market, we can see that announcing a burn is instantly helpful to a crypto valuation assets. However, don’t extrapolate this scenario too far. It’s possible that a burn has no influence on a cryptocurrency’s price.
Request Network (REQ) Case Study
The Request Network situation is a little different. The project is still in development (as of October 2018), and the product will most likely take some time to complete.
REQ, on the other hand, will burn its tokens after each usage by a user. As a result, unlike Binance, REQ does not have a set timeline for token burning. We can confidently predict that there will be no price movement in the short run due to the enormous supply of REQ and the minimal quantity that will be consumed with each transaction.
We’re talking about a burn that represents 0.0000001% of the entire quantity of tokens. There’s no way a burn will affect the price in the short run unless it’s a really big and popular project. On the other side, we may begin to observe progress and interest in it over time, perhaps after many years.
Conclusion on the practice of token burning
So you’ve just learned the definition of a token burn. You’ve seen the many sorts of burns that exist, the various reasons why corporations engage in this practice, and the short-term influence it may have on pricing.
We hope you enjoyed this essay and have a better grasp of the notion of token burn as a result of it.
