What Is Token Burning?
Token burning refers to making tokens unusable through protocol or contract rules, effectively removing them from circulation.
What is token burning?
Token burning is the process of removing a specific amount of tokens from the supply by making them unspendable. There is no physical burning process. The smart contract’s function for reducing total supply can be used, or assets can be sent to an address that is widely accepted as unspendable. The method of implementation varies depending on the asset.
A reduction in circulating supply through burning does not always lead to the same result. If the burned tokens are part of a treasury allocation that hasn’t entered the market yet, the current circulating supply may not change directly. It is necessary to track total supply and circulating supply separately.
Does burning increase the price?
A decrease in supply can create an effect if all other conditions remain the same; however, demand and market conditions do not stay constant. Therefore, a burn is not a guarantee of a price increase. A previously announced burn may have already been priced into expectations. Burning a very small amount may also have a limited impact on the total supply.
For example, burning 1 million tokens from a 1 billion token supply is a 0.1% decrease. The large figure in a news headline may seem smaller when converted to a percentage. If 10 million new tokens were produced during the same period, the net supply has still increased.
What needs to be verified?
Whether the burn actually took place, the amount, and the source must be verified. A project buying tokens from an exchange to burn them is economically different from burning its own locked allocation. Both steps in the phrase “buyback and burn” should be verified.
The nature of the address claimed to be unspendable or the burn function in the contract is important. Simply transferring to another wallet is not a burn. Additionally, if the project can mint the same amount later, the long-term supply effect may change. It is more insightful to look at the balance of net production and burning rather than a single transaction.