Coin burning is the process in which the amount of a particular crypto-token in circulation is regulated and reduced. To reduce the number of tokens in circulation, the tokens which are meant to be burnt are sent to an unretrievable wallet which is also called eater addresses, blackholes or dead wallets. These crypto wallets are one-way wallets that can only receive assets and can’t send or reverse transactions. There is no private key linked to these wallets. Since there are no private keys linked to these wallets, these assets no longer exist as they have been permanently pulled out. Hence they have been burnt.
Tokens mainly get burnt when the supply of a particular token is far greater than its demand. Also, tokens get burnt shortly after the initial coin offering ICO in situations where some of the minted coins are unsold till the end of the event.
Recently, it has been confirmed that 11 billion Shiba Inu SHIB tokens worth $251,000 have been burnt. It has also been reported that 100million Binance Coin BnB tokens were burnt which is over 50% percent of its total supply, Bibox BIX developers also burnt 300million BIX tokens which is about 60% of its total supply, and Kucoin token developers burnt 100million Kucoin tokens which are about 50% of its total supply.
How coin burning makes a cryptocurrency deflationary
When a token gets burnt, its overall supply is reduced and it leads to a deflationary event. The main goal of crypto burning is to regulate supply and influence the price of the token and its influence on the market is subject to the basic laws of demand and supply.
By burning crypto tokens, the amount of tokens in circulation reduces and this results in scarcity in the number of tokens in circulation. With this scarcity, if the demand for a particular burnt token increases and it’s limited in supply, the price of that particular token will increase in line with the laws of demand and supply. Even when demand does not increase but remains constant, the prices of that particular token will still increase because the constant demand has to be met by the limited tokens. This was proved when the Terra project burnt 88.7 million LUNA tokens in November 2021. Subsequently, the LUNA token set a new all-time high ATH record.
This is also applicable to stable coins. Stable coins automatically mint new tokens and also burn them frequently to maintain their normal price range. When the demand for stable coins increases and the price diverges above its normal dollar fixed rate, the protocol of the smart contract will issue several new tokens to increase supply and make the price fall. And when the prices fall below their normal fixed rate, the same protocol automatically burns these tokens which makes the price go up to retain its normal fixed level.
In conclusion, the fact that the crypto market in its normal nature is volatile and unpredictable, the expected bullish move of a token as a result of coin burning might not happen in some tokens and for some, it’s a long-term result. This is further confirmed by prof Abhay Chebbi, pro-chancellor of Alliance University as she gives an illustration of the last Bitcoin burning by its developers which led to a significant increase in its price against that of BnB whose tokens were burnt and there was still no significant increase in price.