CryptoPyromania: why projects burn their tokens?

Burning tokens is the destruction of a certain amount of tokens (or coins) to reduce their number in circulation. This method is successfully applied by startups, traditional enterprises and even global corporations in the case of their shares.

For example, in the spring of this year, Apple launched a plan to buy back $ 100 billion of shares with their subsequent burning and increased dividends on shares by 16 percent. One of the founders of the financial platform Humaniq Alex Fork shared with Bitcoinist his thoughts on the implementation of the procedure for burning tokens in the crypto market.

Why is it necessary

The main purpose of burning tokens is quite simple — companies need to support the growth of their own asset prices. In addition, each startup in the crypt needs to guarantee a clear, functional and profitable use of tokens in the ecosystem of its project.

Processes of redemption and burning tokens have the potential to become the new standard for the future of the industry ICO, if the startups will be to perform this procedure is reasonable and fair, and will also be able to prove their economic viability. This is why the company should always provide evidence that it has burned its tokens.

This model of development implies a gradual reduction in the number of coins in circulation and an increase in demand for them. In fact, projects can take their own disinflation measures with multiple mechanisms to raise the token price. To do this, they can be redeemed from exchanges for subsequent burning or introduce loyalty programs that will encourage holders for long-term abstention from selling coins.



Sometimes it is enough just to support rumors about the possible destruction of coins. For example, the founder of TRON Justin San constantly reminded his subscribers about the burning of the project tokens on his streams. And although other representatives of the startup did not confirm the rumors, the excitement around the coin gradually grew. Finally, in June the company made the burning of a billion tokens.TRX.

There are several other scenarios in which burning coins would be beneficial.

Increasing the value of tokens

The fewer tokens traded on exchanges, the higher their exchange rate (a simple consequence of the law of supply and demand). Most projects already have a limited emission, but to reduce the number of coins in circulation still need to gradually, so as not to shake the balance of the crypto market.

According to this scenario, the Binance exchange operates, which burns its own tokens every quarter. Thus, the company makes its asset attractive to investors in the long term.

Error correction

Sometimes developers can release a product with a bug that can be "cured" only by burning tokens. These problems include an excessive number of coins issued, the accidental creation of an incorrect address, or an increase in emissions due to technical errors.

It is easy to solve this type of trouble — it is enough to send the required number of tokens to the address from which they can not be withdrawn. In fact, the term "incineration" itself is slightly incorrect. Coins do not cease to exist by themselves, they are simply "buried" on a wallet inaccessible to anyone.

Getting rid of surpluses with ICO

Most projects limit the number of tokens they are going to sell during the ICO. In some cases, the startup fails to close all its crowdfunding goals and part of the cryptocurrency remains on the company's wallets. Often, developers simply sell the remaining tokens in the market to get a good profit.

However, a much better scenario is to burn unsold tokens. So the team gives confirmation to its investors that it uses only the funds raised for business purposes. Thus, the income from the ICO is justified by the actual demand for tokens, which is fair enough for the market and holders.

The provision of dividends

If a project issues a security token, its investors can be compared to holders of traditional shares that receive dividends. The company buys the tokens and burns them, thereby creating a deficit in the market.

Moreover, instead of paying dividends, startups can simply increase the value of their digital assets by burning extra tokens. For even greater investor interest, developers are introducing entire programs of incineration and incentives.