Cryptocurrency burning doesn’t affect the price, and here’s why
Token burning is a tool designed to increase the value of an asset. There are fewer coins in circulation, so the price should grow. In reality, it doesn’t work in every case.
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The easiest way to burn coins is to send them to a zero address. In most networks, it’s similar to 0X0000…Dead. It is impossible to return coins from zero addresses because no one can access this wallet.
The Ethereum blockchain has burned $238 million worth of tokens.
The dollar equivalent of tokens burned in the Ethereum network (Etherscan)
A more advanced way is to deploy a specific algorithm in the main network. Such an upgrade was implemented in the Ethereum blockchain last year. On August 5, 2021, the London hard fork was activated along with the EIP-1559 update. Since then, each transaction has burned a part of the basic commission. 2.5 million coins with a total value of $3.8 billion have been burned in one year.
ETH burning results (ultrasound.money)
Ethereum has an inflationary structure. The maximum issuance is not limited, which theoretically creates a barrier to price increases. The London hard fork does not prevent new coins from being minted, but it slows inflation considerably. During periods of heavy network load, more ETH may be burned than new coins being generated, making “Ether” a deflationary asset at times.
When does burning not work?
In the case of ETH, coins that were purchased and/or mined by miners are withdrawn from circulation. This means money was paid for the asset’s purchase, and the coins are secured with liquidity. Burning does not work when only “minted” tokens not backed by funds are destroyed.
Often young projects also burn coins. To do this, “empty” tokens are sent to a zero address before listing. Data on the amount of burning can be found in the corresponding tokenomics section. This maneuver does not directly contribute to the price increase because the asset is not yet traded on the exchange. However, it is a demonstration of the deflationary policy vector.
In May 2022, the LUNA token began to be uncontrollably generated by the Terra blockchain to recover the UST stablecoin exchange rate. The network was issuing trillions of LUNA, selling them on the market. The community suggested burning the generated coins as a rehabilitation plan. The idea was rejected because burning tokens not backed by money is useless and is pure manipulation.
Before you invest in a project, make sure that burning is a viable way to reduce token issuance and increase value in the long term. Don’t trust projects that burn unsecured coins in order to attract users.
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