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Token burning in cryptocurrency refers to the process of permanently removing a certain amount of tokens or coins from circulation. This is typically done to reduce the total supply, which can potentially increase scarcity and value for the remaining tokens (similar to how stock buybacks work in traditional finance). It's a common mechanism in many blockchain projects, especially those with deflationary models.
How Token Burning Works
Mechanism: Tokens are "burned" by sending them to a dead-end wallet address (often called a "burn address" or "black hole") that no one controls or can access. This address is usually something like 0x000000000000000000000000000000000000dead in Ethereum-based networks. Once sent there, the tokens are effectively out of circulation forever, as there's no private key to retrieve them.
Implementation Methods:
Manual Burns: Project teams or holders manually transfer tokens to the burn address.
Automated Burns: Built into the protocol, such as a percentage of transaction fees being burned automatically (e.g., in Binance Coin or some DeFi tokens).
Proof-of-Burn (PoB): A consensus mechanism where users burn coins to gain mining rights or validate transactions, proving commitment to the network.
Reasons for Burning:
Supply Control: To combat inflation by decreasing the circulating supply over time.
Value Appreciation: Reducing supply can drive up demand and price if adoption remains steady (though this isn't guaranteed and depends on market dynamics).
Incentives: Used in tokenomics to reward holders, fund development, or as part of upgrades (e.g., Ethereum's EIP-1559 burns a portion of base fees from transactions).
Error Correction: Sometimes to remove accidentally minted tokens or fix bugs.
Examples
Ethereum (ETH): Since the London Hard Fork in 2021, a portion of every transaction fee is burned, making ETH deflationary during high network activity. Over 4 million ETH have been burned to date.
Binance Coin (BNB): Binance conducts quarterly burns based on trading volume, aiming to reduce supply from 200 million to 100 million tokens.
Shiba Inu (SHIB): Community-driven burns where holders voluntarily send tokens to burn addresses, often tied to events or portals.
Terra (LUNA): Before its collapse, it used burning to stabilize its algorithmic stablecoin, though that didn't prevent issues.
Burning doesn't always lead to price increases—
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