In the Bitcoin protocol, the issuance of mined coins is capped, and a deflationary mechanism called halving is used, under which miners’ rewards are reduced by half roughly every four years.
Creators of later protocols devised a token burning mechanism. Here we explain what it is, how it works, and what happens during the burning of tokens and coins.
What token and coin burning in cryptocurrency is
Among companies whose shares trade on the stock market, the practice of share buybacks is common. In other words, a company buys back shares from investors to reduce the number in circulation.
Cryptocurrency projects use a similar mechanism: the creators and developers of decentralised platforms send part of the tokens circulating on the market to an address for which no private key exists, permanently removing them from circulation — that is what token burning is. This can be done in two ways: by buying back from investors or by destroying cryptocurrency already held.
All transactions are recorded on the blockchain and cannot be forged or altered, so any user can check in a blockchain explorer whether tokens were indeed burned. This approach, however, has its drawbacks, which we will examine shortly.
Some coins are removed from circulation accidentally. For example, many early Bitcoin investors and miners lost the private keys to their wallets and cannot sell their assets. According to the crypto research company Chainalysis, 29% of mined coins have not moved even once over a period of five years or more. Analysts believe those BTC are lost forever.
Why projects burn their tokens
The reason for burning coins depends on the goals a project team is trying to achieve. In some respects, burning coins may seem illogical: why burn your share in order to reduce it?
There are several reasons, which we will outline now, along with the advantages of this approach.
Coin deflation
Burning tokens increases the token’s investment appeal both in the short and long term: the lower the supply of coins, the higher the price — provided demand is maintained. And if demand falls, burning can soften the decline in price.
The formula is simple: the more investors hold coins, the fewer trade on the market, and the tighter the supply becomes. A double effect arises — growth that fuels further acceleration.
Rewards
As the price rises, rewards for miners or validators (depending on the consensus protocol) also increase. As a result, burning helps attract new miners, who — like long-term investors — are interested in holding coins, pushing the cryptocurrency’s price higher still. Validators benefit from rising coin and token prices and from higher staking rewards via staking.
Any cryptocurrency or token can be burned, even if the team did not initially provide for it. For example, miners can coordinate and send part of their coins to inactive addresses.
Burning mechanism: how it works
All types of token burning can be divided into two categories: manual burning or protocol-based burning. Automatic token burning is used least often in the crypto industry and is implemented in only a handful of protocols. Let’s look at different types of burning using examples of well-known cryptocurrencies.
Both methods share one feature: the cryptocurrency is irreversibly sent to a one-way wallet address from which coins cannot be withdrawn. This address cannot be recovered because there is no corresponding private key.
Manual burning
Buybacks of coins and tokens
This is one of the most common mechanisms among crypto projects. Earlier platforms did not provide for protocol-level token burning, but developers of some projects decided to conduct manual burns by buying back or selling accumulated coins.
For example, in July 2019 the stablecoin issuer Tether mistakenly minted 5 billion unbacked USDT tokens on the Tron blockchain, which would have caused a collapse had the company not promptly burned them.
Destroying reserves
Some projects set up funds and hold their own reserves, enabling them to intervene at any moment. For example, in 2019 the Stellar Development Foundation (SDF) burned more than 55 billion XLM — over 50% of total issuance. Incidentally, in a protocol update the developers removed the inflation function, making the issuance of Stellar tokens capped.
Using protocol functions
Smart contracts allow for token burning by calling a special function available in the Ethereum and Binance Smart Chain protocols.
Major crypto exchanges Binance and OKEx use this mechanism: once a quarter the companies call a function to burn Binance Coin (BNB) and OKEx Coin (OKB), in order to remove coins from circulation permanently. In addition, holders of these cryptocurrencies receive extra benefits, such as discounts on trading fees.
How the burn function works:
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The holder calls the Burn Function and specifies the number of coins to burn.
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The smart contract checks whether the owner’s wallet has a sufficient balance.
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If so, the function executes and the coins are sent to a frozen address from which assets cannot be withdrawn, and the total number of coins in circulation (issuance) is updated. This can be verified in a blockchain explorer.
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If the difference is negative, the function will not execute.
Any holder of ERC-20 Shiba Inu tokens can use the same function. By calling the Burn Function, you remove the nominated number of tokens from circulation. To verify that tokens have been burned, use Etherscan.
Limiting transactions
The Ripple blockchain includes a mechanism to restrict and prevent DDoS attacks: the protocol reduces the number of transactions permitted on the network. In addition, Ripple uses a transaction-acceleration function that allows XRP to be used as gas similar to Ethereum — but with burning. Thus, with each such transaction, XRP’s issuance decreases.
Fee-burning mechanism
Following the Ethereum London hard fork and the EIP-1559 update, a new coin-burning mechanism was integrated into the network: a portion of transaction fees is burned. Periodically, the amount of ETH burned even exceeds the number of coins mined — around $0.5 million worth of ETH is burned every hour. You can track statistics on burned Ether at Watch The Burn.
Protect and Burn mechanism
The Swissborg crypto platform uses a unique burning mechanism under which 20% of profit earned from user fees is sent to a reserve to protect the price of the CHSB token. Then, if the price shows a bearish trend based on the 20-day MA (moving average), tokens are bought back and burned.
Proof-of-Burn
Some platforms, such as Slimcoin, use the Proof-of-Burn (PoB) consensus. The proof-of-burn algorithm is based on holders burning part of their coins to obtain the right to mine. In PoB networks, the number of coins burned determines how many blocks miners can validate.
Developers have addressed this dilemma by adding a function that checks miners and can restrict some of them from validating transactions.
PoB is in many ways similar to Proof-of-Stake, since in both cases miners must lock coins to gain the right to mine. Unlike PoS, however, miners on Proof-of-Burn blockchains cannot retrieve their coins after they stop staking.
Drawbacks of token burning
The fact is that a token-burning mechanism implemented not automatically at the protocol level, but through developers’ actions, requires trust in the project team for two reasons:
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There is no guarantee the team will honour its commitments and continue to burn tokens. This enables price manipulation and leaves room to profit at investors’ expense.
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It is not always possible to verify that neither team members nor anyone else truly has the keys to the wallet to which the “burned” coins are sent. You can prove possession, but you cannot prove the absence of possession, since providing evidence of the absence of something is practically impossible.
When the next token burns are
Some projects, such as Binance and OKEx, burn tokens quarterly, while others do so as circumstances dictate.
As a rule, information about upcoming or completed token burns is published on Twitter and other channels, so we recommend subscribing to the feeds of projects you follow and switching on notifications so as not to miss important tweets.
Binance Coin (BNB) — coin burn
Binance adheres to a set burn schedule, so the event is predictable.
Burns usually take place on the 17th — 18th of January, April, July and October. Coins will be burned until only 50% of the total supply remains — that is, 100,000,000 BNB.
Shiba Inu (SHIB) — coin burn
The Shiba Inu developers have made the burning of SHIB, LEASH and BONE a central community strategy, so several million SHIB are burned daily, which can be tracked via the burn address. Analysts have begun to agree that Shiba Inu is the “Dogecoin killer”.
Cardano (ADA) — coin burn
Cardano founder Charles Hoskinson, who had previously urged developers to build a Proof-of-Burn-based application, rejected the coin-burning mechanism, explaining that a deflationary economy can be likened to stealing food.
“We’re very happy that you can tell us to destroy other people’s funds so that you can make a little extra money and then sell ADA and move on to something else,” Hoskinson said in his interview.
OKEx Coin (OKB) — coin burn
Like Binance, OKEx conducts burns quarterly, but on different dates — at the beginning of March, June, September and December. For example, during the 23rd burn on 16 March 2024, a record number of tokens were destroyed — about $744 million worth (11.48 million OKB).
Conclusion
You now know what token burning means, how it works and which projects use this approach.
Ultimately, the decisive factor is not the number of coins, nor even the absence of inflation, but whether the coin will be used in 5, 10 or 15 years. In that sense, one can partly agree with Cardano founder Charles Hoskinson: deflation attracts people while the price is rising, but what happens when the price starts falling and many decide to “abandon the sinking ship”? You could issue just 10 coins, but they will be worthless if nobody needs them.
