For the wider public, money burning may be primarily associated with the British house duo The KLF, which in the 1990s attracted a lot of attention when they burned a million pounds.
In the crypto world, however, it is much more common to burn money. It happens through the phenomenon of “token burning”, which we will explain in detail in this article.
Permanent deletion of cryptocurrency
Token burning means, just as the name suggests, that a certain amount of a cryptocurrency is permanently removed by its creator.
The reason for doing this is usually to counteract inflation.
On larger blockchains such as bitcoin’s and ethereum’s, token burning rarely occurs. It is more common in smaller so-called altcoins where one wants to increase or stabilize the value.
This is how the token burning works
Although the concept is easy to explain, token burning can take place in a variety of ways.
One of the most common is that the cryptocurrency in question’s creators buy a large number of coins and put them out of circulation.
To do this, they put the cryptocurrency they bought in a blocked node on the blockchain.
The big exchange Binance burns large amounts of its cryptocurrency binance coin once a quarter to reach its goal of burning a total of 100 million binance coin.
The crypto company Ripple has chosen a different route and burns a small amount of its cryptocurrency xrp automatically every time a transaction occurs.
Not just inflation control
As mentioned, token burning is usually done to maintain the value of a cryptocurrency and to avoid inflation. But there are other uses as well.
Perhaps the most famous is the “proof of burn” mining method. The way it works is that a miner on a blockchain must destroy a certain amount of a cryptocurrency to get to mine a new block.
A win-win situation
Companies that provide cryptocurrencies earn on token burning by making the value of its coins less volatile and therefore able to function better as a means of payment.
But even investors can profit from the method because the coins they already own become more valuable when other coins are burned.
Since they are less volatile, the increases for token burning coins may not be as high as in cryptocurrencies that do not use the method. But this also works the other way since they also suffer less from sudden losses, according to Cointelegraph.