In crypto, burning refers to the permanent removal of a certain number of tokens from circulation. This helps control the token supply and balance the token value.
Burning reduces the token supply in a crypto project, helping keep the token price stable. Without burning, too many new tokens could erase the token value, which is called inflation.
This aspect is so important in crypto projects that many of them, like Shiba Inu, deliberately burn tokens at regular intervals as a marketing tactic to attract new users.
What is Burning in Crypto?
In crypto and blockchain, burning refers to the process of permanently removing a certain portion of the circulating supply (usually very small) so that the reduced supply can contribute to a rise in token value.
Usually, the token is sent to a dead address, which is a blockchain address with no private key. This means that no one can access this address and recover this crypto. Dead addresses can be easily identified because they contain too many or all zeroes.
For example, here is the common dead address for Etheruem and Shiba Inu.
0x000000000000000000000000000000000000dead
Fundamental Concepts Behind Burning
If you are new to crypto, understanding these fundamental economic concepts will help you understand token burning. All definitions have been provided in the context of burning; for more details, you can visit the specific pages (link provided).
Demand and Supply
The act of burning crypto is based on the law of demand and supply.
The law states that at any given price, the total demand for a token increases with a reduction in supply and vice versa. This means that if there is too much token supply, its demand will be fulfilled which will then decrease. Low demand will result in a crash in price since everyone has got their demand fulfilled.
An alternate way to look at this concept is that when there is an abundance of something, its value is generally close to zero. For example, the value of soil is zero; it’s just the cost of transportation, govt fees, and labor costs you pay when you need soil. On the other hand, the value of gold is too much since the quantity of gold available in the world is very low.
In crypto, this same concept makes Bitcoin far more expensive (21 million tokens only) and makes Shiba Inu cheaper (589 trillion tokens). That’s why Shiba Inu has to run a burn program and not Bitcoin.
Dilution
If you keep increasing the number of tokens in a project, it will erase the value of those that are already in circulation, and this phenomenon is called “dilution.” Most crypto owners hate dilution because it causes the price of their token holdings to shrink marginally.
Inflation
Inflation is the increase in the circulating supply of tokens in a project due to the creation of new tokens. This creation might happen due to an algorithm (like in UST-LUNA), to pay validators (like in Ethereum), due to token unlocks (like in Arbitrum) or due to any other reason.
Inflation erodes the token value in a crypto project and diminishes its value. The opposite of this is deflation.
Deflation
Deflation is the decrease in the value of a token because its token supply is falling. This causes the value of circulating tokens to rise.
In crypto, deflation is generally seen in projects with a fixed supply. Here, the burning of tokens causes the token supply to fall (like in Shiba Inu) and increases the token price.
