Burn

The primary purpose is to reduce the circulating supply of a token, creating artificial scarcity. This is based on the fundamental economic principle that, all else being equal, a decrease in supply can increase the value of the remaining tokens. It is a deflationary mechanism often used to counteract inflation from token issuance or mining rewards.

• Example: Ethereum's EIP-1559 burns a portion of transaction fees (base fee), making ETH a potentially deflationary asset during high network usage.

Burning can be used to directly link a protocol's revenue or utility to token value. By using a portion of fees, profits, or revenues to buy and burn tokens from the open market, the protocol creates a value sink. This mechanism, similar to a stock buyback, transfers value from the protocol's treasury or operations directly to token holders by increasing demand and reducing supply.

• Example: Binance Coin (BNB) uses a quarterly burn of tokens based on exchange profits.

In Proof-of-Burn (PoB) consensus mechanisms, burning tokens serves as a sybil resistance and commitment signal. By provably destroying tokens, a participant earns the right to mine or validate blocks, aligning their economic interest with the network's long-term health. The burned tokens act as a virtual mining rig.

• Example: Slimcoin implements a PoB system where burning native tokens grants mining power for a period.

Burning is a key lever in tokenomic design to manage inflation schedules, vesting cliffs, and unsold token allocations. Projects may burn tokens from a team or investor allocation to signal commitment or adjust initial supply models. It can also be used in governance voting where tokens are burned to cast votes, ensuring skin-in-the-game (e.g., conviction voting models).

Burning acts as a method for correcting mistakes or removing unwanted assets from the ecosystem. This includes:

• Burning tokens sent to incorrect addresses (e.g., contract addresses without withdrawal functions).
• Removing "dust" UTXOs or low-value tokens to optimize network state and reduce bloat.
• Eliminating tokens from deprecated smart contracts or legacy systems.

A voluntary, publicly verifiable burn acts as a credible signal to the market. By destroying a portion of the treasury or team tokens, developers demonstrate a long-term commitment by reducing their own potential future supply. This can build trust by aligning developer incentives with community holders, showing that value accrual is prioritized over dilution.

The most common use of burning is to create a deflationary economic model. By permanently removing tokens from circulation, protocols aim to increase the scarcity and potential value of the remaining tokens. This is often implemented as a transaction fee burn, where a portion of every transaction fee is destroyed. Key examples include:

• Ethereum's EIP-1559: A base fee is burned with every transaction, making ETH a potentially deflationary asset.
• Binance Coin (BNB): BNB uses quarterly burns based on exchange profits to reduce its total supply from 200 million to 100 million.

Proof-of-Burn (PoB) is a consensus mechanism where miners or validators demonstrate commitment to the network by sending coins to an unspendable address, effectively "burning" them. This act grants them the right to mine or validate blocks. It's an alternative to Proof-of-Work's energy consumption. Notable implementations include:

• Slimcoin: An early cryptocurrency that pioneered the PoB model.
• Counterparty (XCP): Created by burning Bitcoin, establishing its initial distribution and value.

Burning is essential for the minting and redemption cycles of wrapped assets and stablecoins. To redeem the underlying asset (e.g., receive native ETH back), users must burn the wrapped token (e.g., wETH). This ensures a 1:1, verifiable peg. The process is critical for:

• Wrapped Tokens (wBTC, wETH): Burn the wrapped token to unlock the native asset from custody.
• Algorithmic Stablecoins: Some models burn tokens to reduce supply and increase price during periods below peg.

In gaming and NFT ecosystems, burning is a core utility and sink mechanism. It removes items or tokens from the game's economy to create scarcity, drive engagement, and manage inflation. Common applications include:

• Crafting/Upgrading: Burning multiple common NFTs to mint a single, rarer one.
• Consumables: Using a token or item that is destroyed upon use (e.g., a power-up, key, or fuel).
• Badge Verification: Burning a token to prove completion of a task or to gain exclusive access.

Burning is strategically embedded in tokenomics and governance models to align incentives. Protocols may use treasury funds or revenue to buy back and burn tokens, directly benefiting holders. This is often governed by community vote. Examples include:

• Buyback-and-Burn Programs: Similar to corporate stock buybacks, using protocol revenue.
• Governance-Controlled Burns: DAOs vote on parameters like burn rate or whether to initiate a burn event from the treasury.
• Vesting Sink: Unclaimed or forfeited tokens from team or investor vesting schedules are sometimes burned.

Burning acts as a tool for error correction and key management in smart contract systems. It provides a definitive, on-chain method to render assets inert. This is used in scenarios such as:

• Irrecoverable Assets: Burning tokens sent to the wrong contract address (e.g., a non-ERC20 receiving contract).
• Private Key Loss: Protocols may allow users to burn assets associated with a lost key to prevent them from being permanently stranded, often after a time-lock or social recovery process.
• Contract Migration: Burning old tokens during an upgrade to a new contract version.

A cryptocurrency with a decreasing total supply over time, often achieved through programmed burn mechanisms. This contrasts with inflationary tokens that have increasing supply. Key models include:

• Buyback-and-Burn: Using protocol revenue to purchase and destroy tokens from the open market.
• Transaction Fee Burns: A portion of every transaction fee is permanently removed (e.g., Ethereum's EIP-1559 base fee burn). The goal is to create scarcity, potentially increasing the value of remaining tokens if demand holds.

A publicly known cryptocurrency address with no known private key, making any funds sent to it permanently inaccessible. This is the technical destination for burned tokens. Common examples include:

• 0x0000000000000000000000000000000000000000 (the Ethereum zero address).
• 1CounterpartyXXXXXXXXXXXXXXXUWLpVr (used for Bitcoin-based burns). Transactions to a sink address are verifiable on-chain, providing cryptographic proof that the burn occurred.

The economic design of a cryptocurrency, encompassing its supply, distribution, and utility. Burning is a critical lever within a token's tokenomics model. It interacts with:

• Vesting Schedules: Burning unallocated or unsold tokens from initial distributions.
• Staking Rewards: Offsetting inflation from new token issuance.
• Governance: Using burns as a tool for treasury management or value accrual decided by token holders. Effective tokenomics uses burns to align long-term incentives between developers and holders.

A sudden and significant change in an asset's available supply, which can dramatically impact its price. A burn event can create a positive supply shock by rapidly reducing circulating tokens. This is distinct from a demand shock. Notable examples include:

• One-time large burns of treasury holdings.
• Programmed hyper-deflationary burns on each transaction. The market impact depends on the percentage of supply burned and the prevailing market liquidity and sentiment.