Token burning is the process of permanently removing a certain number of tokens from circulation, thereby reducing the total supply. It is often used as a deflationary mechanism to increase scarcity and potentially drive up the value of the remaining tokens.
Burning tokens is usually done by sending them to a verifiably unspendable wallet address, often referred to as a burn address (e.g., 0x000...dead). Tokens sent to this address cannot be retrieved, making them effectively destroyed.
Why Burn Tokens?
- Control Inflation
Just like central banks manage fiat currency supply, crypto projects use token burns to reduce oversupply. - Increase Token Value
Scarcity can create demand. If fewer tokens are available, and demand stays the same or increases, the token price may rise. - Reward Holders
Token burns can indirectly benefit holders by making their tokens more valuable due to reduced supply. - Transaction Utility
Some protocols burn tokens automatically as part of transaction fees (e.g., Ethereum’s EIP-1559 upgrade). - Reputation and Trust
Projects that burn tokens may be perceived as more trustworthy, especially when they reduce insider or team allocations.
Step-by-Step: How Token Burns Work
Step 1: Decision to Burn
A burn event may be:
- Manual: Announced and executed by the project team or DAO.
- Automatic: Programmed into smart contracts (e.g., burn a percentage of each transaction).
Step 2: Token Removal Mechanism
The tokens to be burned are:
- Sent to a burn address
- Locked in a contract with no access
- Removed from supply using blockchain-level functions (e.g.,
_burn()in ERC-20 smart contracts)
Step 3: On-chain Verification
Because burns are transparent and irreversible, they can be:
- Verified on a block explorer
- Tracked using public smart contract addresses
- Audited by the community
Step 4: Supply Adjustment
Once burned:
- Circulating supply decreases
- Total supply may or may not decrease depending on how the protocol defines it
The change is reflected in tokenomics and analytics platforms like CoinMarketCap or CoinGecko.
Types of Token Burns
- Manual Burns
Done periodically by the project team, typically announced ahead of time. Example: Binance (BNB) performs quarterly burns based on revenue. - Automatic Burns
Programmed into the protocol to burn a percentage of each transaction. Example: SafeMoon burns a portion of every transfer. - Buyback and Burn
The protocol uses profits or reserves to buy tokens from the market and then burns them. Example: Some DeFi platforms use trading fees to buy and burn tokens. - Fee-Based Burns
A part of every transaction fee is burned automatically. Example: Ethereum’s EIP-1559 burns a base fee from every transaction. - NFT or Event-Driven Burns
Users burn tokens to mint NFTs or participate in limited events. Example: Token burning to participate in IDOs (Initial DEX Offerings) or governance votes.
What Is a Deflationary Model?
A deflationary token model is designed to reduce token supply over time to create scarcity, increase value, and control inflation. Unlike inflationary models (like fiat currency printing), deflationary tokens aim to shrink total supply.
Core Characteristics of Deflationary Models
- Limited Maximum Supply
Many deflationary tokens have a hard cap. Bitcoin, for instance, has a cap of 21 million coins. - Burn Mechanism
As discussed, tokens are removed from supply via burning. - Halving Events
Rewards for mining or staking are reduced periodically, slowing new token issuance (e.g., Bitcoin halving every 4 years). - Fee Redistribution
Some models redistribute transaction fees among holders while burning another portion. - Scarcity through Usage
Token is required to access certain services, and part of it is burned during use (e.g., gas tokens on smart contract platforms).
Examples of Deflationary Cryptocurrencies
| Token | Deflation Method | Notes |
|---|---|---|
| BNB (Binance Coin) | Quarterly burn from profits | Burn continues until 50% of total supply is gone |
| ETH (Ethereum) | EIP-1559 burns part of gas fees | Effective deflationary post-merge |
| SHIB (Shiba Inu) | Community burn campaigns | Burn address contributions via fees or tipping |
| SafeMoon | Auto-burn on every transaction | Encourages holding |
| Terra Classic (LUNC) | 1.2% tax burn on transactions (at one point) | Community-voted burn parameter |
Token Burn Example: Binance Coin (BNB)
- Binance uses 20% of profits each quarter to buy back and burn BNB tokens.
- Objective: Reduce supply from 200 million to 100 million.
- Each burn is public, and the amount is shared in official reports.
- This mechanism boosts confidence and supports long-term price.
Impact of Token Burns on Price
While burning tokens doesn’t guarantee price increases, it may positively influence price by:
- Reducing overall supply
- Signaling project commitment to sustainability
- Creating short-term speculative demand during burns
However, if demand doesn’t keep pace with the reduced supply, price may not rise significantly.
Pros and Cons of Token Burns
Pros:
- Helps fight inflation
- Creates scarcity
- Incentivizes long-term holding
- Builds trust in project commitment
Cons:
- Doesn’t automatically increase value
- Can be used as a marketing gimmick
- Unsustainable if done too frequently
- Reduces liquidity and circulation
Token Burns vs Buybacks (in Traditional Finance)
| Concept | Crypto Token Burn | Stock Buyback |
|---|---|---|
| Removes asset | Yes, permanently | Temporarily (shares may be reissued) |
| Goal | Increase scarcity | Increase share price and EPS |
| Transparency | On-chain, public | Disclosed via reports |
| Who executes | Project or smart contract | Corporate board or management |
The Future of Deflationary Models
Deflationary models are becoming increasingly common as projects try to mimic the limited supply narrative of Bitcoin while adding innovative burn mechanics.
Emerging trends include:
- Dynamic burn rates that adjust based on market conditions
- Governance-based burn votes where communities decide when and how much to burn
- Burn-to-earn models where users are rewarded for burning tokens
While not every project needs a deflationary model, it’s a powerful tool for supply management and economic design—especially in highly competitive DeFi and NFT ecosystems.