Many cryptocurrency projects have adopted an approach called token burning to restrict the supply of their tokens. This may conjure up images of smoke and matches, but no tokens are actually burnt in the process. They are, however, rendered unusable in the future. So, what’s the point of token burning and who does it benefit?
Token burning explained
When a company decides to burn tokens, it has two options. It can either purchase existing tokens from the market (known as buy-back) or it can choose to take existing currency out of circulation.
This could be tokens stored elsewhere such as in a Treasury or team wallet, or it could be unallocated tokens. For example, when OKEx launched OKChain in February of this year, the exchange decided to burn the 700 million unissued OKB tokens to make it a completely deflationary currency and the first fully circulating platform token.
To ‘burn’ these tokens, their signatures are sent to a black hole (or “eater”) address. This is an irretrievable public wallet that can be viewed by anyone and the coins’ status is broadcast to the blockchain.
— Binance (@binance) April 18, 2020
Some companies may burn tokens as a one-off event while others, such as Binance, and OKEx hold quarterly burns. How and why companies burn tokens ultimately depends on what they’re aiming to achieve. One-off burns often occur after a fundraise is completed and tokens