The total maximum supply of cryptocurrencies differs depending on their tokenomics. BTC (bitcoin) has a limited supply of only 21,000,000 BTC while ETH (ethereum) has an infinite supply. The price movement of these digital assets is driven by their demand and supply. One of the seven economic rules that would basically apply to this is scarcity. But what is scarcity? It means that the demand for a certain asset is greater than the supply available and when this happens, the value of that asset surges. And as the demand increases, its price will soar even more which may result in a recorded all-time high.
With most cryptocurrencies, when a burning happens, a particular number of tokens are removed from circulation and this is usually carried out by miners and developers. These tokens are sent to a “burner” or “eater” address that can never be accessed which means retrieval is not possible. Typical wallets have private keys that enable users’ access but these wallets do not have one making them inaccessible. It’s like a point of no return that once sent, retrieving is impossible.
Most cryptocurrencies use this mechanism to create scarcity. But BTC (bitcoin) on the other hand utilizes halving which happens every time 210,000 blocks are mined. By reducing the rewards received by bitcoin miners, the number of new Bitcoin in circulation is limited creating scarcity. Both halving and burning create scarcity and when there is a strong demand, the price of the cryptocurrency may rise.
But Bitcoin has been scarce from the start with only a maximum supply of 21,000,000 BTC. And with only 3,000,000 BTC left to mine, halving guarantees its scarcity even more. Creating scarcity becomes a problem, especially with digital assets with infinite supply. One best example of this is ETH (ethereum), the second leading cryptocurrency and the king of altcoins. Today, the altcoin has a total circulating supply of more than 120 million. The yearly maximum supply is capped at 18 million or 25% of the digital asset’s initial supply. But there is no end to the number of the altcoin to be mined over time. And the same goes for DOGE (dogecoin) which has a yearly supply capped at 5 billion.
But this process is not actually new since it is already being used by central banks to regulate the amount of currency in circulation to adjust the currency’s purchasing power. This is also true of the traditional stock market where publicly traded companies buy back company stocks to increase share value and the company’s financial performance. In the same manner, the burning of cryptocurrencies reduces the number of tokens in circulation to increase the value that comes with its limited supply. But since cryptocurrencies are decentralized, how is burning implemented?
Cryptocurrencies utilize different types of consensus mechanisms which include proof-of-burn (POB). It was first introduced by Iain Stewart in 2012 as an alternative to the proof-of-work mechanism as it has minimal energy consumption. The mechanism enables miners to burn digital assets granting them the right to mine equivalent blocks to the burnt crypto assets. The coins are then sent to a burner address and this process requires no energy. The concept ensures the network remains agile and active. Users who have participated in the process will receive rewards by burning their tokens and that of the other users. On top of that, the process also aids in deterring unfair advantages for the token’s early adopters. This helps to maintain balance within the network between early adopters and new users. With burning in place, miners will need to continue mining for new coins while old ones are sent for burning. But does burning really creates scarcity that may raise the prices of cryptocurrencies?
To date, there is no evidence that burning cryptocurrencies increase their value. But the concept can influence buyers’ sentiment which may result in an increase in its demand. Limited supply coupled with increased demand may likely result in a rise in its price. Although burning does not guarantee a price surge, it is still viewed as a positive move. Burning serves as a reassurance for investors of the token’s limited supply and that inflation will be unlikely to happen.
ETH (ethereum), the second-largest cryptocurrency by market cap has already burned a total of 2,000,996 ETH from the time of its launching. And with the boom of the DeFi space, the number of ETH tokens burned every day continues to increase. OpenSea, the largest NFT marketplace accounts for the largest ETH burnt tokens with 2,755 ETH destroyed within 24 hours. Burning a greater sum of ETH (ethereum) tokens aims to make the crypto asset deflationary. And this may also be true with tokens with an infinite supply like DOGE (dogecoin) and DAI (Dai).