Burning cryptocurrencies is not about hardware wallets in flames destroying coins. Think of it rather as crypto lingo for a mechanism somewhat similar but not entirely to the well-known share buybacks in traditional capital markets. When a company decides to retire a number of shares from the market, this may have an impact on the market price and or it may convey a signal about the company`s growth.
In the cryptocurrency world, when a number of coins are burnt, it means they are sent to an unreachable address which is called the “eater address”. This is an address whose private keys can’t be accessed by anyone.
One of the main reasons that coins have deployed burning mechanisms is to manage inflation and affect positively the coin price. But not all coin burning schemes are the same.
The BNB token of Binance is an example of a quarterly burning scheme that was implemented nearly 4 years ago, well before BNB became the native coin of theBinance chain blockchain. The exact burning dates are not fixed and the number of coins burnt depends on the trading volume and profitability of the Binance exchange.
The BNB burning mechanism is based on a purely centralized decision of the company and involves no voting from BNB holders. The coin burning will continue until half of the total BNB supply – 200 million BNB – is destroyed. The 14th BNB coin burn in Q4 2020 was the largest to date - ca. 3.6 million BNB. The 15th BNB coin in Q1 2021 burnt 1.1 million BNB and brought the total circulating supply down to 169 million BNB. Binance has decided to accelerate the burning rate going forward in order to reach the 100 million goal faster.
The MKR token of the MakerDao Defi protocol is an example of an autonomous, built-in burning scheme, which admittedly, is complex. MakerDAO is currently the 2nd largest DeFi lending platform with over USD 9 billion worth of cryptocurrencies locked in its vaults. MKR token holders have voting rights which enable them to govern the protocol and decide on several parameters, including the so-called stability fee. Every time ETH is locked into a vault, the borrower receives 66% of their collateral value in DAI stablecoins which accrues interest in DAI (i.e. at the stability fee rate). Once the loan is repaid, MKR is burned and buried with its sibling the DAI. The formula that determines how much MKR is burnt is the following
MKR Burn rate=[DAI Market Cap x [Stability fee] x [Time]] / [MKR price in DAI]
Burning in the MakerDAO network is a way to manage the DAI stabelcoin price and to mitigate the lending systemic risk.
The KNC coin which is native to the Kyber protocol is an example of a third different burning scheme. The Kyber network is built to enable peer-to-peer swapping of coins and partners with DEXs to provide liquidity. There is a built-in burning mechanism that automatically burns part of the profits from each transaction, which are in KNC coins. The higher the transaction volume in the network, the more KNC tokens are burnt.
The Kyber Network burning scheme is similar to the upcoming introduction of burning that will be implement with the EIP-1559 upgrade of the Ethereum network. Ethereum blockchain developers have voted for this change as a way to mitigate the current problem of the expensive transaction fees. Under EIP-1559 gas fees will be based on an algorithmically determined price (the base price) plus optional fees if you want to speed up the processing of the transaction. These base fees will be burnt and not paid to miners. Naturally, miners are not happy, and some mining pools are attempting to gather steam to voice their opposition.
Another coin burning case is one that was decided by the miners not the developers, for Bitcoin Cash. Ant Pool, a Bitcoin mining pool, started in the Spring of 2018 burning 12% of all the transaction fees they processed. At the time, AntPool was validating about 10% of all bitcoin cash transactionsand therefore, affecting the inflation rate.
All of the above examples of coin burning per transaction schemes, are burning coins that are in circulation. Ripple too has been engaging in similar activities. However in addition, there is the possibility that the company Ripple maybe forced by the community to burn the 48 billion XRP they hold in an escrow account and are not currently in circulation.
One-off coin burning also was common practice back in the days of the ICO hype, with most early-stage projects burning unsold tokens after the ICO so that the team wouldn’t have an unfair advantage.
Another major one-off coin burn took place in November 2019 when the Stellar Foundation burnt 55 billion of its XLM tokens. The community voted to reduce the total supply in half (from the original 105 billion XLM) and also decided to never have another burn in the future.
Figure 1 ‐ Coin Burning
Stellar`s coin burn is the largest one-off unexpected burn.
Binance`s coin burn scheme is one of the first quarterly coin burns with a goal to reach a fixed supply (half of the original).
Ethereum`s new burn scheme is the first to be newly introduced several years after launch, as a means to manage scalability issues.
MKR`s burning mechanism is the first autonomous Decentralized finance stabilizing mechanism.