Coin burning refers to permanently removing some tokens from circulation by transferring them into a wallet from which they can never be reclaimed. It's common to say that this eliminates tokens as the tokens can no longer be used because the wallet is not connected to the network. The address where the tokens are sent is also called burner addresses. Because burner addresses lack a private key, the tokens are permanently lost. Several coins burn tokens to increase the value of the coin. Coins such as Binance, Ethereum, and Terra use the burning of tokens. Recently, Terra (LUNA) had a terrible crash earlier this month due to the mass burning of LUNA because of its connection to the stablecoin TerraUSD (UST). Due to the fall of both tokens, the only option for TerraUSD (UST) to regain its pegged $1 value is by the mass burning of Terra (LUNA) tokens, which would raise the value of the linked stablecoin.
The demand of traders and investors drives a significant portion of the cryptocurrency market, and the supply-demand equation is susceptible to swings. Crypto Burning is mainly used to decrease the circulating supply, and as the demand increases, it leads to an increase in the value of coins. However, burning coins can occasionally aid in a coin's price recovery only in certain scenarios.
The explanation for this is rather straightforward: burning coins reduces the quantity in circulation. Reduced supply creates more scarcity, which raises demand and increases value.
Burning cryptocurrencies is another way to reward or encourage investors. When a cryptocurrency's price rises, more people may decide to buy it, which will create demand and raise the price even higher.
Applications of Coin Burning
In an effort to raise the value of the currencies that are still in use, crypto developers burn the coins. It resembles a lot of what takes place in the world of oil. If the price of a barrel of crude oil falls because there is an excess supply and the demand is insufficient, the oil-producing countries cut back on production to raise prices. The same supply and demand mechanism is at work when coins are burned.
