DeFi
September 21, 2022
What are Whitepapers and Litepapers?
Whitepapers and Litepapers are both essential to research related to any crypto project. Get to know what they are and how to use them effectively.
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A digital asset is essentially removed from circulation by being locked up forever or burned by sending it to a point from which it cannot be reclaimed ever, also known as a burn address.
A burn address is a digital wallet that cannot be accessible since a private key is not connected with it, much like a lock for which a keyhole has never been created. Eater addresses are another name for burn addresses.
By transferring tokens to a burn address, they are completely removed from circulation, locked up in no one's possession, and deemed untradeable ever again. Burning a financial asset could seem drastic, but doing so with cryptocurrency tokens is pretty typical and has an effect on the token’s value.
Token burning is a tactic used by cryptocurrency projects to affect a token's or coin's market rate. Although Bitcoin and Ethereum, the two most popular cryptocurrencies, don't have token burning mechanisms, many competitive altcoins do.
With all being said about what a token burn is, and the fact that it affects a coin’s market rate, it is naturally a question as to why does it happen in the first place?
Yes, a token burn happens in a manner similar to how businesses rebuy their shares absorbing the cost of the stock and giving investors value in the form of an increased price for the security.
Certain cryptocurrency projects will periodically burn their tokens. Because of this, news of a project burning tokens may be seen favorably, though it may not always cause prices to rise instantly.
This is due to the fact that certain token burns are mechanized to occur on a regular basis or are notified in advance and are thus implicitly priced into the value at which a token trades before the burn happens. It's also feasible that unrelated news about a digital asset could impact price changes in a more dramatic way.
Usually, developers are the individuals who burn tokens. Because of the reduced supply, the cost of the currency rises, rewarding investors.
One of the most well-publicized cryptocurrency burns occurred when Ryoshi, the Shiba Inu's alias creator, offered Ethereum co-founder Vitalik Buterin 50% of the token's allocation when it first launched. Buterin stated that he did not want to become "the hub of power" in 2021 and burned 90% of his tokens, leaving the remaining tokens to be given to charitable causes. The value of the burned tokens was estimated to be $6 billion in the day, and they would now be valued at billions and trillions of dollars.
Yuga Labs' Otherside metaverse venture, which is being developed by Bored Ape Yacht Club developer Yuga Labs, burned $157 million worth of Ethereum in the rush to mint Otherdeed NFTs.
Nevertheless, since the downfall of Terra's stablecoin UST in May, when the value of both UST and the LUNA token used in the burn-mint mechanism dropped to almost zero, the effectiveness of the algorithmic stablecoin following burn-mint mechanism has been thrown into doubt. No stablecoin has been capable of successfully holding its price peg using only computations or burn techniques up to this point.
Token burning aims to strip a specified sum of a token from the circulating supply of the cryptocurrency.
One of the most common methods used by cryptocurrency projects to execute a burn is to purchase a specific number of tokens from the market to remove them from distribution.
Then, these tokens are sent to a Burn address, a frozen private address. The burn address to which the tokens are sent cannot ever be retrieved since there is no private key linked to that address, making it a one-way address with no way to undo the transaction or recover the funds. The asset has effectively been "burned," thus it is no longer present.
Burns of more than $2.8 billion has been executed for stablecoins like USDT, GUSC, USDC, and HUSD. Once resources are deposited or retired, this makes the reserves transparent. Tokens are minted following a deposit into reserves. When coins are withdrawn from the reserve and burned, the circulating supply is controlled and the balance is retained.
Ripple, a well know cryptocurrency also does this but in a different way. By limiting the number of transactions permitted on its network, it reduces the likelihood of a DDoS assault (which destabilizes the normal traffic of a service, server, or network).
Another method includes using fees as "gas" to speed up a transaction more quickly. Each transaction lowers the supply of XRP that is readily available on the market.
Much has been discussed about the concept of token burning, let’s jot down the three points in short as to how this method proves to be helpful for us:
1. It might support the revenue growth of the coin. Even while it's far from a guarantee, certain cryptocurrencies have witnessed price hikes when tokens are burned.
2. Burning tokens can halt a price from rising if a cryptocurrency has a high level of inflation.
3. It is a method for users of proof-of-burn cryptos to donate additional transactional blocks to a blockchain.
Token burning affects the price of a coin, at least momentarily, as seen by the proportional rise in the value of many cryptos. However, there are exceptions like Stellar and many other tokens as XLM sank during the Coronavirus crisis. However, starting in late April 2020, the token stabilized and eventually reached the $0.10 level in July of that same year itself.
The act of burning coins does not imply the cryptocurrency is a worthy investment. There are cryptocurrency token burners that are both positive and negative. Understanding how coin burning functions can help you better comprehend cryptocurrencies that utilize it.
Supply and demand are one of the core aspects affecting the price of cryptocurrencies. The need for traders and investors drives a sizable percentage of the cryptocurrency market, and the supply-demand equation is vulnerable to fluctuations and volatility. A coin's price may hurt slightly or even dramatically if demand declines while supply increases.
However, burning coins can sometimes aid in a coin's price recovery but only in certain cases. The explanation for this is quite uncomplicated: we know that burning coins reduces the number of tokens in circulation. Reduced supply creates more scarcity, which raises demand and raises the value of the coin.
A significant number of a cryptocurrency must be burned in order to have a worthy impact on the market. Additionally, developers could be hesitant to carry out a significant burn if a coin is getting close to the end of its limited supply.
Burning cryptocurrencies is another way to reward or urge investors. When a cryptocurrency's price rises, more people may decide to invest in it, which will create demand and push the cost even further.
Non-fungible tokens (NFTs) can be burned in addition to burning traditional crypto tokens, and also some NFT projects include built-in burn principles in their brands. So both fungible and non-fungible tokens can incorporate a token burning mechanism as per the requirement.
Prof. Chebbi has advised, “Unless you are hoarding Coins of any denomination (be it Bitcoin, BNE, or others), you don’t want to burn the coins you own. Currently, only the promoters (for example Binance team for BNB tokens) burn some of their holdings so the people investing in their currency realize a higher value for their investments. If you are an investor looking to invest in crypto, you should study if token burns have happened for that currency and if there is a defined burn schedule.”
Token burning is not simply about disposing of tokens; it is also a component of a larger narrative in which authority is being returned to individuals in different ways. For the project who truly understands the utility of this, it will undoubtedly result in some impressive, practical, and believed blockchain advancements. And it's safe to say, consulting a professional is recommended.
Whitepapers and Litepapers are both essential to research related to any crypto project. Get to know what they are and how to use them effectively.
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