Burning token is the destruction of a certain number of tokens (or coins) to reduce their number in circulation. This method has been used successfully with startups, traditional businesses and even global corporations in the case their shares.
For example, in the spring of this year, Apple has launched a plan to buyback $ 100 billion with their subsequent burning and increased dividends by 16 percent. One of the founders of the financial platform Humaniq Alex Fork shared with Bitcoinist his thoughts on the implementation of the burning procedure of tokens in the stock market.
Why is it necessary
The main purpose of burning tokens is quite simple — companies need to sustain growth rates of their assets. Moreover, each startup in the crypt of the need to ensure a clear, functional and profitable use of tokens in the ecosystem of your project.
Processes of redemption and burning tokens have the potential to become the new standard for the future of the industry ICO, if the startups will be to perform this procedure is reasonable and fair, and will also be able to prove their economic viability. That is why the company should always provide evidence that it burned their tokens.
This model of development implies a gradual reduction in the number of coins in circulation and an increase in demand for them. In fact, projects can make their own disinflationary measures with multiple mechanisms for increasing the price of the token. To do this, they can buy from the exchanges for incineration or introduce loyalty programs that will encourage holders for a long period of abstinence from the sale of coins.
Sometimes it is enough just to support the rumors about the possible destruction of the coins. For example, the founder of TRON Justin San constantly reminded his followers about burning the tokens of the project on their streams. Although other members of the startup did not confirm the rumors, the hype surrounding the coins is gradually growing. Finally, in June, the company made the burning of a billion tokens.TRX.
There are several scenarios under which the burning of coins would be advantageous.
Increasing the value of tokens
The smaller token is traded on exchanges, the higher exchange rate (a simple consequence of the law of supply and demand). Most of the projects and so is of limited emissions, but to reduce the number of coins in circulation is still need to gradually, so as not to alter the equilibrium of the stock market.
In such a scenario valid, the exchange Binance, which burns its own tokens each quarter. Thus, the company makes its assets attractive to investors in the long term.
Sometimes developers can release a release a product with a bug that can be “cured” only by burning token. These problems include an excessive number of issued coins, the random creation of a wrong address or the increase in emissions due to technical errors.
To solve the nuisance of this type is easy enough to send the right amount of tokens to the address from which they cannot be withdrawn. In fact, the term “burning” is slightly incorrect. Coins do not cease to exist by themselves, they simply “buried” for no purse.
Getting rid of excess ICO
Most of the projects limit the number of tokens that they’re going to sell during the ICO. In some cases, a startup is unable to close all their goals on crowdfunding and part of the cryptocurrency remains on the wallets of the company. Often developers just sell the remaining tokens on the market to get good profit.
However, a much better scenario is to burn unsold tokens. So a team gives confirmation to its investors that it only uses the borrowed funds for business purposes. Thus, the income from ICO is justified by the actual demand for the tokens that fair enough for the market and holders.
The provision of dividends
If the project produces a security token, its investors can be compared with holders of traditional shares that receive dividends. The company buys tokens and burn them, thereby creating a gap in the market.
Moreover, instead of a dividend payment startups can simply increase the value of their digital assets by burning excess tokens. For even greater investor interest better than a whole series of programs burns and incentives.
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