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Burning, Burned

When cryptocurrency is burned, it means that a certain amount of tokens have been removed from the total number in circulation. There are different ways that tokens can end up getting burned. For example, on some ledgers, as transactions go through the consensus algorithm, a transaction fee is paid and, subsequently, a specific fraction of that transaction fee is burned. Ethereum is one ledger that works this way. However, not all ledgers burn tokens as a part of the validation process. Algorithmic stablecoins are known for burning tokens in order to maintain their peg (which is often a peg to US$1).

Similar to what happens with fiat currency (for example, when US dollars are removed from circulation), burning tokens has a deflationary effect on token value. As tokens are removed from circulation, the tokens that remain in circulation increase in value relative to fiat currency (such as the US dollar or euro).

While burning tokens as a means of removing them from circulation metaphorically conjures images of a physical pile of cash being tossed into a furnace, there is no way to set a digital token ablaze. Instead, “burning” entails the permanent transfer of the tokens to an account that is sometimes referred to as the “burn address”; an address from which tokens can never be recovered.

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