Token Burn - Advantages and Disadvantages - Burnsteem25 initiative

Pexel

In my last post I can recall talking about the burn function. I made a detailed explanation on how tokens are burn and this is marked by setting a percentage of which the blockchain Burns quarterly. The BNB chain triggers its burn function quarterly and a certain percentage of BNB tokens are born with special consideration to the total volume traded in the exchange, that is binance.

After this burn, 20% of the total profit within the brand period is used to buy back the BNB token burn. This method of buying back burn tokens after profit-taking every quarter has been tagged as a long-term burn whereas the short-term burn involves the use of the daily autoburn command button on the exchange. Early December 2021, it was observed that the quarterly burn was replaced with the use of the autoburn which brings about greater predictability and transparency of the process to stakeholders and investors.

The autoburn mechanism employed by BNB determines the amount of BNB burned and the formula used to determine this is shown below. This formula puts into consideration the price of BNB as of the time it was burn and the number of blocks generated under this review period. Approximately 850 BNB burns daily with this new autoburn function which also represents a real-time burn function. The formula for auto burn;

B=N×1000/(P+K)
Where B= Amount of BNB or BNB amount

• N is the number of blocks produced quarterly
• P is the price of BNB
• K is the constant value which is set at 1,000.

Source

Through this process, the value of BNB has continue to grow continually each time the burn activity is conducted.

Token burns have advantages and disadvantages on the long run. The token burn is a mechanism employed to reduce the total supply of an asset by removing a percentage from circulation . The advantages are as follows...

• Burning of tokens reduces the overall supply which creates scarcity. This scarcity increases the value of an asset and the reduction in supply of this token will increase the demand of the token of which investors will invest in the asset because of the asset's value.....

• The Token's price will increase drastically as a result of this burn. It adds to the price of the token which attracts investors to the asset. With a limited quantity in circulation, demand for that particular asset would be increased and more investors would be on standby to buy the asset so they'll be in profit as well. That's the advantage of burning a particular token.

• Investors become confident when they see this increase in the value of the token. They'll invest in the asset on a long-term basis . It also aligns interest of project developers and holders of the coin. Those who bought at a lower rate will benefit when this coin pumps as a result of the burn and changing market conditions.

Disadvantages

• Tokens burnt if not properly managed can yield consequences like insufficient tokens for operation of the network and development of the blockchain. It can also create scarcity that is artificial which influences any value that's real added to the system.

• Liquidity is reduced in a particular asset which may limit trading options and make it difficult for investors to buy or sell tokens. Volatility is also introduced which triggerd short-term stability

This initiative was created almost a year back. The purpose of this initiative is to reduce the total supply of steems in circulation as outlined in my explanation of what burning a token mean. The platform brought about this initiative where users can set 25% of their earnings to a user whose wallet address is linked to a smart contract on an exchange that would burn the coin at the set percentage. This is one of the reasons why you can't see steems in that wallet because anytime our percentage enters, it disappears automatically.

This is the reason why we burn steem to increase the price of Steem and maintain it as well. In conclusion, we've seen why it's important for coins to be burn and how they are burn. A popular case is how binance burns BNB quarterly at a set percentage.

Disclaimer :Any financial and crypto market information provided in this post was written for informational purposes only and does not constitute 100% investment advice. It's just basic knowledge every crypto trader or investor should have