What are token burning and token minting in NFTs, and why do they matter? Tokenomics Debate
Minting and burning of tokens are akin to the yin the yang of cryptoeconomics. Tokens are removed out of circulation (burning) and another creates minting new tokens (minting). Both drastically impact demand, supply, and, ultimately, the price.
- Coin Minting can be described as the procedure of making new tokens. Imagine it as printing money in the financial system of old.
- Token burning is the reverse of it is when tokens are withdrawn from circulation, typically by the transfer of them to a wallet that is inaccessible to the public (a burned address).
These aren’t merely technical processes. They directly impact the rate of inflation, scarcity and confidence of investors. It’s important to know when, how and why a given project employs either of these strategies.
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Which one affects crypto value more, token burning or minting?
When I first started to explore crypto, I came across terms such as “minting” and “burning” used in a constant manner. However, no one has ever explained the meaning behind them, or more important was what they contributed to increase the value of the token.
After years of researching and investing in the space I’ve come to realize that the two main mechanisms that can be the difference between a successful and unsuccessful cryptocurrency project. Let’s take a look into two parts: token burning and token minting. What are they and how do they function and which one is the one with the most impact?
Read also: How to Evaluate Tokenomics Effectively
How does token minting work and Does token minting help crypto grow or just cause inflation?
Each time a new token is issued in any way, be it for staking rewards, platform incentives or expansion of the ecosystem is considered to be minting.
There are many kinds of minting
- Fixed Supply Minting The tokens will be created in advance and distributed over the course of time.
- Dynamic Mining: Coins get minted according to the need, mostly to help with Staking or DeFi reward.
- Permissionless Minting In NFTs, and other Layer-1 protocols which allows users to create their own coins according to rules set by smart contracts.
The benefit? Minting can be used to fund development, reward users and expand the ecosystem. What’s the downside? If the issue is not addressed it can lead to inflation that can devalue the value of tokens. I always read the whitepaper of a project to determine whether the minting process is restricted or controlled by transparent rules.
Projects such as Ethereum (before the merger) utilized mining to compensate miners. With proof-of-stake, the project still mints ETH however less frequently. This shift was vital in reducing inflation.
Read also: Understanding Tokenomics for NFTs
Does burning tokens make them more valuable by reducing supply?
Token burning is a method to deliberately reduce the amount of tokens available typically to increase the amount of tokens available and thus bolstering its price. When demand is steady or increases, and the supply decreases, the price usually increases. It’s the basic principle of economics.
A few popular methods for burning:
- Purchase and burn The project makes use of the revenue generated to buy tokens on the market, and burn them.
- Fee Burn The portion that is charged for transaction charges is burned automatically (e.g. the Ethereum EIP-1559).
- Manual Burns The teams burn their tokens regularly in their tokenomics.
Burning is considered to be an instrument to deflate, and is particularly useful in an over-saturated market. Binance Coin (BNB) famously has quarterly burns and has been a major reason for its steady price stability.
But, token burning aren’t a way to assure the value of your token will increase. If demand isn’t strong the burning process alone will not save the price.
Which has a bigger impact on a token’s value, minting or burning?
What I’ve learned is that It’s not about which is superior. It’s about finding the right balance.
Minting can increase growth. Burning may help preserve the value. If either of them is misused the process can backfire.
I stay clear of projects that issue continuously without a deflationary counterbalance. I’m also wary of companies that use tokens to burn to make a splash but lack genuine demand factors. Beware of:
- A minting policy that is controlled (with cap or management)
- A deflationary plan (burns linked to usage or revenue)
- A clear, transparent approach to whitepaper on supply management
If the process of minting funds is innovative and burning boosts price, you can have a strong token economy.
Summary:
- Minting = creation of tokens. Fuels incentives and growth. Risk: inflation.
- Burning = Token destruction. Boosts scarcity. Risk Ineffective without demand.
- The Ideal Model projects that create to earn money or utility however, they burn to control inflation.
Read also: How does burning crypto work: A Bold take on Token Burning and Deflation Benefits
FAQs
Q Do you think burning is always a good idea to be used for token prices?
A: No. Burning can only help when there is demand. If not, it’s an elaborate gimmick.
Q Can a token be simultaneously burned and minted?
A: Absolutely. Many tokens perform both functions to regulate demand and supply.
Q: Where can I find out whether a token is burning or is minting?
A: Read the whitepaper, the tokenomics section or any activities on-chain (e.g. Etherscan, for instance).
Q Does minting imply that an idea that is inflationary?
A not always. It’s all dependent on the speed and the method of controlling it.
Final Thoughts on token burning vs Token minting
When you’re investing your money in cryptocurrency and not knowing how supply is managed it’s a mistake to be blind. I consider burning and minting as vital health indicators of any cryptocurrency. They demonstrate the level of care a company takes in its economics.
So, before I make a purchase? I always check whether they are minting in a responsible manner? Are they burning in a meaningful way? Since these questions can reveal more about a product than any marketing campaign ever could.
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