Supply and Burning 101: What is Total Supply, Circulating Supply, and Coin Burning?
If you track crypto in any way, you’ve probably heard of coin burning, a strategy of reducing a coin’s supply that became popular around 2017. Since then, it has been duplicated nearly indefinitely, as is common in the crypto world.
It is a common practice for developers to burn millions, billions, or even trillions of tokens. Today, we will be explaining what cryptocurrency burning is and why developers do it.
Understanding the Supply System of Crypto
In cryptocurrency ecosystems, protocols with endless supply act as central banks, with their own set of regulations for releasing new currencies.
In the world of cryptocurrencies, the great majority of coins are designed to have a finite quantity. The most prominent example is Bitcoin, which has a finite number of 21,000,000 coins. At the time of writing, 88 percent of Bitcoin (18.5 million coins) has been mined. Furthermore, more than 1.5 million Bitcoins were lost permanently as a result of incorrect address transactions and lost private keys. To be clear, that is more than 17 billion US dollars.
Total supply refers to the quantity of coins or tokens that are currently in circulation or are locked in some way. It is the total number of coins mined (or issued) minus the total number of coins burnt or destroyed.
As a result, the total supply comprises both the circulating supply and coins that have yet to be sold on the open market. For example, coins are subject to a lockup or vesting period that often follows a private sale or Initial Coin Offering (ICO) event.
The total supply does not include coins or tokens that are eventually burnt. This implies that whenever token developers like Empire Token do burn events, the overall supply of EMPIRE is permanently lowered.
The quantity of cryptocurrency coins or tokens that are publicly available and circulating in the market is referred to as the circulating supply.
A cryptocurrency’s circulating supply may rise or fall over time. The circulating quantity of Bitcoin, for example, will progressively rise until the maximum number of 21 million coins is achieved. This slow rise is due to the mining process, which creates new coins every 10 minutes on average. Alternatively, coin burn events — such as those held by Empire Token — reduce the circulating supply, thereby eliminating coins from the market.
The circulating supply refers to coins that are available to the general public and should not be confused with the total or maximum quantity. The total supply is used to calculate the number of coins in circulation, which is the number of coins that have previously been issued minus the coins that have been burnt. The entire supply is essentially the sum of the circulating supply and the coins in escrow. The max supply, on the other hand, quantifies the greatest number of coins that will ever exist, including coins that will be produced or made accessible in the future.
Circulating supply should not be confused with total supply, which is the number of coins produced thus far minus all coins deliberately burnt, and maximum supply, which is the hard-coded limit that neither total nor circulating supply can ever surpass.
Coins that are locked, reserved, or unable to be traded on the open market cannot impact the price and, as a result, should not be permitted to affect market capitalization. In conventional investment, the strategy of employing circulating supply is equivalent to the concept of using public float to determine the market capitalization of corporations.
Coin burning occurs when a cryptocurrency token is delivered to an unusable wallet address in order to remove it from circulation. The address, known as a burn or eater address, cannot be accessed or allocated to anybody. Once a token is transferred to a burn address, it is permanently lost.
Anyone who owns a cryptocurrency has the option to burn it, but it’s not something you’d want to do for no reason because you’d simply be throwing money away.
Most of the time, the creators of a cryptocurrency determine how much to burn. Coin burning lowers supply, making cryptocurrency tokens more rare. Scarcity can cause prices to rise as demand increases, benefiting investors. As of this writing, Empire Token has burned a total of 142,143,499 tokens from the maximum supply of 1 billion.
How did it begin?
The concept of coin burning predates cryptocurrencies by a long time. It’s comparable to, and most likely inspired by, stock buybacks.
A stock buyback occurs when the firm that issued the stock buys back shares at market value and reabsorbs them, lowering the total number of shares in the market. While buybacks and coin burning aren’t the same thing, they’re both related concepts that can achieve the same results.
Can every cryptocurrency be burned?
Every cryptocurrency has the ability to be burnt. Because any cryptocurrency may be delivered to a burn address, it is feasible to burn cryptocurrency with any of them.
Why is it being done?
Cryptocurrency designers and/or engineers burn the coins in order to raise the value of the coins that remain in circulation. It’s not different from what happens in the oil industry. If the price of a barrel of crude oil falls due to a glut in supply and demand is not commensurately high, the oil-producing nations restrict production, causing prices to rise again. The same supply and demand mechanism is at work behind the process of coin burning.
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