A central part of the design of any crypto project is its token economics. Tokenomics (short for “token economics”) outline the logic of distribution and future supply of the token. Notably, tokenomics can be altered and voted upon by means of decentralized community governance. For instance, the community might decide to increase the supply by minting new tokens or decrease it through token burns.
Token burning is the process of permanently removing tokens from circulation, therefore reducing the total supply of a crypto asset. These tokens are essentially transferred to a one-way address known as the burn address which makes it impossible for anybody to withdraw tokens from that address as there exists no corresponding private key.
How does a token burn work?
From a technical standpoint, tokens are burnt in the following procedure:
- A token holder calls the burn function indicating that they want to burn a given amount of tokens
- The contract then verifies that the holder has the specific amount of tokens in the wallet
- If the holder doesn’t have enough coins or provides a negative number, the function will not be executed
- If the holder has the tokens, they will be subtracted from the wallet. The total supply of the token will be also updated by tracking the burn address.
As mentioned above, this process is irreversible and the tokens cannot be recovered as the burn address has unobtainable private keys. The transactions are fully transparent on the blockchain and everyone can view that the tokens have been burned.
On Injective, 60% of the exchange fees will undergo an on-chain buy-back and burn event. Exchange fees collected from all trading pairs are aggregated over a set period of time and auctioned to market makers who bid with INJ tokens. A derivatives protocol contract will continuously aggregate all exchange fees collected into a pool and then conduct a blind auction at the end of the period. The smart contract will verify and select the highest bid to conduct the exchange. All proceeds from the auction will be burnt.
About Injective Protocol
Injective Protocol is the first layer-2 decentralized exchange protocol that unlocks the full potential of decentralized derivatives and borderless DeFi. Injective Protocol enables fully decentralized trading without any restrictions, allowing individuals to trade on any derivative market of their choosing. Injective is backed by a prominent group of stakeholders including Mark Cuban, Pantera Capital and Binance.