If you’ve spent any amount of time in the world of crypto, you most likely already know about Ethereum. It entered the market in 2015 and has since become the second-largest cryptocurrency on the planet right behind Bitcoin.
At the time of writing ETH has a market capitalization of over 226 billion USD. While the sheer size of Ethereum is impressive, what we’re more interested in today is its supply that’s in circulation. Currently, this number hovers around 120+ million tokens.
Since Ethereum doesn’t have an upper limit on its supply like Bitcoin, there’s a chance that — as its supply increases — the value of each ETH token will tank. To prevent such a future from becoming a reality, Ethereum has a dedicated burn address and supply-reducing feature to counter inflation.
Understanding how this burn address works can help us get a better insight into the future of Ethereum as a valuable asset. With that in mind, let’s take a closer look at what this address does and why it matters.
The Ethereum Burn Address Explained
To summarize, the Ethereum Burn Address is a valid crypto address that can receive ETH transactions without any issues. However, this address does not have a private key so any ETH tokens sent to this address are effectively lost, or “burned” if you will.
Ethereum Burn Address
0x0000000000000000000000000000000000000000
At the time of writing, this address holds about 11,732 ETH tokens which equals more than 22 million USD. In addition to this, we also found more than 200 other Ethereum-based tokens on this address with a combined valuation of more than 44 million USD.
How the Ethereum burn address functions
From what we know, there is no automated system in the base Ethereum network to utilize this address. In other words, all of the ETH tokens you see in this address today were sent to it willingly by holders.
However, this is not the only burn option Ethereum has. In 2021, there was the launch of EIP-1559, which is an automated system.
What is EIP-1559?
EIP-1559 is a newer, automatic system implemented to control the supply of ETH tokens. Under this system, there is a base fee that’s charged with every transaction and that fee gets destroyed completely from the network.
The exact base fee can vary between transactions depending on factors like network traffic.
All in all, this system proved to be super effective as nearly 30 million USD worth of ETH tokens were destroyed just two days after the launch of this feature.
Why Ethereum uses a burn address
We’ll discuss the details of why this burn address exists later. In essence, the purpose of this burn address is to manage supply and ensure that there isn’t an oversupply of ETH tokens.
If there wasn’t any place to effectively burn the Ethereum coins, the supply would keep on increasing. It’ll then eventually surpass the demand, leading to a collapse of ETH’s market value.
The Process of Burning Ethereum
Now that we have a better idea of what the Ethereum burn address is, let’s take a closer look at how it operates. That said, the exact process of burning Ethereum depends on which of the methods is being used.
These methods are:
Burn account
In our experience, the process of burning Ethereum with the help of the burn account is almost identical to a normal ETH transaction. To test it out, we decided to burn a small amount of Ethereum to see what happens. Here’s the process that you can replicate as well:
Follow these steps and you should be able to burn Ethereum from circulation without any issues.
EIP-1559
While you have to do things manually for the burn account method, EIP-1559 burns ETH on its own. All you have to do is initiate an Ethereum transaction, doesn’t matter to who. The cost of this transaction includes a base fee that will get burned automatically once the transaction is complete.
Circumstances under which Ethereum might be burned
Now, you might be wondering, why would anyone send Ethereum to the burn address deliberately? There can be a number of reasons, eg: smart contracts between two entities.
In September 2021, KuCoin — one of the largest crypto exchanges in the world — transferred tens of millions worth of ETH to the burn account. To our knowledge, no one in the public crypto community knows the reason behind these transfers.
How much Ethereum has been burned?
As we mentioned before, the Ethereum burn account holds 11,732 ETH tokens with a current market value of 22 million USD.
We understand how this number seems huge for an individual trader. However, it is minuscule compared to the complete scale of the Ether cryptocurrency. In fact, it is less than 0.000095% of the total ETH available on the market today.
The real difference in the supply of Ethereum comes from the EIP-1559 feature. Since its launch, it has removed 3.1 million ETH tokens from circulation, which is about 0.025% of the current supply.
The Significance of Burning Ethereum
Burning Ethereum efficiently is a necessary step in keeping its value stable. But, why is that? Isn’t burning Ethereum the equivalent of just throwing away money? Well, not necessarily.
As we mentioned earlier, there is no upper limit to how many Ethereum coins can exist on the crypto market. So, as new ETH tokens keep getting created, the value of each individual token will start going down. This problem will accelerate if the demand for ETH falls at the same time.
So, to protect Ethereum from total collapse, measures like the burn account and EIP-1559 are used to periodically destroy a part of the total supply. This keeps the value of the remaining coins more consistent and introduces stability — something that’s sorely needed in the world of crypto.
Of course, the best thing about automatic measures such as EIP-1559 is that they can be adjusted depending on the situation. For example, if the value of ETH starts plummeting due to low demand, an increase in EIP-1559 base fees can balance things out.
What this means for the price of Ethereum
When we consider the effects of burning Ethereum on its value, it becomes clear that this process exerts considerable influence on Ethereum’s market dynamics.
As the circulating supply of Ethereum diminishes through burning, the relative scarcity of the remaining tokens intensifies. This scarcity, combined with the persistent demand for Ethereum, creates an environment conducive to price growth and potential price stability.
Which Cryptocurrencies Burn Coins?
All things considered, burning tokens to maintain the supply and demand balance is a fairly ingenious idea. That’s why Ethereum is not the only crypto asset that uses this method. Some other examples of similar processes we’ve seen include:
Binance coin (BNB)
The Binance chain uses a method similar to EIP-1559 to burn excess BNB tokens. In other words, a portion of the gas fees on the BNB chain gets burned periodically.
Avalanche (AVAX)
Avalanche also burns the transaction fees for its AVAX token to ensure the stability of its remaining supply. This system is also quite active as more than 25,000 AVAX tokens were burned on May 11th, 2022 — the highest for any single day.
Conclusion
To recap what we’ve discussed so far, the Ethereum burn address serves as a non-recoverable destination for sending ETH tokens — effectively eliminating them from circulation. There’s also the EIP-1559 system that automatically burns a specific amount of ETH with each transaction.
This act of burning ETH tokens has a significant effect on the Ethereum network's economic dynamics by creating scarcity and potentially increasing the value of remaining tokens.
Looking ahead, this Ethereum burning process has the potential to make ETH more robust and resilient. In our opinion, if used effectively, these burning methods can become the backbone Ethereum needs to legitimize itself as a usable and trustworthy currency.