If you follow cryptocurrency at all, it won’t be long before you hear about coin burning, a strategy that gained popularity in 2017 for reducing a coin’s supply.
There have been reports that developers have destroyed millions, billions, or even trillions of tokens. This article explains precisely what cryptocurrency burning is and why developers engage in it.
What is coin burning?
A cryptocurrency token gets burned when it is purposely delivered to an unworkable wallet address in order to remove it from circulation. The address, known as a burn address or eater address, is inaccessible and cannot be assigned to anyone. When a token is transferred to a burn address, it is destroyed permanently.
Burning a cryptocurrency is possible for everyone who owns one, but it’s not something you’d want to do for no reason because you’d essentially be throwing money away.
Typically, the developers of a cryptocurrency decide to burn a particular quantity. Coin burning reduces the supply of a cryptocurrency, making its tokens scarcer. This scarcity can result in a price increase that benefits investors.
Several exceptions must be made to coin burning. It is not guaranteed to raise the value of the cryptocurrency. In fact, many see little to no value in it.
The destruction of cryptocurrency coins can be exploited to deceive investors. Developers can declare that they are burning tokens while actually sending them to a wallet they control. To avoid this, it’s essential to conduct research on the cryptocurrency you’re investing in or to stick to more secure cryptocurrency stocks.
Developers may potentially destroy tokens to conceal the identities of wealthy cryptocurrency holders known as “whales.” Suppose a developer releases a cryptocurrency with 1 billion tokens, retains 100 million, and promptly burns 600 million. Because the initial supply was 1 billion, it will appear as if the developer owns 10% of the supply. But the developer owns 25% of the rest of the 400 million tokens, which is obviously a much larger amount.
How did coin burning begin?
The concept of coin burning predates Bitcoin by a significant margin. It is quite similar to stock buybacks and was likely inspired by them.
A stock buyback occurs when the firm that issued the stock repurchases the shares at market price and reabsorbs them, thereby lowering the total number of shares on the market. Although buybacks and coin burning are not identical concepts, they might serve the same purpose.
In 2017 and 2018, many cryptocurrencies, including Binance Coin (CRYPTO: BNB), Bitcoin Cash (CRYPTO: BCH), and Stellar (CRYPTO: XLM), burned tokens in an effort to reduce supply and increase prices. Recently, it has become a regular practice for emerging cryptocurrencies to launch with a huge token supply.
One of the primary reasons coin burning has gained popularity recently is that it allows cryptocurrencies to begin trading at low rates and then artificially raises their value once individuals invest. Due to the cheap price, a new cryptocurrency can begin with 1 trillion tokens worth a fraction of a cent and attract investors. The developers can later burn billions of tokens to increase the price.
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What is evidence of burn?
Proof of burn is a consensus algorithm used to validate and add transactions to blockchains. It is employed to prevent fraud and ensure that only legitimate transactions are processed.
The consensus algorithm is the method by which a blockchain verifies transactions. Proof of work and proof of stake are the two most used consensus algorithms; proof of burn is a more recent option.
Proof of burn requires cryptocurrency miners to burn their own tokens in order to mine new blocks of transactions. They can mine more resources, the more tokens they use. Participants are rewarded with the coin they are mining.
Some proof-of-burn cryptocurrencies mandate that miners burn the same cryptocurrency they are mining. Some also allow miners to burn other forms of cryptocurrency.
Proof of burn is a good way to verify transactions because it works quickly and doesn’t use as much energy as the proof-of-work model.
Is burning cryptocurrency beneficial or detrimental?
Burning cryptocurrency removes tokens from circulation. Similar to corporate stock buy-backs, it can be advantageous or detrimental to cryptocurrencies, depending on investor and user sentiments and how the new supply and demand dynamics affect prices.
How Are Cryptocurrency Tokens Burned?
Tokens are destroyed by sending them to a wallet address that cannot send tokens but can only receive them. This “burns” or removes them from circulation.
Why Do Businesses Destroy Cryptocurrency?
In general, tokens are burned by developers. This theoretically increases the currency’s price and benefits investors by reducing the supply.