30 September 2022
As the name suggests, Coin burning is a process where Cryptocurrency miners and developers remove a portion of coins from circulation to control their price. It is influenced by the dynamics of supply and demand Hence, the most significant purpose of burning down the coins is to generate a deduction effect. These actions make Tokens scarce and increase the Cryptocurrency’s values by reducing the overall amount of Tokens in circulation.
Coin Burn means intentionally burning or eliminating the coins representing them as useless/inapplicable; the Coins creators usually takes this decision. Coin Burn is a unique concept in the Crypto industry, and a wide range of coins and tokens have adopted it.
In Coin Burn, Cryptocurrency is sent to the public address whose private keys are unknown or unapproachable. This process of sending a portion of coins to an “eater address” is also known as “black hole” because unattainable addresses make the coins useless. Everybody can review such transactions as they are publicly recorded and validated by their peers on the Blockchain.
The coin burn process is similar to proof-of-burn; Larger Crypto Coins, such as Bitcoin and Ethereum, make use of this process, but the smaller Tokens and Altcoins are frequently burned to reduce supply and provide significant incentives to investors. Most investors think that burning the coins will increase their value in the market; however, this has taken a turn since the Coin supply has reduced by over 50%.
How Does Coin Burn Work?
The Mechanism of How the Coin Burn or Token Burn process works is as follows:
- The Coin Holder is the one who decides about nominating the number of coins they would like to burn.
- Later, the Smart Contract verifies whether the person holds the specified number of coins in their Wallet. Also, note only Positive Numbers work.
- If the individual does not hold the valid number of coins then the function will not execute.
- If an individual holds a valid number of coins, then those coins will be subtracted from that Wallet. Eventually, updating the total supply and burning the coins.
This successful execution of the Coin burn function will destroy the coins forever, and it is impossible to recover these coins back.
Don’t worry this process is completely legal to perform, as it has been practised by many well-known developers like BINANCE (BNB) and TRON (TRX)- they are popular for burning their coins to reward their coins holders. Binance has done this several times per year; with its most recent seventh coin burn destroying around 830,000 BNB, or over $16 Million. At the same time, VeChain and TRON adopted a similar concept. This strategy has a significant advantage, as the size of the burn is largely determined by the market forces and price action.
Reasons for Coin Burn:
1. Effective Consensus Mechanism:
This category includes coins that use Proof of Burn (POB) as their consensus technique. POB is a substitute consensus algorithm created to eliminate excessive power consumption by Proof of Work Consensus. The primary thought behind POB is that users are expected to burn their coins, which allows them to mine in the Proof of Burn Consensus Algorithm. Furthermore, in a distributed network, the burnt portion of the coins creates a unique way of approaching consensus.
2. Increase in Value of Coins:
As you may know, Coin burning is a method of purposely reducing the total amount in circulation to stabilize and boost the price of coins and Tokens. To understand this much deeper, one must learn the concept of demand and supply. Values can be added to a particular asset by creating scarcity. Cryptocurrencies, have a fixed coin supply, and no new coins are generated once the total supply is achieved.
For example, Bitcoin has a fixed supply of around 21 Million; if the demand increases, the prices will increase too as there are limited supply of BTC. But if the supply of Bitcoin drops due to lost private keys, forgotten BTC, or even burning, the prices will continue to rise because the supply of BTC has decreased, and the demand of people is still not met.
3. Spam Protection:
Coin burn is a natural technique for preventing spam transactions and safeguarding against a Distributed Denial of Service Attack (DDOS) in the Cryptocurrency sector. Usually, coin burning generates a cost for executing transactions. There are a few projects that have integrated a burning mechanism where a small portion of the amount sent is burnt automatically. Some projects have a similar burning mechanism. For example, Ripple (XRP)
4. Long Term Commitment:
Coin Burning is a method of signalling a firm and a long-term commitment in a Cryptocurrency project. A coin burning mechanism is used to burn extra ICO Tokens or to provide periodic burning schedules, which helps to strengthen a project’s growth. It also helps to maintain price stability, which is important for long-term investors who are unwilling to sell or use their coins.
Coin Burning is a revolutionary strategy for Cryptocurrency projects on a protocol and policy level, with a variety of implementations and features. The benefits of including Coin Burn are numerous, ranging from a more environmentally friendly consensus mechanism to increased long-term value for coin holders. As a result, Coin Burn is a legitimate mechanism for conserving wealth for all network users.