If you keep up with digital currency at all, it won’t take you long to hear about cryptocurrency burning, which is a method of cutting the supply of the coin that became famous around 2017. As you can see in crypto, it has been copied almost numerous times since then.
With cryptos large and small, there is news about how the crypto developers burned millions and billions of tokens. In this article, you will learn what exactly is cryptocurrency burning and why developers practice this.
What Is Cryptocurrency Burning?
Cryptocurrency burning is the process in which customers can remove tokens from circulation, which decreases the number of coins that are being used. The coins are sent to a crypto wallet address that cannot be utilized for transactions other than getting the coin. The wallet is outside the network, and the token can not be used anymore.
Understanding The Concept Of Cryptocurrency Burning
Digital currency users are assigned an address employed to receive and send coins. You can think of an address like your email address. You can receive and send emails from that email address anywhere you have access to it. A digital currency address is similar, and the digital currency network identifies that address as yours and uses it for the purpose of transactions. This is your wallet address.
Digital currency is “burned” when a token is sent to a wallet address that can only get coins. These addresses are also known as “burner” or “eater” addresses. Digital currency wallets have private keys that allow you to access the token that you have stored in them; however, burner addresses do not offer a private key, which implies the tokens are gone forever.
Practical Applications For Coin Burning
Eliminating an asset from circulation to adapt availability and value is not a new idea. For instance, central banks adjust the quantity of circulating currency to adjust the purchasing power of that currency. There are a few other practical purposes for burning cryptocurrency as well.
Intentional Burns To Increase Value
If you have doubts regarding does burning crypto increase value, then this part will solve your doubt. Publicly traded entities purchase back stock to decrease the number of shares that are being circulated. In general, this practice is aimed at increasing the value of the shares while raising the financial performance of the company. Unfortunately, it does not always work as aimed and at times it has the opposite impact. Shares are also re-bought as a process of control and entities can use this tactic to stop a hostile takeover which is the act of purchasing shares to gain a majority and thus ownership of the business.
Proof of Burn
PoB (Proof of Burn) is among the several consensus mechanism algorithms enacted by a blockchain network to assure that all contributing nodes agree to the true and valid condition of the blockchain network. A consensus structure is a set of protocols that utilizes multiple validators to agree that a transaction is valid.
PoB is often known as a PoW (proof-of-work) system without energy waste. It functions on the principle of enabling miners to burn digital currency tokens. They are then offered the right to write blocks (mine) in proportion to the coins that are burnt.
Burning To Promote Mining Balance
To stop the chance of unfair benefits for early adopters, the PoB mechanism has enacted a mechanism that boosts the periodic burning of digital currency to maintain a balance between early mining adopters and the new users.
The speed at which tokens are created via PoW decreases each time a new block is mined. This boosts regular activity by the miners; instead of mining 1 crypto when mining first starts, miners must burn their early coins and then mine new ones. Because new proof-of-work mining makes it more difficult to mine new coins as more are formed, it becomes more hard for the early investors—or well-funded ones with big mining farms, to maintain a majority of the coins.
What Coins Can Be Burnt Through The Process Of Crypto Mining?
Every digital currency can be burned. All digital currencies can be sent to any burn address, which implies it is possible to burn crypto with any of them. Here are a few famous digital currency tokens that have been burnt and the scenarios surrounding these events:
- Cryptocurrency exchange Binance began holding quarterly burns of its Binance Coin (BNB) in 2017. The exchange has committed to cryptocurrency burning until 50 percent of the total Binance Coin supply is eliminated from circulation. This was the crypto coin burn schedule of the Binance Coin.
- The Stellar Development Foundation burnt over half of the Stellar supply (55 billion XLM tokens) in 2019.
- In what was likely a try to receive attention, the developers of Shiba Inu (CRYPTO: SHIB) offered half the supply to Vitalik Buterin, the co-founder of Ethereum (CRYPTO: ETH), in 2021. He promptly burned 90 percent of those tokens and also donated the rest. So if you have wondered is Shiba burning coins, you must have got your answers now.
Now coming to the final fact: is burning crypto good? The process of cryptocurrency burning takes coins out of circulation. Similar to corporate stock purchase backs, it can be advantageous for the digital currency or backfire, relying on investor and user sentiments and how the latest supply and demand dynamics affect prices
Crypto coins are burned by sending them to a particular wallet address that can only get tokens, but does not sends any. This eliminates them from circulation, or this “burns” them. In general, it is the developers that burn tokens. This decreases the supply, which ideally acts to raise the price of the currency and benefit investors. An upcoming token burn includes a burn of AME Chain (AME) on 25.04.2022.