- Burned coins are sent to a “black hole” – an address from whence they can’t return
- There are numerous reasons for crypto burning, explained below
- Crypto burning often operates on the concept of less is more
Most readers would be surprised to hear that they can earn more while holding burnt cryptocurrencies. You don’t think so? If you don’t, read through this guide to learn about the concept of “Coin Burn” and its appeal in the cryptosphere.
Introduction to Coin Burning
Don’t get carried away by the literal meaning of the term. The term refers to a process in crypto where users are allowed to intentionally send their crypto coins to a public address for which private keys are unobtainable or unknown. The coins sent to such an address, known as an eater address or a black hole cannot be recovered and become unusable since the keys are unobtainable. Coin burning is typically done on a publicly known address that anyone can visit to verify whether the coins have legally been burnt.
Reasons for burning coins
There are several reasons why crypto coins are burned but the following three are the primary ones:
1. To create scarcity
This method is used to create an economic scarcity by reducing the overall supply of the particular coin with the intention of rewarding holders. Those that use this method are not obliged to give dividends to holders for their loyalty but instead they make their holding more valuable. Binance Coin (BNB) has embraced this method well and they burn a similar amount of coins quarterly where they buy back BNB coins from the market before burning them.
2. To create new coins through proof of burn
As an alternative to Proof of Work (PoW) and Proof of Stake (PoS), Proof of Burn (PoB) is another method for distributed consensus. The idea is for miners to show that they burned some coins by sending them to a verifiably inaccessible address. Similar to Proof of Work, the only resources that are consumed are the underlying assets. All proof of burn cryptocurrencies work by burning proof-of-work mined cryptos so the ultimate source of scarcity remains the proof-of-work-mined “fuel”. Currently, only Counterparty (XCP) uses proof-of-burn.
3. To destroy unsold tokens after ICO or token sale
Tokens that remain unsold during a token sale or ICO are usually burnt to give every investor an equal advantage. The offering company does this to ensure there are no chances it keeps a massive advantage when the tokens increase in price as soon as trading begins. A company holding so many tokens could easily take advantage of the huge number of tokens and dump them besides being less motivated to deliver the product. They do the burn in this case to earn the trust of investors and ensure they stay motivated to remain in the product. A good example is Neblio cryptocurrency team that burned 122 million tokens that were not sold during their ICO by sending them to an unspendable NEBL address.
4. To pay transaction fees
The other reason why cryptocurrencies are burned is to facilitate the payment of transaction fees. Ripple (XRP) uses this method such that for every transaction that is executed on the network, a small amount of that transaction is burned. When this is done, the user pays for the transaction while the Ripple network benefits from the usage of Ripple (XRP) since there is going to be less and less of the crypto in circulation, ultimately driving up the price. Request Network (REQ) is the other payment cryptocurrency that uses crypto burn on transaction fees. REQ tokens are burned every time there is a transaction on the network.
Proving the process
The cryptocurrencies that are burned are sent to a verifiable address that is valid, but cannot be accessed or used. This ensures that the digital currencies will not be accessible for trade since they are removed from circulation entirely and thus cannot be used. For investors that want tangible evidence that the coins have been burned, the method “proof of burn” comes into play. This method uses the same logic as in the blockchain technology that ensures a trust is established without a third party to verify the actions and transactions. The proof of burn concept provides empirical evidence showing that cryptocurrencies have been burned.
Less is more
The main point for burning cryptocurrency is to ensure that the tokens in circulation increase in value. Most cryptocurrencies have a finite total number that can be mined and, as a result, assuming that the demand for the token remains constant, the value should theoretically go up every time there are fewer tokens in circulation. The idea stems from that fact that there will be fewer tokens to satisfy the overall demand for the particular token making the ones that exist more desirable and therefore more valuable. An increase in the demand of a cryptocurrency can easily be noted by its rise in its price besides its growing volume.