If you have recently started crypto trading, we are sure you’ve come across the term coin burning. For those who don’t know, it’s the method of cutting the supply of coins that gained popularity back in 2017, and as we usually see in the crypto world, it has been going on endlessly.
With so many coins in the market, like litecoin and bitcoin, there is ongoing news about crypto developers burning millions and trillions of crypto tokens. So, with this article, we are sharing information about cryptocurrency coin burning and why it’s done at all!
Understanding Coin Burning
Coin burning incurs when the token is transmitted to the unusable wallet address to make sure it’s eliminated from the network or circulation. The address is known as eater address or burn address and cannot be assigned or accessed by anyone.
In simpler words, when the token is transmitted to the burn address, it is basically gone. Anyone who owns the cryptocurrency has the ability to burn it but many don’t do it as it involves throwing away your money.
In the majority of cases, the cryptocurrency developers decide to burn a specific quantity of cryptocurrency. This is because burning can reduce the overall supply, which results in the scarcity of cryptocurrency tokens.
Consequently, the scarcity will result in a higher price that benefits the investors. When it comes down to cryptocurrency burning, there are multiple caveats to consider, such as zero guarantees if it increases the value. In fact, many developers think that it doesn’t do any good.
However, cryptocurrency coin burning is perfect for deceiving investors because developers can claim that they are burning tokens when they are actually sending the tokens to a controllable wallet.
For this purpose, it’s important to conduct due research on the cryptocurrency that you are purchasing or investing in to ensure you end up with better stocks. The developers can also burn the tokens to mask the whale that holds an enormous amount of cryptocurrency.
To illustrate, if a developer launches some cryptocurrency with one billion tokens, keeps one-hundred million tokens, and burns the remaining 600 million tokens. It will appear that the developer owns 10% of the supply since the original quantity was one billion. However, the developer owns around 25% of the 400 in-circulation tokens, which is a significant amount.
When Did Coin Burning Begin?
Honestly, the concept of coin burning has been evident before the launch of cryptocurrency since it has been inspired by stock buybacks. To illustrate, the stock buyback is defined as the process when the company that issued the shares, reabsorbs them, eventually reducing the number of total shares in the market. It’s safe to say that coin burning and buybacks aren’t ditto but they have a similar concept with many similar objectives and goals.
As far as coin burning is concerned, it became popular when cryptocurrency gained popularity back in 2017 and 2018. This is because, during this time, BNB, BCH, and XLM burned down the tokens to increase prices and cut down the supplies.
Ever since then, it has been a popular way among the latest cryptocurrencies that were started with enormous token supplies. One of the primary reasons why coin burning became popular recently is its ability to initiate cryptocurrency at cheaper prices and artificially increase the value when a lot of people have invested in it.
Which Coins Need To Be Burned?
There is no specification when it comes down to burning because every cryptocurrency coin can be burned. This is because every cryptocurrency can be transmitted to the burn address, which means every coin can be burned. As for recent history, the following digital tokens have been burned, such as;
- Binance, a common cryptocurrency exchange, started holding the quarter-based burns of the Binance coin back in 2017. This exchange has committed to do this until half of the total coin supply is eliminated from the circulation
- Stellar Development Foundation burned 50% of the supply which made around 55 billion tokens. This happened in 2019
Proof Of Burn
Proof of burn is defined as a consensus algorithm that can be used by the blockchain to validate and increase transactions. It is important to prevent the chances of fraud and ensure that only valid transactions are processed. So, are you clear about the concept of cryptocurrency burning?