You may have heard the phrase “crypto coin burning,” but what does it mean? The burning of tokens is vital to the world of cryptocurrency. However, there are a few things you will want to know about coin burning. If you are curious about crypto coin burning, we explain the entire process and its reason.
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The Basics of Crypto Coin Burning
In this process, cryptocurrency is burned so that users can remove the tokens (or coins) from circulation. As a result, this process will reduce the number of crypto coins in use. The tokens are sent to another wallet address. However, the holder cannot use the currencies if the wallet is closed outside the network. These wallet addresses are often called “eater” or “burner” addresses. Crypto coin burning effectively removes the token from the available supply and decreases the coins in circulation.
Understanding Cryptocurrency Burning
All cryptocurrency users will have an assigned address where they can receive and send coins. This address works similarly to an email address. As long as the user has access to the wallet, they can access the coins. The cryptocurrency network recognizes the address as belonging to a specific individual and can be used for a wide range of transactions.
Cryptocurrency is considered “burned” when the token is sent to a wallet address that is only available to receive coins. Almost all cryptocurrency wallets have private keys that provide access to a specific person or group. But these burner wallets are different and do not have a private key. When the coins are burned, they are gone forever.
Removing an asset from circulation to change its availability and value is not exclusive to cryptocurrency. For example, many central banks often adjust the amount of the currency in circulation to change its purchasing power. However, there are many other reasons for burning cryptocurrency coins.
An Intentional Burns To Increase Value
In some situations, publicly traded companies will buy back stock to reduce the number of shares in circulation. For the most part, this action can increase the value of the shares and boost the company’s financial performance. Unfortunately, those actions can have the opposite effect. The company often repurchases those shares to prevent a hostile takeover.
With burning crypto coins, there can be varying results in the markets. Burning cryptocurrency coins does not always increase the value of that specific crypto. But in most cases, this action can influence investors to buy more crypto, causing prices to rise. When the number of tokens is reduced in the marketplace, there is hope that the coins will be more valuable and less attainable. Some cryptocurrency developers will intentionally burn crypto coins to increase the value.
Proof-of-Burn is considered a consensus mechanism algorithm. The blockchain network implements it to ensure that the participating nodes are validated in the network. The consensus mechanism is a set of protocols to ensure the transaction is valid.
In some circles, PoB is also called a Proof-of-Work. PoW allows users to burn vital crypto coins. With that, they will have the right to mine in proportion to those tokens burned. For the miners to burn the coins, these miners must send the token to a burner address. The process does not use many resources. PoW ensures that the network continues to remain agile and active. Depending on the implementation, miners can burn their native currency or alternative coins on other blockchains. As a reward, the miner will receive native currency tokens of the blockchain. When a transaction is sent out to the network, that action can also burn coins. Other participants at the top of the miner’s block can also burn the coins. Miners can even use transactions of those other miners to add them to the block. All mining activities will keep the network agile as the participants are rewarded for burning the coins.
Bring Balance To Mining
Sometimes, burning is done to stop any unfair advantages to those early adopters. The PoW system does have a mechanism that promotes the periodic burning of these coins. With that, it can help balance new users and early mining adopters. Each time a new block is mined, the speed of the coins created will decrease. Burning can promote regular activity with the miners. As a result, miners must burn their early coins and mine those new ones. Remember that the new PoW makes it harder to mine new coins. Plus, this process makes it harder for the early miners to hold on to the majority of their coins.
With cryptocurrency burning, some of those tokens are taken out of circulation. Like a corporate stock buy-back, burning cryptocurrency can be beneficial or backfire, depending on the investors. Supply and demand will also affect the prices on the market, especially those cryptocurrency assets. You can only send these burned coins to a wallet that can receive coins. However, the wallet holder cannot transfer the coins to anyone else. Remember those points if you want to receive burned crypto coins. Generally, developers are the ones that burn tokens. When the supply is reduced, it can lead to significant benefits for investors.
Burning Crypto Coins Can Be Beneficial
Burning these coins can have a few advantages, but there are always drawbacks. In many cases, the burning is done to decrease circulation and increase prices on the market. Some consider it a market manipulation, but many feel it helps level the playing field for investors and miners.
With that, you know the basics of burning cryptocurrency coins. Are you searching for an “off-the-shelf” approach to your banking needs? At Unbanked, learn more about our suite of crypto-enabled financial products.