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- Coin Burning refers to the process of eliminating coins from circulating supply permanently.
- Coin Burn results in reduced supply and increased price, serving its motive.
- Every cryptocurrency can be burned and Proof-of-burn can be used to validate the burning of coins.
Coin burning, at its most basic, points towards destroying or making cryptocurrency tokens unusable to reduce the supply and make the price more stable. Once coin burning occurs, the supply reduces, this shortage of tokens may result in increasing prices of the related cryptocurrency and serving profits to the investors. However, there is no such rule that the prices have to go up, sometimes you may not see any fluctuations in the price, or the price may even drop. The process is quite the same as the buy-back of shares in the stock market or the demonetization of currency in a country.
The process of coin burning is quite clear and easy. Anyone can burn coins but it is mostly done by developers or miners. A specific number of coins or tokens are selected and sent deliberately to a wallet address that is not usable. The address to which these coins or tokens are sent is called the eater address or the burn address and they do not have a private key. With no private key, accessing the wallet becomes impossible, which means once the coins sent to such wallet addresses will stay there forever, eliminated from the circulating supply.
The idea of coin burning is very old, but it gained popularity in recent years, starting from 2017 & 2018 when different crypto tokens were burned to increase prices by cutting the supply. Stellar and Bitcoin Cash are some cryptos that burned tokens in 2017 & 2018.
A new concept was bought into light by Iain Stewart to implement coin burning, called Proof-of-burning. Proof-of-burn simply works by burning its coins or tokens to serve incentives to its nodes and motivate them to act as good entertainers on the blockchain. In this Proof-of-burn concept, if miners need the right to mine or want more blocks to mine, the miners have to send their coins or tokens to an eater address. When miners burn their coins, depending on how much they burn, the algorithm selects the miner to mine the block. The more a miner burns his coins, the higher the chance of getting blocks to mine.
Almost all cryptocurrencies are burned but in different manners. For instance, when a bag of coffee is sold at Shiba Inu’s coffee company, 10% of the company’s profit is burnt in SHIB burning. Other cryptocurrencies like Ethereum, after the London Hard Fork, burns 3.17 Ethereum every single minute, whereas SafeMoon follows a tax system & applies a 10% tax on every transaction, i.e., burning an average of $7000 worth of tokens every day.
The influence of coin burning on markets hasn’t been proven yet, but some believe that, when approached theoretically, coin burning should result in stabilizing the market and the prices for the cryptocurrency as well. However, coin burning is an important factor for investors as it hints that the prices or the market of the cryptocurrency will stabilize itself and it may serve them with increased profits. It should be kept in mind that coin burning, alone, doesn’t signify if that cryptocurrency is worth investing in or not.
Steve Anderson is an Australian crypto enthusiast. He is a specialist in management and trading for over 5 years. Steve has worked as a crypto trader, he loves learning about decentralisation, understanding the true potential of the blockchain.
