Main Reason Behind Coin Burn
A coin burn happens when a crypto currency token is send to an unusable wallet so that it is removed from circulation, this is made possible by sending it to a specific public address (eater or burn address) with private keys that aren’t accessible. When the private keys is inaccessible to the public it means no one can ever have an access to the burnt coins rendering them useless.
How the method works
When it comes to the methodology and the actual burning process, there are indeed many ways to kill a cat. Once the token is destroyed its permanent and the total supply of it gets reduced. Some coin burns resemble stock buy-backs we know from the equity markets where the publicly traded company buys back some of its stock, thereby reducing the total number of outstanding shares to improve earnings per share. Coin burns that follow this process include major stakeholders in a cryptocurrency buying back some of the existing supply and transferring it to a burn address. Hence, the coins no longer exist and have been burned. Another method can be used of having a built in self destructive mechanism which will be in line with the currency’s protocol, in some instances the fees affiliated with transaction is burned out of the network completely.
3 categories of coin burning
- As an economic policy to avoid inflation
- For POB proof of burn as a crypto currency industry protocol
- As means of reward to push the price upwards
Major Reasons behind coin Burn
For protection against spams
Coin burning can be used for protecting a crypto network from a Distributed Denial of Service (DDoS) attack where spam transactions slow down the network. Instead of paying miners/validators transaction fees for confirming transactions and securing the network, some cryptocurrencies use a mechanism where transaction fees are burned. Users are required to burn a part of their transactions to enable them to take place, by so doing the chance of spam transactions flooding the network is reduced, leaving more room for healthy transactions.
Some cryptocurrencies use Proof-of-Burn (PoB) as an alternative consensus mechanism to verify transactions. This method of consensus was created to solve the problems of Bitcoin’s Proof-of-Work algorithms, where miners are required to own complex mining hardware that consumes massive amounts of energy. Proof of Burn only requires validators/miners to burn a portion of their tokens to reach a consensus on the state of a cryptocurrency ledger
For value increment
Coin burning as a concept is used by many cryptocurrencies to increase their value to reward HodLers, when the value increases then it attracts more investors. when the circulation supply is reduced and scarcity created, the price typically increases. Most cryptocurrencies are created with a fixed supply limit, like in the case of Bitcoin it has a maximum coin supply of 21 million give or take, and the more it gains momentum and mainstream adoption, the higher the price will go as there is only a limited number to go around.
Showcase of long term commitment
when a coin or token carries some consistent or periodic burns as part of the crypto protocol it will signify that the the project is actually going far, its an indication of commitment towards the long-term contract of the project and this will attract more investors.