What if I told you that you can make more money while holding your burned cryptocurrency? Before drawing any such conclusions, let’s first understand the whole concept of Cryptocurrency Burning.
Various coins and tokens have adopted the unique concept of Coin burn. Typically, Initial Coin Offerings (ICOs) integrate a token burn mechanism for unsold tokens at the end of the token sale. Additionally, major cryptocurrency exchanges like Binance have also adopted a token burning mechanism to add value to those who hold BNB.
What is Cryptocurrency Burning?
As the name suggests, cryptocurrency burning is the process of deliberately burning or eliminating coins to make them unusable. It also means sending encrypted coins to public addresses whose private keys are unknown or unavailable. Thus, making coins sent on that address unusable or inaccessible.
Basically, this is done by transferring a portion of the coins to a “burn address”. This is often referred to as a “black hole” because no one can obtain the private key for that address. Therefore, coins sent to the burn address are unrecoverable and can never be used again.
How Does Cryptocurrency Burning Work?
The coin burning process takes place in the following order:
Initially, the coin holder will call a burn function, claiming to burn a certain amount of coins.
After that, the contract verifies that the person has the specified amount of coins in their wallet. Also note that only positive numbers are valid.
If the person does not hold a valid amount of cryptocurrencies , the function will not be executed.
If they hold a valid amount of coins, those coins will be debited from that wallet. Eventually, the total supply is updated and the coins are destroyed.
Successful execution of the destroy coin function will destroy the coin forever. Furthermore, it is impossible to recover these coins after they have been burned.
Proof-of-burn is an alternative consensus algorithm that solves the energy consumption problem of proof-of-work. Basically, Proof of Burn is known as Proof of Work that does not waste energy. You can also use it to steer one cryptocurrency away from another. Ultimately, the core concept of Proof of Burn is that individuals burn their coins to mine in the POB consensus protocol. The technology follows the concept of “burning” or “destroying” the coins held by jobs and then granting them the right to work.
Why do Cryptocurrency Get Burned?
Why would anyone burn coins when you own them? Well, there are several reasons why someone should burn coins:
The main reason coins get burned is that they encourage long-term commitment and project time. Thus, greater price stability can be provided to the token as long-term investors do not want to sell or spend their tokens.
The token burn mechanism acts as a natural way to defend against distributed denial of service attacks (DDOS). Thus, this prevents spam transactions from clogging up the network. Often, coin burn incurs the cost of executing transactions. There are projects that integrate a burning mechanism, where a small portion of the amount sent is automatically burned.
Increase the Value of New Cryptocurrency
Usually, newly created coins after burning coins are only valuable after burning coins. Whenever a developer creates a cryptocurrency, interested parties invest in it. Investors are now receiving cryptocurrencies with value due to demand. Also, similar value is transferred to developers.
Pay Transaction Fees
The proof-of-burn mechanism came about because it was suitable for paying transaction fees. For example, Ripple uses this approach. Whenever a Ripple transaction is made, a small portion of the transaction is burned. With this, users pay for transactions, and the Ripple network benefits greatly from the use of Ripple.
The coin burn mechanism is a novel approach to cryptocurrency projects with various features and implementations that can be adopted. Integrating token burns can range from greener consensus mechanisms to enhancing long-term value for token holders. Additionally, token burns represent a viable tool to preserve wealth for all participants in the network.