What if I tell you that you can earn more while holding the cryptocurrencies that are burnt?
Will you believe me? I’m sure you will not believe or might be you’re confused.
Before coming to any such conclusion, let’s get cleared with the whole concept of Coin Burn…
A wide range of coins and tokens have adopted the unique concept of Coin burn. Usually the Initial Coin Offerings (ICOs) integrate a coin burn mechanism for the unsold tokens at the end of the token sale. Also, major cryptocurrency exchanges like Binance has also adopted the coin burning mechanism to add value to those who hold BNB.
What Is Coin Burn?
As the name suggests, Coin Burn is a process of intentionally burning or eliminating the coins rendering them to be unusable. Coin burn also means sending the crypto coins to such a public address where private keys are unknown or unobtainable. Hence, making the coins sent on that address unusable or inaccessible.
Basically, this is done by transferring a portion of coins to an ‘eater address’. This is often referred to as ‘black hole’ because no one can obtain the private keys to that address. Hence, the coins sent to an eater address are unrecoverable and can never be used again.
How Does Coin Burn Work?
Well, when you have known what coin burn actually means, now is the time to know how this Coin Burn mechanism works. The Coin burn process is carried out in the following order:
- Initially, the coin holder will call a burn function, claiming to burn a certain number of coins.
- Later, the contract verifies whether the person has the specified number of coins in his wallet. Also note only positive numbers work.
- In case if the person does not hold valid number of coins, then the function will not get executed.
- If they hold valid number of coins, then those coins will be subtracted from that wallet. Eventually, updating the total supply and burning the coins.
The successful execution of coin burn function will destroy the coins forever. Also, it is impossible to recover these coins after they are burnt.
Proof of Burn is a substitute consensus algorithm which addresses the energy consumption problem of Proof of Work. Basically, the Proof of Burn is referred to as Proof of Work without waste of energy. You can also use it to bootstrap one cryptocurrency off another. Eventually, the central concept of Proof of Burn is that individuals burn their coins to mine in POB consensus protocol. This technique follows the concept of “burning” or “destroying” coins that the miners hold and then grant them their mining rights.
Why Are Coins Burnt?
When you own coins why would anyone burn coins? Well, there are a few reasons why should someone burn coins:
Long Term Adherence
The main reason why coins are burnt is that they encourage long time commitment and time of project. Hence, enabling a greater price stability for coins, as long time investors do not wish to sell or spend their coins.
Protecting Against Spam
The Coin burn mechanism behaves as a natural way to safeguard against Distributed Denial of Service Attack (DDOS). Hence this prevents spam transactions from clogging the network. Usually, coin burning initiates a cost for executing a transaction. There are a few projects that have integrated a burning mechanism where a small portion of the amount sent is burnt automatically. The cryptocurrency, Ripple (XRP) is a project which utilizes this burning model.
Increase In The Value Of New Coin
Usually, the newly created coins after coin burn have value only because of coin burn. Whenever the developers create cryptocurrency, interested parties invest in it. The cryptocurrencies that the investors now receive has value because of the demand. Also, a similar value is transferred to the developers.
Pay For Transaction Fees
Proof of burn mechanism occurs because it is applicable to pay for transaction fees. For example, Ripple uses this method. Whenever a Ripple transaction is made, a minor amount of that transaction is burnt. With this, the user pays for transaction and the Ripple network benefits immensely from the use of Ripple.
Summing It All
The coin burn mechanism is a novel approach for cryptocurrency projects with various features and implementations that can be adopted. Integrating coin burn is quite wide-ranging, starting from a more environmentally-friendly consensus mechanism to enhancing long-term value for coin holders. Also, coin burn represents a viable tool in preserving wealth for all participants in the network.