What Is Cryptocurrency Burning?
Cryptocurrency burning is the process in which tokens (also called coins) are removed from circulation, reducing the number of coins available.The tokens are sent to a wallet address that cannot be used for transactions other than receiving the coins.The tokens can no longer be used because the private keys to the coins are stored in an inaccessible wallet.
Key Takeaways
– “Burning” a cryptocurrency refers to the act of sending a token to an inaccessible address.
– Wallet addresses used for burning cryptocurrency are called “burner” or “eater” addresses.
– The act of burning effectively removes tokens from the available supply, which decreases the number in circulation.
– Burning is used in some blockchains to increase coin market value, and in others, it is used to confirm a miner’s commitment to the network and grant them the right to mine a block.
Understanding Cryptocurrency Burning
Cryptocurrency users are assigned a publicly-viewable address that is used to send and receive coins.You can think of the address as an email address—you can send and receive emails from anywhere you can access it.
A cryptocurrency address is similar—the cryptocurrency network recognizes that address as yours (although your information is not used) and uses it for transactions.This is your wallet address.
Cryptocurrency is “burned” when a coin is sent to a wallet address that can only receive coins.These addresses are also called “eater” or “burner” addresses.
Cryptocurrency wallets store the keys that let you access your tokens; once keys are sent to a burner wallet, they cannot be accessed or recovered—the tokens are gone forever.
Practical Applications for Coin Burning
Removing an asset from circulation to adjust availability and value is not a new concept.
For example, central banks adjust the amount of circulating currency to adjust that currency’s purchasing power.There are a few other practical reasons for burning cryptocurrency.
Intentional Burns To Increase Value
Publicly traded companies buy back stock to reduce the number of shares
in circulation.In general, this practice is intended to increase the value of the shares while increasing the company’s financial performance.
Unfortunately, it doesn’t always work as intended and sometimes has the opposite effect.Shares are also repurchased as a method of control—companies can use this tactic to prevent a hostile takeover, which is the act of buying shares to establish a majority and, thus, ownership of the company.
There is no evidence yet that burning cryptocurrency tokens automatically increases the value of that specific cryptocurrency.
It decreases supply, theoretically increasing demand—which is actually investor and user beliefs and sentiments about how the markets will react to a decrease in supply.
By reducing the number of coins in supply, the entities doing the burning hope to make the tokens more valuable and less attainable—by controlling the coin supply and maintaining or increasing the value of their own holdings.Some cryptocurrency developers intentionally burn tokens to accomplish these tasks.
Proof-of-Burn
Proof-of-burn (PoB) is one of the several consensus mechanisms blockchains use to ensure that all participating nodes agree to the true and valid state of the blockchain network.A consensus mechanism is a set of protocols that use multiple validators to agree that a transaction is valid.
PoB is often called a proof-of-work system without energy waste.It operates on the principle of requiring miners to burn tokens to be granted the right to mine for the blockchain and receive a reward.
Using this process, there is no competitive mining, which is what causes the PoW system Bitcoin uses to consume so much energy.
To burn the coins, miners send them to a burner address.This process does not consume many resources—other than the energy used to mine the coins before burning them.Depending upon the implementation, you’re allowed to burn the native currency or the currency of an alternate chain, such as Bitcoin.In exchange, you’re allowed to open a block and receive a reward in the native currency token of the blockchain.
Is Burning Cryptocurrency Good or Bad?
Cryptocurrency burning takes tokens out of circulation.Similar to corporate stock buy-backs, it can benefit the cryptocurrency or backfire, depending on investor and user sentiments and how the new supply and demand dynamics influence prices.
How Do You Burn Cryptocurrency Tokens?
Tokens are burned by sending them to a wallet address that cannot be accessed.
This removes them from circulation or “burns” them.
Why Do Companies Burn Cryptocurrency?
It reduces the circulating supply, theoretically increasing demand and affecting the currency’s price.
The Bottom Line
Cryptocurrency burning is the act of sending tokens to a wallet that cannot be accessed.Usually, the holder’s wallet can generate a burner address to which they send tokens.This creates new private keys that belong to the burner wallet—no one has these keys, so the coins become inaccessible.This is usually compared to burning physical forms of money, which is why it is called burning.
Burning removes coins from circulation, reducing that cryptocurrency’s circulating supply.
This is believed to increase demand, causing a value increase.Sometimes, it is used as part of a blockchain’s internal processes—but usually, it is market manipulation disguised as an act for the good of the blockchain, coin, and community.
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As of the date this article was written, the author owns BTC and XRP..
