Understanding Coin Burn In Cryptocurrencies & Its Significance?

Would you believe me if I say:

You can earn more while holding cryptocurrencies that are burnt…

I think you will not !!

But before you reach such a conclusion, why don’t you learn about the concept of ‘Coin Burn’ to learn how you can benefit from it in the cryptosphere.

So let’s get straight to it:

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What Is Coin Burn & What Does It Mean?

But first, for those of you who are already carried away by the literal meaning of ‘Coin Burn,’ I would say relax as no one is asking you to burn your any coin or crypto.

Coin burn literally doesn’t mean burning your coins instead it means sending the crypto coins to such a public address for which private keys are unknown or unobtainable. Thus making the coins sent on that address unusable or inaccessible for future use.

This is as good as burning something because you cannot access these burnt coins again.

Typically coin burn is done on a publically known address so that anyone can check at any time, whether the coins have been legally burnt or not.

For example, see this address of a Bitcoin Eater (i.e., an address to burn your bitcoins):

But Why Coins Are Burnt At The First Place??

Well, that’s the main question that should pop up in everyone’s mind.

That’s done primarily because of three reasons:

  • To create a digital scarcity of coins to push the price up
  • To create new coins (proof of burn)
  • To destroy, unsold tokens or coins after an ICO or token sale has ended.

So that’s why the coins or tokens are burnt, and I am going to explain each of these scenarios through an example in the next section but before that let’s see how coin burn happens.

How Coin Burn Works?

  • User calls a burn () function nominating the amount of coin one wants to burn.
  • Token contract verifies the stated number of coins are available or not.
  • If coins present, burn is completed.

This is how a burn works on a high level but who started coin burning for the first time and why?

Coin Buring In Cryptocurrencies

  • Proof Of Burn

Proof of burn is a method for distributed consensus and an alternative to Proof of Work and Proof of Stake. It can also be used for bootstrapping one cryptocurrency off of another.

The idea is that miners should show proof that they burned some coins – that is, sent them to a verifiably unspendable address.

This is expensive from their individual point of view, just like proof of work; but it consumes no resources other than the burned underlying asset. To date, all proof of burn cryptocurrencies works by burning proof-of-work-mined cryptocurrencies, so the ultimate source of scarcity remains the proof-of-work-mined “fuel”. (Source Wikipedia)

As of now, one of the cryptocurrency that is live and has used proof of burn is Counterparty (XCP).

XCP developers simply choose to make XCP cryptocurrency by burning their bitcoins. This means they sent their respective share of BTCs to an unspendable address, and in exchange for these BTCs, Counterparty tokens (XCP) were generated on the Bitcoin blockchain. Here is the proof as you can check their amount of BTCs burnt for this purpose via XCP proof of burn.

XCP developers did this primarily to avoid pre-mining or ICO for bootstrapping a new cryptocurrency, i.e., Counterparty and thus re-using the energy that was already spent on mining those burnt BTCs.

So, that’s how the underlying burnt asset (i.e. BTC) gave initial value to XCP as well as a fair opportunity to anyone wishing to participate in the project, even the developers.

  • To create a digital scarcity of coins to push the price up

Another reason for coin burning is to reward the holders of that coin or crypto.

This is done so that an economic scarcity can be a creator by reducing the overall supply of the coins and thus rewarding the holders of that particular coin.

The method is quite innovative where you don’t require to give dividends to your holders for their loyalty instead you can make their holdings more valuable this way.

For Example, BnB Coin Burn & Tron Coin Burn (Coin Burn TRX)

Binance Coin (BNB) has embraced this method very well where every quarter they burn some amount of their profits to buy back BNB from the market and then burn it to create a price appreciation to burn its holders. And this will continue for Binance until only 100 BNB tokens are left in the market.

  • Destroying unsold ICO tokens

Another place where coin burn matter is, unsold ICO tokens.

When tokens are not sold in an ICO or token sale, these are often burnt to give everyone equal advantage.

If these tokens are not burnt then the company holding it can have a massive advantage because generally, these ICO tokens increase in price after they start trading.

This can give an unfair advantage to the company holding so many tokens which might dump the tokens and be not motivated to deliver their product.

Burn is also done to win the trust of other investors who have invested in the token and keep them motivated to remain invested in the token.

For example, the Neblio cryptocurrency team did the same when their 122 million tokens were not sold in the ICO, and they did burn their tokens by sending NEBLs to an unspendable NEBL address.

Conclusion: Coin Buring Usecase

Coin burn can have different usecases depending upon for what purpose you are using it, but the underlying method of doing it remains the same.

But coin burn can have its advantages and disadvantages:

Coin Burn
Advantages Disadvantages
Establishing trust & fair distribution Indirectly wastes resources
Bootstrapping new currencies Could be broken
Loyalty rewards for holders of a coin being burnt Dividends more preferred option in the eyes of holders than the indirect price increase.

Lastly, in my opinion, coin burn is a good thing for the cryptosphere as it brings much need transparency. Also, if you are holding a coin that is burnt often then you have got a decent chance of benefiting from its scarcity-driven driven price spike.

That’s all from us today and if you are looking to indulge more in cryptocurrencies, look no further than The Money Mongers because we doing everything to bring crypto education to the masses.

Find this post informative? Do share it with your network and keep growing together in the crypto world !!

Sudhir Khatwani


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