Understanding Cryptocurrency Burning and How It Works

Cryptocurrency Burning - Understanding the Term and How It Works

Cryptocurrency Burning: Understanding the Term and How It Works

The literal meaning of the word “burn” highlights the primary meaning of the phrase ‘cryptocurrency burning’. While the use-case, benefits, and the process of ‘burning cryptocurrencies’ is highly technical; this article will graciously expound all these technical processes, benefits, and likely scenarios that surround the burning of cryptocurrencies.

What is Cryptocurrency Burning?

When you burn something, you destroy it. This is the same case with burning cryptocurrencies. This is the process whereby certain crypto holders or investors remove a specified number of tokens thus resulting in the overall reduction of the total number of available tokens that were created.

Crypto holders send cryptos to dormant wallet addresses. These addresses can never be used to carry out crypto transactions. Such wallet addresses are created in a way where they cannot be used to send tokens to other wallets.

Usually, the main reason for burning cryptos is to reduce the number of available tokens in circulation.

How Does the Burning of Cryptocurrency Occur?

This is exactly how it works. Everyone involved in the burning process will send cryptocurrencies to wallet addresses called burners or eaters. These burner wallet addresses are where the burning would occur. Eater or burner wallet addresses cannot carry out any transaction except receiving tokens.

In some cases, developers also decide to engage in the burning of cryptocurrencies without the overall participation of all the members of such crypto communities holding such tokens.

While each wallet address used for sending and receiving tokens have private keys, burners do not. This is the reason why any token sent to burners’ or eaters’ wallet addresses will never be found. In other words, these burners burn any tokens received literally and figuratively.

Reasons for Burning Cryptocurrencies

  • The main reason for this process is mainly to reduce the number of tokens available for circulation which ultimately leads to an increase in the value of such assets. It is only logical to come to an economic conclusion that when a commodity becomes scarce, the value and the demand increases.
  • Burning cryptos makes crypto even more limited in supply. Everyone wants a piece of a scarce commodity. While enthusiasts are trying to buy the tokens, the value of such tokens increases. In this process, developers and major stakeholders profit a lot from their initial investment.
  • Some crypto projects (especially meme tokens and sh*t coins) are launched with millions, trillions, and even quadrillions of tokens available for circulation and mass adoption. While these projects are often perceived as pump and dump projects, burning of these projects will reduce the quantity massively. This act might even change the perception of potential investors.
  • There is a mechanism called ‘Proof of Burn’. The ‘Proof of Burn’ is a blockchain mechanism that ensures that the unaltered and secured state of the blockchain is maintained. It is the anti-fraud protocol built on the blockchain. It makes sure that both sets of early adopters and the new users are not cheated.
  • The burning of cryptocurrencies also helps to balance any form of unmerited favor that can be enjoyed by the early investors or miners of certain crypto projects. One thing about the blockchain for sure is that proof of work makes mining slower and even more tedious as a task because of the new blocks created. Burning old coins makes it easier to mine new ones.
Related:   Understanding Bond Ratings and How It Works

Key Cryptocurrency Burning Takeaways

  • Theoretically, cryptocurrency burnt is most likely to increase in value. Reducing the circulation of tokens available for liquidity and public consumption is a great strategy. However, it is not a guaranteed strategy in the real world. The value and prices are greatly determined by forces of demand and supply.
  • Immediately the coins or tokens are sent to the burner wallet addresses. They have been burnt with an automatic and immediate effect. They can never be retrieved again.
  • In most cases, the reality is that crypto developers are the ones most involved in the burning of cryptocurrencies. In most cases, public announcements are made to the community weeks or days before the burning process starts.
  • There have also been cases where the act of burning cryptocurrencies has created market stability for certain cryptos. As mentioned earlier, everything relating to market price is of course based on demand and supply interactions.
  • While there are huge potentials that come with burning tokens created on the blockchain. Some demerits are attracted to it. One of such is how technical the process is for the average person.
  • The verification is a very long technical process and might not be understood easily. It requires a lot of testing and sometimes the process is not so transparent.

In Conclusion

Although a lot of controversies surround burning cryptos, it is still one of the surest strategies for maintaining price stability and even increasing the value of such crypto. While the testing of the validity of cryptos burnt is highly technical, there is just one thing that the average person needs to understand. That is sending tokens or coins to a burner or eater wallet address.

The Author

Awoyele Olanrewaju

Lanre is a professional writer with over eight (8) years of experience. He has created various content across multiple niches such as business, academic, grant research, and cryptocurrency.