Before launching a new crypto, projects tend to design a price development model and calculate possible risks. When these risks are too real to be ignored, the developers often resort to burning the asset. The process presupposes creating a cryptocurrency deficit that, like a lifeline, manages to keep control of the asset. But there are more reasons for it. This article will tell you why and how the cryptocurrency is burned.
Definition
Coin burning destroys a certain amount of a crypto asset by removing it from circulation. The cryptocurrency does not get to be destroyed literally but is often simply transferred to the wallet, from where there is no way back. The procedure has a positive effect on the economic performance of the cryptocurrency since the emission regulation tends to increase the value of the asset.
When does crypto get burned?
Getting rid of a certain amount of crypto is a standard procedure to improve the general state of affairs for both the cryptocurrency and its holders/traders. Let’s cover the most common reasons for burning cryptocurrency.
- Increase the price
When it comes to market relations, a shortage of goods increases demand. The cryptocurrency market is no exception: the tokens that remain after the burning create a deficit, increasing their value and attracting buyers’ interest.
2. Reduce inflation
Burning crypto assets helps not only to increase their value but also to keep them at a comfortable price level in the context of continuous mining. If the creation of new cryptocurrencies is not regulated, their price will gradually move to zero.
3. As a result of ICO
Some projects cannot sell all tokens during the ICO. The assets remaining on the company’s account after the ICO are usually burned, which shows that the project cares about the asset and the users.
4. Get rid of the bugs
A blockchain product can be launched with errors. One of the quickest ways to fix the problem is to burn the asset — that is, send the cryptocurrency irrevocably to a special wallet.
5. Create a new cryptocurrency
A Proof-of-Burn consensus goes alongside Proof-of-Work but is more ecologically friendly. The users send a certain amount of coins mined through PoW to a particular wallet, and the information about these transactions becomes proof of burning. This proof confirms the user’s right to mine new coins.
Ways to burn cryptocurrency
There are four main ways to “burn” crypto assets.
- A special wallet. It is akin to a black hole in the crypto space where spare cryptocurrency is sent to support the overall well-being of the project. The private key of such a wallet is deleted and cannot be generated again.
- Fees. Typically, transaction fees are sent to miners as a reward. However, there are networks where the fees go one way to a special wallet. In other words, they get burned. You can find the info about the fees for each asset on our exchange here.
- Special apps for burning. If users do not want to bother with finding a wallet address to destroy the cryptocurrency, they can use special services with an automatic asset-burning function. All in all, one just needs to enter the required amount and click “Burn.”
- Hard fork. Large-scale blockchain updates are accompanied by major changes to the code. It is often necessary to liquidate part of the cryptocurrency in circulation to carry out such operations.
No way back?
Freezing and burning assets are not the same things. When frozen, the assets are sent to a specific address where they get blocked with a private key. When burned, the assets are also sent to a special wallet, but the private key to the wallet is destroyed. Thus, the only way to bring the burned cryptocurrency back to life is to carry out a 51% attack on the entire blockchain, which is possible only in theory so far.
Conclusion
Coin burning is an organic way to ensure the economic well-being of the cryptocurrency. A part of the asset is withdrawn from circulation and sent to a special wallet, where it is no longer possible to return from. The reasons for coin burning are to prevent inflation, increase the value of an asset, get rid of bugs, and more. It is important to remember that burning cryptocurrency is not a plaster for all sores. However, a competent periodic regulation of emission helps companies take better care of their crypto projects.
