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What is A Coin Burn?

BitForex Editor
Dec 11, 2020

Over the years, the concept of digital currencies has gained a great amount of popularity, which is evident in the attention it has gotten from investors and the daily news. While there might still be numerous prominent holdouts, there is no denying that more and more investors are gradually opening up to the benefits of digital currencies and blockchain technology on a daily basis. As a result of this, the value of all cryptocurrencies has successfully skyrocketed by more than 3000 percent. One factor that has fueled further interest in cryptocurrencies is the fact that some investors within a short time we're able to attain great wealth from this trendy new investment area.

Though digital currencies were able to grab everyone’s attention in a short amount of time, there have, however, been some trends that have come and gone. One of the first major trends in the crypto world was Bitcoin, shortly after which privacy coins such as “Monero” and “Dash” where are all the rave. However, another trend has been able to break into the crypto world, and it is commonly known as “coin burning.”

What is Coin Burning?

Coin burn or burning refers to a process associated with the permanent removal of coins from circulation to reduce the total supply. Coin burning can also be seen as an act by which developers, as well as digital coin miners, remove coins or tokens from circulation in other to reduce the total circulating supply of coins or slow down inflation rates.

How is this possible? First of all, it is necessary to understand that in the digital currency world, it is also next to impossible to control the flow of coins from the moment they have been mined. In other to remove certain coins from circulation, developers and miners acquire those coins and ship them to specialized addresses that are equipped with unobtainable private keys. In this way, without access to a private key, there is no way for anyone to gain access to those coins to use them for transactions.

Through this means, tokens or coins become unusable for any purpose, and they become relegated to a space that is outside of the circulating supply.

Background Of Coin Burning

One crucial factor to note is that digital currencies were not the first to discover the concept of coin burning. In the real sense, the process can be likened to the concept of a publicly-traded company purchasing stocks. These type of companies makes use of cash on hand to purchase shares of common stock which in turn minimizes the total shares outstanding. This process doesn’t just strengthen the value of the shares that are still in circulation, but it also helps to improve the earnings per share with less outstanding shares, thereby increasing the ratio of net income to shares.

Coin burning is also aimed at achieving a similar goal. By minimizing the number of coins in supply, miners and developers hope to make the coins still in circulation more valuable by making them rare.

How Does Coin Burning Work?

A considerable amount of people still finds it difficult to understand how the coin burning process works, which is why this area will focus on the procedures involved in coin burning. The coin burning process occurs or happens in the following order:

*A token or coin holder will contact the function explaining that they want to burn a certain number of coins.

*The contract will perform the task of confirming that the person actually has the coins present in their wallet as well as validating the amount stated. It is important to note that only positive numbers will work.

*If such an individual does not possess enough coins, or the given number is incorrect, then the burn function will not go through.

*If such a person has enough, then the coins will be removed from the wallet, after which the total supply of the coin will be updated before it is burned.

Another thing to remember is if you go through the burn function to burn your coins, then it will be destroyed forever. Once a coin has been burned, it is impossible to recover.

Practical Applications Of Coin Burning

Over the years, at least two digital currencies have attempted coin burning. One of which is bitcoin cash, which recorded a considerable rise in value in the spring. However, before bitcoin cash got into the process of coin burning, BNB, or Binance Coin, also explored this strategy.

 The token of the Binance digital currency exchange is BNB. This token is used to motivate users by providing them the opportunity to pay transaction fees using a staggered approach; based on reports, over 1.8 million BNB coins were burned at the beginning of the year, after which another 30 million dollars of BNB were burned in April. BNB has, however, not been able to record the number of gains similar to what was experienced by bitcoin cash, but it has nevertheless been an excellent performer among other cryptocurrencies.

While coin burning provides certain benefits such as increased cryptocurrency value and protection against spam, amongst others, it is, however, essential to understand that coin burning also provides numerous risks. First of all, the burning of token or coins does not offer an assurance that the coins that are still in circulation will gain or increase in value; also, it does not minimize the total amount of coins outstanding in circulation; this is based on the fact that circulation tends to fluctuate considerable.

One cryptocurrency that serves as an example of why the coin burning process may not work is Bitcoin. The market cap of Bitcoin is at 21 million tokens; some cryptocurrency experts and analysts are of the opinion that its cap plays a role in the value of BTC. Even with this, bitcoin has still been able to create other new types of coins like bitcoin gold and bitcoin cash, all thanks to “hard forks.”

Conclusion

Finally, while the advantages of coin burning might be somewhat extensive, ranging from value enhancement to environmental protection, it is necessary to remember that it also has its downside. Nevertheless, it is safe to safe that coin burning tends to change the scope of cryptocurrencies in the crypto world, and it is one trend that is not fading anytime soon.

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