- By Pierre-Alexandre
July 4th, 2019
With the concept of Coin Burning getting popular in the cryptocurrency ecosystem, here’s everything you need to know about it.
Cryptocurrencies have been here for over a decade and they will continue to stay here in the time ahead. However, what has changed over the years is the way that these crypto tokens are created and distributed in the marketplace.
Coin burning is a specific concept in the cryptocurrency market and as the name itself hints, it is the process of removing the coins permanently from the ecosystem. Coin Burning is executed through a special consensus model called as Proof-of-Burn.
In the coin burning process, the coins to be burnt (or eliminated) are sent to the ‘eater address’ which is also called as the ‘black hole’. The ‘eater address’ is basically a public address from where the burnt coins can never be spent as the private keys related to those addresses are unrecoverable. However, the ‘eater address’ should be available on the blockchain for anyone to review or verify the Coin Burning event.
What Are The Benefits for Coin Burning?
While the Coin Burning process might not sound appealing to crypto investors at first there are certainly some benefits behind it and its working model. Below are some of the few reasons why Coin Burning can prove to be useful.
Coin Burn: Effective and Better Consensus Mechanism
Just like the proof-of-stake and proof-of-work, the Proof-of-Burn (PoB) is a distributed consensus mechanism which required the participants or miner to show the proof that they have burnt some tokens by sending them to the unspendable public address.
So the main benefit of PoB is that unlike the Proof-of-Work (PoW), it doesn’t consume any additional resources. Hence the PoB is more cost-effective than its other counterpart consensus mechanisms.
Proof-of-Burn Helps to Protect Against Spam
The PoB consensus mechanism prevents spam by acting as a shield against the Distributed Denial of Service Attack (DDOS). Just like one pays a fee for BTC transactions, Coin Burning is seen as a fee paid to keep the network healthy and functional.
Instead of paying the miners for transaction validation, some crypto projects use the Coin Burning mechanism in itself.
Coin Burning: A Way For Rewarding The Token Holders
Coin Burning works on the basic principles of economics i.e. the demand and supply mechanism. Coin Burning decreases the supply of tokens in circulation thereby increasing the demand for the remaining tokens.
Thus the increase in demand leads to the increase in the price of the cryptocurrencies which ultimately leads to rewarding the token HODLers.
Additionally, such crypto projects also serve as a way to pay the HODLers a dividend by initiating a buyback of the native tokens and destroying them later. Crypto projects like Binance having other revenue streams like trading fee, usually use their profits for the BNB token buybacks and rewards the investors by paying dividends.
The major benefit of ‘dividend payment’ using Coin burning is that it prevents the attention of securities regulators. This is because dividend payments in the form of cash or crypto tokens can be regarded as investment security which could attract regulatory attention.
Destroying Unsold Tokens and Coins After an ICO
For cryptocurrency projects raising funds through ICOs, Coin Burning can prove useful in case their tokens remain unsold. Usually, after a token-sale through ICO, the price of the token goes high.
In this case, if the tokens remain unsold, the crypto projects can take undue advantage by selling these unsold tokens at a higher price in the open market. Coin Burning provides a way to prevent this unfair advantage to the token issuers.
Popular Crypto Projects Implementing Coin Burning
Popular crypto exchange Binance implements coin burning for its native Binance Coin (BNB) tokens by using the smart function called as the burn function. The BNB Coin Burning events take place every quarter wherein the BNB tokens are burnt as per the overall trading volume. You can learn more about the BNB coin burning process here.
Last month, crypto exchange Bitfinex initiated the buyback of its LEO tokens which were later destroyed using the “Coin Burning” process.
As part of the celebration of the 12-month anniversary of the VeChain mainnet, the non-profit foundation has announced the buyback of $25 million worth VeChain (VET) tokens which will be later destroyed through Coin Burning.