Key Highlights
- The process of burning involves sending tokens and coins to a dead wallet.
- The wallet addresses where the tokens and coins are sent to execute burning are called burn addresses or eater addresses.
- The cryptocurrency burning increases the price of its existing tokens and rewards its holders.
- Crypto burning is the process of removing a certain number of a cryptocurrency from its circulation supply.
After entering the crypto world, it does not take more than a month to hear the term 'Crypto Burning'. And if it's the year 2022, burning is an even more frequently heard phenomenon associated with different cryptocurrencies.
But how can something virtual like cryptocurrency burn? How does it happen, and more importantly, why does it happen?
All these questions can come up only in a true crypto-curious mind, and we are excited to answer all of them.
So let's get to the definition of crypto Burning.
What is Crypto Burning?
Crypto burning is the process that involves removing a specific number of coins or tokens from the crypto market by sending them to a non-redeemable wallet.
Let's understand it with a general example.
Assume that you trade in paper towels to make a living. Now, the market is full of paper towels to such an extent that the demand is less, and the supply is more. So you and other traders of paper rolls decide to burn some of your paper towels to reduce their supply. Your plan works, and the paper towel supply reduces. Now, since the demand is the same as before and the supply has become less, it will result in a hike in the price of paper towels, and you will be able to make more profit than before.
As a cryptocurrency is a virtual asset, it can not be burned like paper towels, so its miners/developers send some of it to unusable wallet addresses. This act of removing a specific amount of a cryptocurrency from the market by sending it to a dead wallet address is called Crypto Burning.
How Do You Burn Cryptocurrency Tokens?
The token that needs to be burned is sent to a wallet that only supports receiving and not sending or spending. It means no one can buy, sell, stake, or do anything with the coin/token sent to a dead wallet address. The location or address of the burned coin is called a burn address or eater address.
Here is the detailed process behind token burning:
- Say a holder 'A' of a cryptocurrency calls for burning his coins stating that he wants to burn a specified number of his owned coins or tokens.
- The smart contracts associated with that cryptocurrency verify if 'A' who proposed the burning owns the specified number of coins in his wallet or not.
- If 'A' proposes an invalid number, for example, zero or any negative number, the smart contract will conclude it as an invalid entry, and the burning will not start.
- If 'A' has the proposed number of coins in his wallet, the burning process will begin, and the network will send those coins to a non-redeemable wallet coin. This way, the coins will subtract from the wallet of A.
- After it, the total supply of that coin gets updated everywhere.
Once the burning gets completed, you can not get the burned coins again in your wallet because they are removed permanently from its circulation supply. In other words, the process of burning is irreversible.
What Happens When a Cryptocurrency Burns?
Every cryptocurrency sender and receiver is assigned a wallet address to send or receive the coins. These addresses are like email addresses that ensure coin transactions occur between the right people. The cryptocurrency network identifies these addresses and facilitates the transactions between them.
While the burning of a cryptocurrency starts, it is sent from the wallet address of the holder who proposed burning to a dead wallet address that can only receive these tokens. Generally, every cryptocurrency wallet has private keys which act as a password to access that wallet and its coins. But the dead or burning wallet does not have a private key; hence, no one can access its coins and tokens. This way, the cryptocurrencies of these wallets become useless forever.
Benefits of Burning Crypto
Crypto burning serves multiple purposes. Here are the most popular reasons why a crypto is burned
To increase the value of the cryptocurrency
The basic concept of demand and supply states that supply and demand are inversely proportional. For the demand to increase, supply must decrease, which is what crypto burning does. Removing a certain number of crypto coins and tokens from circulation reduces their supply and increases their demand and value. In other words, crypto burning creates scarcity of a cryptocurrency which directly affects the price of its existing circulation supply to increase.
To participate in crypto mining
Some cryptocurrencies operate through a proof-of-burn (PoB) consensus mechanism. They require the network participants to burn their coins/tokens to get the right to mine the new blocks. The more coins /tokens the participants burn, the more is their chances of being selected to mine the new block. An example of a cryptocurrency that works on the PoB model is Slimcoin, the first cryptocurrency to use a proof of burn consensus mechanism.
To achieve long-term stability
Many cryptocurrency projects incorporate coin burning to ensure strong price stability for their investors. Since the coin-burning mechanism can be used to burn extra ICO tokens and periodically maintain the supply-demand structure, it attracts the trust of investors looking for long-term investments.
Most Commonly Asked Questions About Crypto Burning
Is burning Crypto good or bad?
While crypto burning seems like a perfect way to boost the value of a cryptocurrency, it is not always the case. Burning can prove beneficial for cryptocurrencies, but it can backfire too. The effects of burning on the cryptocurrency price depend on the sentiments and strategies of its investors and community. For example, in 2018, when a miner revealed that 12% of Bitcoin Cash (BCH) was about to go to a dead wallet, this news caused its price to hike considerably. But it does not always work this way, especially for less popular coins. Hence, burning can be good or bad depending on the cryptocurrency and its community.
Who burns cryptocurrency?
Generally, the developers of a cryptocurrency initiate its burning, followed by its community members. While they succeed in increasing the price of a cryptocurrency by burning, sometimes they lose a considerable amount of their native tokens with no price hike.
Which coins can be burnt?
All cryptocurrencies can undergo burning since all of them can be sent to a dead wallet address. But a few of them go through frequent burning in bulk. Steller, SHIBA INU, Ethereum, and Terra LUNA are some most popular cryptocurrencies that undergo bulk burning.
Where to find the burn address for a cryptocurrency?
Most of the time, the developers create a burning portal for their cryptocurrency holders where they can burn their tokens by sending them to a provided dead wallet address.
