In short, cryptocurrency burning is the process by which users can remove coins and tokens from circulation. This then reduces the number of coins or tokens that are in use. To prevent their use, the coins or tokens are sent to a wallet address that cannot be used for any transaction other than for receiving the coins.
Cryptocurrency Burning In Depth
Those who invest in cryptocurrency will have a wallet address. You need a wallet if you want to store, send, or receive coins. The wallet address is like your bank's account number, you can receive money from anywhere at any time if someone has your account number.
When a wallet address is used only for receiving and not storing, this is referred to as a burner address or eater address.
Since these wallets don’t have private keys that allow access, unlike regular crypto wallets, the coins or tokens are gone forever. No one can access the wallet so the cryptocurrency in the wallet can never be used or transferred. Imagine someone locking a door and throwing away the key.
Practical Applications for Coin Burning
While burning cryptocurrency seems like an insane idea, there are a few practical reasons why this will take place every now and then.
1. Value Adjustment
Removing an asset from circulation in order to adjust its value is nothing new. For example, central banks around the world often adjust the amount of paper money in circulation in order to prevent huge inflation. The less money there is, the more valuable it becomes.
The same works for cryptocurrency, the fewer coins or tokens available, the more sought after and valuable it is. Those who have invested a lot of money into particular crypto and have a lot of money riding on their investment may intentionally burn a large number of their coins or buy more just to burn them to increase the value of what they already own.
Although this isn’t a guaranteed plan and like in the market with other commodities, burning assets doesn’t mean you’ll get the outcome you’re hoping for. In the case of burning crypto to increase value, you’re taking on a massive risk.
Proof-of-burn (PoB) is one of the several consensus mechanism algorithms implemented by a blockchain network to ensure that all participating nodes agree to the true and valid state of the blockchain network. A consensus mechanism is a set of protocols that use multiple validators to agree that a transaction is valid.
PoB is like a proof-of-work system that doesn’t have any energy waste. It operates on the principle of allowing miners to burn virtual currency tokens. They are then granted the right to write blocks (mine) in proportion to the coins burnt.
Miners can send their coins directly to a burner address, this process doesn’t waste energy and ensures that the network shows a lot of activity. The consistent activity also keeps the network agile and entices more miners to get involved in mining the coin for their own benefit. It’s a good way to create buzz and trust for a particular coin or token.
3. Promoting Mining Balance
Early adopters of any cryptocurrency have an unfair advantage. Since they were there at the beginning, they can buy a cryptocurrency for the lowest price and make the most profit when the value increases.
Not everyone in the community is happy about this situation and it can often lead to certain issues. So, to help keep a balance between early adopters and those lagging a little bit behind, burning is used.
In this case, early miners are forced to burn their early coins and continue mining to start obtaining the coins that they can keep. This method also prevents mining farms from taking ownership and holding most of the coins or tokens available.
Important Points to Takeaway
- Burning crypto currency is the process of sending coins or tokens to a wallet address that is set up to only receive and not send
- The private keys of burner wallets are not used and therefore, no one can get into the wallet
- Burning removes coins or tokens from circulation and can help increase the value of the asset or prevent early investors and large mining farms from holding the majority of coins or tokens available
Frequently Asked Questions About Cryptocurrency Burning
How Do You Burn Cryptocurrency Tokens?
The process of burning is incredibly simple. All you have to do is send the coins or tokens to a wallet address that has been set up for the sole purpose of receiving but not sending. Since the crypto sits in the wallet untouched and unused, the coins are effectively taken out of circulation forever.
Is Burning Cryptocurrency Bad?
While burning cryptocurrency isn’t always bad, the method can backfire. Especially when it's used to increase the value of the cryptocurrency. Burning should only be done in specific circumstances.
Why Do Companies Burn Cryptocurrency?
Those with large stakes in a cryptocurrency want to make as much profit as possible. That’s why they sometimes deem it to be a worthwhile risk to burn coins or tokens in order to push up the value of the ones they already own.
Why Joining a Mining Pool Is the Answer for Miners
A mining pool is a group of people who collectively agree to pool their resources and share the profits.
For example, have you ever split the cost of a bunch of lottery tickets with work colleagues or friends with the agreement that if one of the tickets wins you all share the prize? While you might have to share the prize, there is more chance of you winning in the first place. After all, it’s far better to share $1 million, than it is to keep 100% of nothing.
Well, a mining pool works in the same way. The group of miners will collectively use their resources to create more mining power. The more mining power you have, the higher the chance is that you will generate a block on the blockchain and therefore, receive the reward.
One of the best parts of joining a mining pool is that you don’t have to match other investors. The reward is divided relative to how much power each member contributed. This means you don’t have to be stinking rich or own a ton of resources in the first place. You simply take out proportional to what you put in.
You should also bear in mind that the mining pool will have an owner who will, rightfully, charge each member a fee for joining. The amount will vary from owner to owner, but it’s unlikely to ever be an unaffordable amount since the owner also benefits from having as many members as possible.
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