Coin burn is a term meaning the intentional riddance of a certain number of cryptocurrency items to ensure its stable work, rate normalization or create a new cryptocurrency.
What is the coin burn?
The coin burn has economical and technical prerequisites. First, this is the most popular artificial way to increase the value of the cryptocurrency: the fewer coins, the more they are valued on the market. Secondly, at the transactions with some kinds of cryptocurrencies (for example, XRP and XLM), the transfer commission is intentionally burned to protect from spam of small transactions.
Ways of coin burn
There are several ways to burn the cryptocurrency.
The special software developed for some kinds of cryptocurrency, allows burning the coins created earlier. This is one of the easiest methods: the user only needs to enter the amount necessary to be burnt, in the window of the third-party developer’s program, and the process will be launched automatically.
Sending to a public address
The cryptocurrency is sent to a public address from which these coins cannot be spend, because the private keys of such an address are unavailable. After a while the coins “are burnt”.
The algorithms of the majority of digital currencies involve the possibility to destroy the coins during the transfer. When a cryptocurrency owner performs a transaction, his (her) commission regardless of the amount, is destroyed. This allows to exclude the transaction spam as well as not to lower the turnover of this currency.
This method involves the change of the encryption protocol, which introduces a new rule incompliant with the old software. This approach allows excluding a certain part of the coins from the transactions.
Request of an incomplete reward amount
When changing the program code or connecting a third-party software to burn coins, one can request an incomplete commission during the transaction, as the result of which the cryptocurrency will disappear. The blockchain will not store the data of these transfers, and using these coins will be impossible
Proof-of-Burn is one of the little-known methods that allows to receive tokens or right to mining of a certain cryptocurrency kind. It involves the annihilation of some amount of an alternative currency that was received together with the proof of work. Simply put, Proof-of-Burn is the evidence of the fact that today, the user is ready to sacrifice the tokens to receive a bigger profit from his long-term investments in the future.
The work principle of Proof-of-Burn is the following: a user sends the coins to a special address where they “burn”, and the record of this transfer in the blockchain proves that the user has really burnt his coins. In the future, the user is paid a reward by virtue of this data.
Reasons for burning coins
There are several different reasons of burning the cryptocurrency.
Rise of the cryptocurrency rate
By burning a certain amount of the cryptocurrency during a certain period of time, one can artificially keep the currency rate on the appropriate level. The most popular way to increase the value of some currency is to reduce the number of coins drastically.
Keeping the stability
The burning of the cryptocurrency allows avoiding the devaluation of coins: if the number of new cryptocurrency items isn’t limited, after a while its value will go to zero. As a result, the system will become economically unviable.
The hardfork allows dividing the necessary number of coins from the existing one by changing the encryption protocol. The part divided in such a way, can be announced a new cryptocurrency and brought to the market.
Examples of the cryptocurrency burn
The work algorithms of some cryptocurrencies initially assume the coin burn. Here are some examples.
Ripple Coin Burn (XRP)
The conception of the cryptocurrency Ripple (XRP) assumes a certain amount of coins that is not increased, which, according to the creators’ idea, will allow to avoid the inflation. For this, a special algorithm has been developed, which automatically burns 0.00001 XRP for every transfer. Along with it, such algorithm reduces the number of spam transactions.
Tron Coin Burn (TRX)
The possibility of burning the cryptocurrency TRON (TRX) is one of the main questions that bother the coins owners. The founder of the project, Justin Sun, tells in one video how exactly he is planning to burn TRX coins. The coin burn will allow raising the rate of this cryptocurrency and making the tokens more valuable.
Binance Coin – Coin Burn (BNB)
The cryptocurrency Binance Coin (BNB) is considered one of the most promising for the investing today. The Binance Exchange practices the coin burn every quarter to artificially reduce the offer when the long-term demand rises. According to the data as of June 2018, Binance has already performed three burns, while every time thereafter the number of the burnt coins was by times bigger than the previous one.