Crypto coin burn has been one of the processes used in the crypto space to add value to crypto coins. This process is also used in Initial Coin Offerings (ICOs). Here, tokens that are still struggling after the sale period are burnt.
One can compare the Crypto coin burn process to stock buyback. In a stock buyback, a company buys back some shares that it had sold out to its members. This helps the company to reduce the total number of shares circulating in the market.
In a nutshell, coin burn is the process where crypto holders send their tokens to a burning wallet.
After being transferred to the burning wallet, the tokens become completely inaccessible, which is commonly referred to as an “eater address”.
It is important to note that, this crypto wallet only receives crypto tokens and cannot send them. This process sometimes lowers the tokens’ total supply and sometimes increases their demand.
Why do crypto coins get burned
Crypto burn can set the token on a bullish trend, but an exponential price increase is not guaranteed. If the coin registers such growth, then the price might drop someday.
Crypto burn has become more common with the rise of decentralized finance (DeFi). Let’s now look at some of the reasons for the crypto burn.
For stablecoins stability
In this case, a small amount of the total supply of the stablecoin is burnt. This can help the stablecoins stay pegged to their fiat currency.
Sometimes the demand and price can rise past the fiat currency peg. In such a case, the protocol’s smart contract releases new tokens. In return, these new tokens will then cause the price to drop.
The smart contract can direct it to burn some coins that will cause the price to rise to maintain its dollar peg.
Burning as a consensus mechanism
Proof-of-burn (PoB) or Proof-of-work (PoW) is a consensus mechanism some coins use. This mechanism uses protocols that use multiple validators to approve a valid transaction.
When burning crypto coins, miners send them to a burner address. Here, miners pay for the energy used to mine the coins before the coin burn. This method requires both users and miners to burn some of their tokens regularly.
This method is one of the most efficient methods of verifying transactions. This is because it does not use real-world resources.
Burning Crypto to Increase Value
The crypto space also uses this tactic to increase the token value, like share buyback. But there is no conclusive evidence to prove that the process increases the token value of a given token. Sometimes it’s vice versa.
If the process increases the token’s value, it also makes them less attainable. Be aware that some crypto developers can use this mechanism to increase the value of the tokens.
This will work in their favor instead.
Burning to establish Mining Balance
This is where the PoB system promotes the periodic burning of crypto coins. This aims at maintaining a balance between new users and early mining adopters. The rate at which crypto coins get created during the PoW drop every time a new block is mined.
This process promotes regular miners’ activity. The miners burn their initial coins for them to be able to mine new ones. This process makes it hard for the old guards to mine new coins. As more coins are being created, there is a balance between the two users.
To show long-term commitment
Some crypto holders burn the coins on their network as a sign of a commitment toward scarcity.
They view this strategy as a way of keeping the value of the token on a bullish trend.
In return, this strategy gives investors the confidence to invest in their token for a long time.
Burning to protect them against Spam
Crypto burning is also used to protect coin holders against spam.
Some networks need their miners to burn some fees for transactions. This is common among Ethereum users who pay some gas fee for the smart contract computation.
Bitcoin users also pay some fees for sending transactions.
Advantages and Disadvantages of Crypto Burning
Burning crypto coins has both advantages and disadvantages. Let’s look at some of them;
Advantages
- Crypto burning helps to control crypto inflation, especially the stablecoins.
- PoW helps to protect the network from hackers.
- The PoW consensus mechanism validates transactions. This mechanism also creates new tokens while maintaining the supply balance.
- Burning crypto can also enhance the value of crypto tokens by limiting the total supply.
Disadvantages
- Sometimes, the crypto burn process gets compromised. In such cases, developers can use the process to send the tokens to their addresses.
- The crypto burn may have a short-term impact instead of a long-term value gain.
- Instead of decreasing supply while increasing demand, the process can sometimes discourage investors. If they feel manipulated, they can then lose confidence in the crypto tokens.
Does Shiba Inu burn SHIB tokens?
Shiba Inu is one of the crypto tokens that leads with the coin burn processes. Shiba Inu’s burn rate has demonstrated a massive rally in the recent past.
On May 17, 2023, the Shibburn tracking platform posted some statistics on Twitter.
The platform showed a high rate at which Shiba Inu was moving its SHIB tokens to the dead wallet.
The rate rallied by over 9562% within 24 hours.
Shiba Inu started burning its tokens in June 2021. Vitalik Buterin, the Ethereum co-founder, was the first one to burn SHIB tokens.
Buterin burned 90% of the tokens that he received in what seemed like a marketing stunt. At that time, the 90% was worth about $ 6.7 million.
The burning process represented 41% of the total Shiba Inu supply.
After its encounter with Vitalik, Shiba Inu demonstrated massive gains. SHIB even called itself ”DOGE Killer”.
Does Bitcoin burn BTC?
No, Bitcoin does not have a burn mechanism.
Bitcoin’s supply is fixed at 21 million BTC, and no new coins will be created beyond this limit.
However, Bitcoin does have a halving mechanism that reduces the reward for miners in half every 210,000 blocks. This mechanism reduces the rate of new Bitcoin creation and creates a deflationary pressure on the Bitcoin price over time.
Conclusion
To sum everything up, I can say that in most cases coin burning increases the value and stability of tokens. There are some good and genuine reasons for conducting a crypto burn, but can also be vice versa.
Put into consideration that the tokens can also experience a short-term rally. Thus, before investing in cryptocurrencies, do thorough research as cryptos are volatile.
About the author - J-S Tremblay
I've been involved in the cryptocurrency world since 2016 and trading since 2019. I started Moon and Lambo in 2021. I'm passionate about crypto and love to share my knowledge. I hate bankers and I hope that cryptocurrency will change the financial world for the better. View full profile...
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