0:08 Introduction
Do you have a friend that is so filthy rich that they could easily light up a $100 bill and turn it to ashes without a flinch? We at CryptoTimes do know a couple guys who have done that for show. Just like John D. Rockefeller would throw away dimes to create an air of generosity around his personality.
But what if we ask a Bitcoin millionaire to pull off something like that? What would they do? You can’t really destroy something you can’t see or touch. Or can you?
Turns out you kind of can, it’s that it’s not going to be that impressive, because the procedure of eliminating crypto tokens is carried out across a computer network, just like anything else is with crypto.
0:44 What is token burn?
The removal of a certain amount of digital tokens out of circulation is called token burn. It is also can be compared to a public company buying back its own stock to reduce the total number of shares outstanding. But the question is, why would someone burn value represented by digital tokens? There are a number of reasons.
0:53 Why Burn Tokens?
#1 To get a chance of a price boost. An artificially induced deficit often makes the asset’s price go up, so early investors win big time in the wake of a burn. This has happened with every single stage of Binance Coin burning, thus making the asset an excellent hedging tool for any crypto investor.
#2 Sometimes developers or miners of a cryptocurrency want to prevent or rather slow down the rate of inflation. Just look at the Dogecoin price chart over the years. As we’ve mentioned in our previous video about this coin, in February 2014 the limit on the number of coins that can be produced was removed and this has resulted in devaluation of the token.
#3 Also most ICOs burn undistributed tokens, which is regarded as a sign of fair play by the ICO executives.
1:42 Methods of Burn
As for burning mechanisms, there aren’t many of them. So we’ll just describe them briefly.
#1 The developers of a cryptocurrency just send the tokens they wish to get rid of to addresses that cannot be accessed by anybody. The private keys of these addresses are simply unobtainable.
In case of ETH, you can send ETH to this address:
0x0000000000000000000000000000000000000000. The ETH that has been sent there is lost forever – destroyed or burned.
Also last April the Antpool mining team which validates a little over 8% of Bitcoin Cash’s transactions had been sending 12% of the coins it receives as block rewards for transaction validation to these aforementioned unobtainable addresses.
#2 One variety of the method just described is so called proof-of-burn. The idea is that miners should show proof that they burned some coins – that is, sent them to a verifiably unspendable address. Proof-of-burn is actually an alternative consensus algorithm that tries to address the energy consumption issue of the most common algorithm nowadays – POW. When miners burn tokens in this way, they get rewarded. It doesn’t even have to be the same token, by the way. For example, some projects requite a proof of a participant having burnt a certain quantity of Bitcoin to claim a share of the native currency. One such example is the Counterparty coin that came into existence neither through mining nor ICO, but by burning bitcoins.
While some investors might view coin burn as a sign that cryptocurrency developers are beginning to look out for the well-being of investors in their tokens, assuming that coin burn is a guaranteed positive could wind up being a mistake.
Do you think otherwise? Have you heard of a coin burn that wasn’t followed by a price increase? And what about proof-of-burn being a better alternative to all the other energy-inefficient methods of concensus? Tell us what you know in the comment down below.
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