In this highly competitive market, cryptocurrency projects must constantly develop new strategies to stay on top. You’re in major trouble if you put out a token, and its value drops drastically. Not only would your product have lost crucial value, but the community will tear you to pieces. So, how can you pump the coin’s price again? Coin burn.
What Is Coin Burn?
Coin burn refers to indefinitely removing coins from circulation. After burning, you can no longer buy, sell or transfer the coins. It’s as if you burnt down a paper – it’ll no longer be there. Poof, gone.
How Can You Burn Coins?
You send the coins to an unusable wallet address called “burn address”, “eater address” or “null address”. Usually, crypto wallets have a public key and a private key. I send you assets using your public key and you access these assets using your private key.
A burn address, however, doesn’t have a private key. It just receives the coins and you can’t get them back or reaccess them.
It’s important to note that a burn address is different from a burner wallet. The latter has the same concept as a burner phone. It’s a temporary wallet whereas a null address has no use besides receiving no longer needed coins.
Below is an example of a burn address on Etherscan.
But, Why Would You Do That?
Alright, coin burn is a thing but does anyone actually do it? Yes and more often than you think. The important question here is why? Why would you completely wipe out something you put effort into creating?
Think about it. Burning coins significantly reduces the supply which is good for both the project and investors. The scarcer the product, the more valuable it becomes. Also, this shows the team’s true dedication to protecting the value of their coins. This, in turn, attracts long-term investors.
So a lot of projects adopt this strategy to increase the value of their coins and to attract investors. Shiba Inu, the infamous meme coin, has coin burning embedded in its ecosystem.
Shiba Inu Coin Burning
SHIB started with an insane supply of one quadrillion tokens. This is very common within meme coins. The founders sent 50% of the supply to Ethereum’s co-founder Vitalik Buterin. Buterin burned 90% of his holdings which was more than 40% of the total SHIB supply.
This caused an approx 40% price increase. Following the increase, the community decided to burn tokens to reach a price of $0.01. But, because the supply is insane, the community came up with a burn system.
You can play games, watch Youtube, listen to music, or buy merch to initiate SHIB token burning. There isn’t any formal schedule for burning SHIB. But, the community has remained consistent with the Shiba Inu coin burning rate averaging about 21 burns a day.
Proof of Burn: Burning Coins As A Consensus Mechanism
Proof of burn (PoB) is a type of consensus mechanism adopted to ensure all nodes come to an agreement about the true and valid state of the blockchain network.
The most common consensus mechanism is proof-of-work where miners have to solve complex mathematical puzzles in order to mine a block. When they successfully mine a block, they get a block reward in the form of cryptocurrency.
However, in proof of burn, miners burn certain amounts of cryptocurrency to mine a block. The participant that burned the biggest amount gets the chance to mine the next block and receive the rewards.
The concept is that these users show “proof” of true dedication to the network by buying coins to burn them for the better of the blockchain.
Dmitry Machikhin, founder and CEO of crypto tracking tool platform BitOK, noted “This acts as an incentive to keep the network secure, as miners are rewarded with new coins for destroying their old ones.”
- Conserves energy as it doesn’t require complicated mining hardware like PoW does
- Encourages coins scarcity
- Makes cryptocurrency more sustainable over time
- Attracts long-term users as it incentives miners to earn burnt crypto back
- Miners must already own a significant portion of the token supply to afford the coin burn
- Causes permanent loss of assets
- Has only been tested by moderate-sized accounts so far
- Transactions take longer to verify due to large block sizes
Be Aware of The Coin Burns
To recap, coin burn is very beneficial given that it increases the value of coins. So, if you see a project actively burning its tokens, you might be more inclined to invest in it. However, scams are here too. I know, I know scams are literally everywhere. But, founders might claim they’re burning their tokens when in fact they send it to a wallet address they own. So, be very careful and invest with your eyes wide open. And, here’s a full guide on NFT scams to watch out for!