What is Coin Burning Process
What is Coin Burning Process
What is the coin burning process? “Coin Burning Process”, which is very common in the cryptocurrency system, means the permanent removal of a certain part of the existing cryptocurrencies from circulation. This method, mostly implemented by the developers of the coin, involves “burning” some of the existing tokens, that is, deliberately removing them from circulation.
So why is coin burning done? There is not more than one reason for this problem, but the most common reason is to create deflation, that is, to increase the unit price. Coin burning is an application entirely related to cryptocurrency. In traditional currencies, “burning” does not occur. There are different financial practices followed by central banks to ensure the balance of the exchange rate. By analogy, coin burning is similar to publicly traded companies buying back their shares from their investors. In this method, the value can be increased by reducing the amount of paper available. The “coin burn” process can be applied not only to increase the unit price, but also for different purposes.
How to Burn Coins?
Created coins cannot be destroyed, but they can be rendered unusable. To do this, it is sufficient to send the coins to a non-return address. There are "eater addresses", that is, irrevocable addresses, to prevent the use of coins and ensure that they are completely removed from circulation. Coins sent to this address without private key information cannot be accessed again.
Regardless of how and in what form it is carried out, coin burning is a deflationary mechanism. Most of the projects do it to provide regular value growth and encourage traders to hold their coins. The first thing that comes to mind is to increase the value of each coin by reducing the current supply. Theoretically, each token will be worth more as there will be less money in circulation. For this reason, most cryptocurrencies, especially Bitcoin, have limited supply.
Projects can imaginatively increase or decrease the token supply, like turning on a faucet. In this way, it stabilizes the price. Binance's periodic burning process and ICOs burning their tokens when the project is completed are examples of this. Coin burning is also performed for error correction in some cases. In some projects, coins are burned to avoid unwanted transactions and create a security layer. Ripple, for example, charges fees for each transaction and burns them to protect the system against overloading and DDoS attacks.
