Coin Burn In Cryptocurrency

What Is Cryptocurrency Coin Burn: A Beginner’s Guide

Are you looking for a way to make money with cryptocurrencies?

Sure, why not? Then go ahead and invest in some self-burning cryptocurrency. ‘Burning’ is a new approach to make money using cryptocurrency.

If you’re familiar with proof-of-work and proof-of-stake, coin burn is similar to proof-of-burn, which I’ll discuss later in this post.

If you’re not sure what proof-of-work and proof-of-stake are, click the link below to learn more. It will explain why we burn cryptocurrencies coins.

  • What is Proof-Of-Work & Proof-Of-Stake?

Coin Burn In Cryptocurrencies

In the cryptocurrency world, coin burn refers to sending some of a native cryptocurrency’s or another currency’s coins to a public address from which those coins can never be spent since the address’s private keys are lost.

Anyone who wants to review a transaction should be able to use this public address on the blockchain.

Burning coins is common for a variety of reasons, including:

For the purpose of creating new tokens or currencies (proof of burn)
Holders of tokens or coins will be rewarded.
After an ICO or token sale, to destroy unsold tokens or coins
I’ll go over each one separately with an example that you’ll recognize. But first, let me explain how the coins are burned with the proof-of-burn method. There are several different sorts of proof-of-burn, but I’ll only cover one here.

In Cryptocurrencies, Proof-of-Burn is used.
Proof-of-burn is a distributed consensus mechanism that is different from proof-of-work and proof-of-stake. It can also be used to start a coin from scratch.

The concept is that miners/participants should be able to demonstrate that they burned some money by sending them to an unspendable address. Individually, this is costly, similar to proof-of-work, but it consumes no resources other than the burned underlying asset.

To date, all proof-of-burn cryptocurrencies operate by burning proof-of-work-mined cryptocurrencies, therefore the proof-of-work-mined “fuel” remains the ultimate source of scarcity. (Image courtesy of Bitcoin Wiki)

In rare situations, you may also be granted the unique privilege to mine blocks based on the weight of the money you have burned. Consider it a virtual mining setup.

Because BTCs have been burned, they will never be spent again, giving XCP some value. Consider it as if you were switching from gasoline to compressed natural gas. This method of coin production also ensures that everyone has a fair and equal chance (including the founder of the project).

Proof-of-burn, or the burning of coins/tokens by sending them to an unspendable address, is used by many cryptocurrencies to reward token/coin holders. This is done on purpose to create economic scarcity, which benefits token/coin HODLers.

This is because regulations in some countries, including as the United States, make it illegal for cryptos to pay direct dividends to their token holders.

As a result, another option to reward their investors is to create a scarcity of supply, thereby increasing demand, which is bound to reflect in the price appreciation of each token or coin held by the investor.

The cryptocurrency exchange Binance employs this burn of BNB tokens every quarter. Read more about Binance token-economics of coin burn here.

  • For destroying unsold tokens or coins after an ICO or token sale

Another scenario when coins are burnt is after the ICOs or token sale if the all the coins/tokens designated for the sale are not sold. This is done to maintain fair-play.

Usually, the coins/tokens appreciate in value after an ICO or token sale. And in a scenario where not all coins/tokens are sold, it gives the company an unfair amount of free money which they can get by selling the remaining tokens/coins in the free market at the appreciated price.

To avoid this scenario and keep things fair and square, the unsold tokens/coins are sent to an unspendable address.

The Neblio team did the same thing by burning the unsold NEBL tokens on this NEBL address.

Conclusion: Proof-of-Burn Cryptocurrencies

Coin burn or proof-of-burn has several applications, depending upon different scenario you want to use it for. Also, there are quite a few cryptocurrencies that have implemented the proof-of-burn directly to avoid ICOs or token sales.

And there are many out there like Binance that frequently and purposely burn coins to reward their token holders.

I particularly find coin burn a good thing and like holding some tokens/coins that implement some type of burn because it almost guarantees decent returns.

That concludes my contribution to this essay. Join our Telegram channel for quick updates if you’re searching for more excellent content from CoinSutra.

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