What is coin burning?
This is the irreversible withdrawal from circulation of a certain number of coins by the decision of the owner or according to a given algorithm. Special addresses and smart contracts can be used to burn assets. Also, this procedure can be performed automatically during transactions.
Removal from circulation can be carried out by various actors: individuals, companies, marketplaces and decentralized applications. Burning is inherent in the algorithms of many cryptocurrencies.
Retirement uses different sources of assets. Funds can be part of the profits of a custodian or decentralized exchange. Commissions for transactions can be burned, which is implemented in some cryptocurrencies. There is also a Proof-of-Burn (PoB) consensus mechanism, which implies the withdrawal from circulation of part of the validators’ assets.
The procedure is applied, for example, to create deflationary currencies. Burning can be used to distribute profits to the owners of an asset. It is also a tool that performs certain functions: reducing the load on the network, protecting against spam, implementing a special consensus mechanism.
How is coin burning technically implemented?
When you transfer coins to an address to which there is no private key, they will be burned. You can send funds to an erroneous or specially generated address, which is easy to create.
On various information resources, you can find addresses intended for burning coins. The last exist on the bitcoin network, Ethereum, as well as other blockchains.
For example, there is a bitcoin address 1BitcoinEaterAddressDontSendf59kuE, used for this purpose. A significant amount of funds has already accumulated on it. You can view the account balance and transaction details using blockchain explorer…
At the moment, there is no technology that allows you to pick up a private key from a known recipient’s address. This ensures that the coins sent to such accounts will be irretrievably lost. Many people use this method to destroy digital assets. Similar addresses and burn transactions can be found when analyzing various blockchains.
To destroy funds in modern networks, a special smart contract is used. Ethereum has a function burn, which allows you to withdraw ETH from circulation, as well as tokens of various standards.
When burning, it is necessary to indicate the number of coins to be taken out of circulation. If there are enough funds on the user’s balance, the smart contract will block the specified number of tokens, destroying them forever.
Details of one of these operations can be viewed at Etherscan… The transaction data contains information about the coins being withdrawn from circulation (in this case, BNB).
After clicking Decode Input Data, you can find out the details:
The number contains 18 decimal places and indicates that 1,623,818 BNB was burned. The implementation of the smart contract guarantees the withdrawal from circulation of these assets.
In some cases, the burning of coins is incorporated in the algorithm of the project or cryptocurrency. Retirement is an additional transaction in the transfer of assets. As a rule, transaction fees are burned (partially or in full).
Miners can also withdraw coins from circulation using special software. This opportunity is realized by refusing to receive transaction fees when a block is confirmed. If the information about the transfer of funds to the miner is not entered into the blockchain, these assets will not get to anyone.
Project Slimcoin one of the first to implement the Proof-of-Burn consensus mechanism. The algorithm requires miners to send coins to addresses for burning. The result of the transaction is a special hash that allows you to form PoB blocks. The latter alternate with Proof-of-Work (PoW) blocks. Burnt coins over time “Decompose” (Decay). Technically, this is implemented using a multiplier that depends on the number of coins withdrawn from circulation, as well as on the time that has passed since that moment. For example, a burn transaction multiplier of 60 coins would triple in 1000 days. The same result is achieved by destroying 20 tokens after the specified time. Thus, 40 coins have “decomposed” since the first transaction.
The probability of generating a PoW block is proportional to the computing power, for the purchase of which the funds were spent. By analogy with the Proof-of-Work algorithm, the probability of finding a PoB block also depends on the number of spent (burned) coins. The algorithm allows you to abandon the purchase of computing equipment in order to obtain greater benefits. In return, the opportunity is provided to burn coins in order to get high income in the future without resorting to capital investments.
Where does incineration come from?
The burned assets are removed from circulation according to the voluntary decision of the owner. If the destruction of tokens is inherent in the project’s work algorithm, the developers warn about this in advance. As a rule, this information is in the whitepaper. Therefore, the user can refuse to use a project that burns tokens (including as part of paid commissions).
By performing incineration, the owners pursue certain goals (declared or hidden). To achieve the required result, sources of funds may be disclosed.
The project can burn part of its own income. This scheme is implemented in a number of crypto exchanges that use assets to purchase coins at market prices. Such actions are aimed at creating additional demand for the native token of the project. Coins are burned after purchase. An alternative to redemption is the withdrawal from circulation of funds belonging to the trading floor.
When burned, the total supply decreases. This has a positive effect on the value of the asset, subject to constant or growing demand.
Burning is used to remove commissions from circulation on various platforms, crypto-exchanges and other projects. In August 2021, the London hard fork took place on the Ethereum network. One of its innovations is EIP-1559, involving the burning of part of the commissions. The result is a favorable environment for ETH to become a deflationary cryptocurrency.
With the activation of EIP-1559, a base fee appeared, which changes according to a specific algorithm and differs for each block. Even during periods of high network congestion, its value is predictable and known in advance. This avoids a situation where transaction fees in neighboring blocks differ significantly. In the current implementation, the base commission is completely burned out.
In addition to this fee, there is an additional priority fee. It grants the sender the first priority to confirm the transaction. This commission, as well as the block reward, is paid to the miner.
Depending on network congestion, the total ETH supply may decrease or increase. Its change in dynamics can be tracked using the service ultrasound.money… In this case, deflationary blocks may appear, for which the base commission will exceed the priority fee and the block reward. In this case, more funds are burned than released. The emergence of deflationary blocks is associated with an increased load on the network (a large number of transactions). Detailed analytics can be found using the Internet resource Deflationary blocks…
Burning fees can serve a variety of purposes, including protecting your network from spam. In this case, transaction fees are incurred in part or in full. A similar mechanism is implemented in Avalanche, Ripple and other projects.
What projects burn coins periodically?
The Binance platform conducts a quarterly coin burn. V whitepaper it was planned to withdraw the native BNB token from circulation, for which 20% of the profit is used for the specified period. Burning will continue until the total supply decreases to 100 million coins.
Removing tokens from circulation announced and highlighted on the platform… Originally, the destruction of coins was carried out on the Ethereum network, and their number was calculated based on spot trading volumes. BNB is now being burned on the Binance Chain.
The development of the platform has led to the emergence of additional sources of income. At the moment, the amount of funds burned is calculated based on the total trading volume. The developers also offer an improvement to Binance Smart Chain, which, by analogy with Ethereum, involves burning part of the transaction fees.
Bitfinex, owned by iFinex, is also phasing out coins. In 2019, the management company issued the UNUS SED LEO (LEO) token, the volume of which was 1 billion coins. According to whitepaperiFinex is committed to repurchase and burn LEO tokens on a monthly basis using over 27% of total revenues. The company allows monitor the withdrawal of coins from circulation in real time.
The non-custodial PancakeSwap platform also periodically burns coins… CAKE tokens coming from different sources are removed from circulation.
Various projects burn coins on a regular basis, providing detailed information on these events. To keep abreast of the planned destruction of coins, you can use one of the cryptocurrency calendars by performing a targeted search. For example, up-to-date information is provided by the service Coindar (when selecting a tag burning)…
How does incineration affect the value of an asset?
Depending on the stated goals and the algorithm according to which the coins are burned, the operation can have a different effect on the price of the asset in the short and long term.
Exchanges and other projects that use part of the income to buy an asset on the market and then destroy it create the greatest impact. Price is closely related to changes in the balance between supply and demand. Accordingly, the regular purchase of coins stimulates the growth in value.
During the purchase or burning of a significant amount of funds, an abrupt rise in the asset’s rate is possible. In the long term, these actions allow the formation of an additional price increase. Such events will affect the market in the same way. foreign exchange intervention…
Some projects store a significant amount of funds in native tokens. They can use a portion of the profits they make by burning existing coins. At the same time, the total supply decreases, but there is no need to purchase tokens. These actions create a positive news background, but in comparison with the buyback of coins, their impact is much lower. However, a decrease in supply can stimulate an increase in value.
The functioning of PoW cryptocurrencies is associated with the reward of miners, for which block rewards and transaction fees are used. The process of withdrawing commissions or validator funds from circulation cannot be considered separately. Under these conditions, combustion occurs in parallel with emissions. As a result, the number of coins may increase or decrease. It is also possible that the burned tokens are returned to circulation after a while.
The impact of such actions on cost is indirect. As a rule, a significant decrease in the number of coins in circulation is good news, contributing to the growth of the popularity and value of the asset. To understand the situation, it is necessary to analyze the dynamics of changes in supply, as well as the number of deflationary blocks. This information can be found using specialized analytical resources.
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