If you’re new to cryptocurrencies, you’ve probably been amused by the term coin burn, and wondered why someone would need to do so. So, here’s how it works.
The process by which miners and developers remove coins from circulation is known as coin burn. To put it another way, coin burn is the process of burning a coin so that it can no longer be used (trading or otherwise). The coins will be sent to specialised addresses with inaccessible private keys by the developers and miners. They should also make the proof-of-burn algorithm available to the market in order to promote cross-verification.
Consider a person who has five $100 notes and intends to burn (literally). Once five notes have been burned, no one, including the issuer, may use or access them. Because cryptocurrencies are virtual and cannot be burned, miners and developers use digital methods to render them unusable. The purpose of a coin burn is to create a supply shortage, causing the token price to rise artificially.
Coin burning in the real world would include creating a mound of currency coins or notes and setting a fire on top of them. Coin burn is the same in the cryptocurrency realm, albeit it is the virtual burning of the cryptocurrency. Each cryptocurrency network has its own methodology for performing the burn, but it essentially involves pairing the currencies in circulation with unobtainable private keys, making it impossible for anybody to claim ownership. The event of a Coin burn is also documented in the ledger records, making the burn infallible.
Cryptocurrency producers burn coins in order to raise the value of the coins still in circulation. It’s not dissimilar to what happens in the oil industry. If the price of a barrel of crude oil falls because there is a surplus in supply and demand isn’t keeping pace, oil-producing nations restrict supply, causing prices to rise again. The same supply and demand dynamic is at work in the process of coin burning. The basic goal of coin burn is to control supply and thus maintain price stability. Demonetisation of money or share buy-backs are examples of similar processes.
The amount of coins available in the digital currency market decreases when developers/miners burn the currencies. As a result, the coin’s value will increase (at least theoretically it should).
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