Coin burning is the process in which users can remove tokens/coins from circulation, which reduces the number of coins in use. The tokens are sent to a wallet address that cannot be used for transactions other than receiving the coins. These addresses are also called "eater" or "burner" addresses. The wallet is outside the network, and the tokens can no longer be used.

Anyone who owns a cryptocurrency can burn it, but it's not exactly something you'd want to do for no reason since you'd essentially be throwing money away.

Most of the time, it's the developers of a cryptocurrency who decide to burn a certain amount. Coin burning reduces the supply, making tokens of that cryptocurrency scarcer. That scarcity can lead to an increase in price and benefit investors.

NOTE: There is no evidence yet that burning tokens/coins can increases the value of that specific cryptocurrency. The action can influence investor and user sentiment which would have more of an effect of driving prices up and down.

Coin burning can be used to deceive investors. Developers can claim to burn tokens when they're actually sending those tokens to a wallet they control. To avoid this, it's important to do your research on the crypto you're investing in or stick to safer.

Developers can also burn tokens as a way to hide whales who hold large portions of a coin. For example:

A developer launches a cryptocurrency with 100 million tokens, he keep 10 million token, and immediately burns 60 million. It looks like the developer owns 10% of the supply because the original supply was 100 million. But! in reality the Developer owns 25% of the 40 million tokens still in circulation, which is obviously a much larger amount

That's why some people say that Coin burning is "stealing" people money

This category refers to when coin burning has been hardwired into the project’s DNA from inception. Similar to a halving mechanism that is conducted at a certain block, coin burning may be automatically implemented based on the network’s codebase.

This refers to when coin burning is implemented as part of an economic policy, i.e. when a portion of transaction fees are burned after being received for payment for an activity on the network.

Proof of burn (PoB) is one of the several consensus mechanism algorithms implemented by a blockchain network to ensure that all participating nodes agree to the true and valid state of the blockchain network. A consensus mechanism is a set of protocols that use multiple validators to agree that a transaction is valid.

PoB is often called a proof of work system without energy waste. It operates on the principle of allowing miners to burn virtual currency tokens. They are then granted the right to write blocks (mine) in proportion to the coins burnt

To burn the coins, miners send them to a burner address. This process does not consume many resources other than the energy used to mine the coins before burning them and ensures that the network remains active and agile. Depending upon the implementation, you're allowed to burn the native currency or the currency of an alternate chain, such as Bitcoin. In exchange, you receive a reward in the native currency token of the blockchain.

The idea behind coin burning dates back to well before cryptocurrency. It's very similar to stock buybacks. A stock buyback is when the company that issued the stock buys shares back at the market price and reabsorbs them, reducing the number of total shares in the market. While buybacks and coin burning aren't an exact match, they're similar concepts that can serve the same goals.

Coin burning started becoming popular with cryptocurrencies in 2017 and 2018 when multiple coins, including Binance Coin, Ripple XRP, and Stellar burned tokens to cut supplies and boost prices. Recently, it has been a common strategy with newer cryptocurrencies that start out with massive token supplies.

One of the main reasons coin burning has caught on lately is because it allow cryptocurrencies to start out at cheap prices and then artificially increases their value once people have invested. A new cryptocurrency can launch with 1 trillion tokens worth a fraction of a cent and attract investors because of the low price. Later, the developers can burn billions of tokens to raise the price.

REMINDER: There is no evidence yet that burning tokens/coins can increases the value of that specific cryptocurrency. The action can influence investor and user sentiment which would have more of an effect of driving prices up and down.

Ripple (XRP), a top 10 cryptocurrency, uses coin burning in their transaction processes. The network burns a small fraction of XRP each time a transaction is executed, essentially burning a portion of the “gas” or transaction fee. This gradually reduces the amount of XRP in circulation, incorporating a deflationary element into the network’s supply. The amount is very small however, so it will take years to make any significant difference to the circulating supply. 0.00001 XRP is burned per transaction, requiring 100,000 transactions in order for 1 XRP to be burned.

Binance Coin (BNB) is the official token of the Binance exchange and also currently a top 5 cryptocurrency. Through various incentives, the token is used for staggering transaction fee payments owed to the exchange. The network has undergone several coin burns over the years which has contributed to the massive gain in value the coin has witnessed. As recently as January 2021 the token underwent its 14th burn, which equated to $165,791,000 in value being burned at the time. The burns are instigated by trading volume, with the network promising to burn 50% of the original supply. The next BNB Burn - the 18th burn - will take place at the end of Q4 2021, in January 2022.

The last time a developer burned Stellar tokens was in 2019. Then 55 billion of the 105 billion issued coins were destroyed. After that, the cryptocurrency has risen in price by 20%.

Another important use case for token burning is to maintain the price peg of stablecoins (cryptocurrencies whose value corresponds to another asset, like the U.S. dollar): by burning or minting new tokens as necessary, the controlling authority can influence the asset’s price to remain at a near-constant level.

Studi the coin before investing

If you are an investor looking to invest in crypto, you should study if Coin burns have happened for that currency and if there is a defined burn schedule.

It should be a part of your calculus while making investment decisions. In general, if Coin burns have happened and/or scheduled, it should give you more confidence that there are people invested in seeing that currency grow, and that would be a factor in its favor

1. The Motley Fool
2. Investopedia
3. Financialexpress
4. Coin Market Cap
5. Oobit
6. Latoken

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