Ever wondered what cryptocurrency coin burning is and why people do it? Read on!
The crypto market is incredibly fast-paced and constantly evolving. New cryptocurrencies enter the space each day — in fact, there are currently over 11,000 different cryptos in circulation! But have you ever noticed that some also disappear? Coin burning is the process of purposefully removing a type of cryptocurrency coin or token from the circulating supply.
How does coin burning work?
Coin burning involves sending cryptocurrency coins or tokens to a wallet that has no key. Because there’s no private key, nobody can access the assets — they’re gone forever. After all, ‘not your keys not your coins…’ Another reminder of the importance of secure cryptocurrency storage that doesn’t rely on a backup seed phrase!
Sometimes, people refer to these coin burning wallets as ‘eater addresses’ or ‘black holes’.
When cryptocurrencies are sent to eater addresses, their balance will still be openly visible on the blockchain. However, nobody will actually be able to get to the contents.
In most cases, it’s the development team behind a certain crypto asset that will carry out the coin burning.
Why do people burn cryptocurrency coins?
There are a few different reasons that people may burn crypto assets. Most often, people use it as a way of driving an asset’s price upwards. Coin burns can have a direct impact on a crypto’s supply and demand dynamics. By decreasing the circulating supply, coin burning makes a cryptocurrency more scarce, boosting its market value. This scarcity incentivizes investors and traders to buy more.
A higher price can benefit those who already hold an amount of the cryptocurrency in question and miners of the crypto.
Another reason people may carry out coin burning is to maintain the price peg of stablecoins. A stablecoin (such as Tether or DAI) is a price-stable coin whose market value is attached to another stable asset, for example, the US dollar. Controlling authorities can balance the stablecoin’s price by burning or minting new tokens as needed. This means the asset can stay at a near-constant level.
Some people benefit from coin burns as they can be similar to share buybacks. Asset holders can repurchase the crypto at a low rate then instantly burn it to increase the value of each holder’s existing fund.
Sometimes, crypto coin burning happens when a blockchain undergoes an upgrade. For example, in August 2021, Ethereum’s EIP-1559 (London) update came into play to improve and simplify the way asset holders pay transaction fees. The new mechanism led to the burning of a portion of the transaction fees. At the time of writing (August 2021), 109,536.5 ETH had been burned. Will this boost Ethereum’s market price?
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If you’d like to learn more about different cryptocurrencies and the Blockchain universe, don’t hesitate to read more of our blog articles! From crypto FAQs to information on consensus mechanisms, we try to cover all aspects of this exciting sector!
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