LUNA took the digital currency world by surprise by reaching its ATH in November 2021. Call it a coincidence but LUNA’s ATH came immediately after the TerraUSD community proposed a plan for coin burn. Also, that same night, LUNA had a burn of around 520,000 tokens. Burning is a regular phenomenon in the crypto scape and burning episodes or speculations are often followed by a surge in coin price. The concept of coin burn refers to the process of permanent and complete removal of a set number of crypto tokens.
The post below offers a brief on the process of coin burn, followed by a discussion on the significance and impact of the concept.
Coin burn- an overview
The word “coin burn” might pop up a visualization of a pile of coins set on fire but that’s not the exact technical or operational process with crypto coin burn. Essentially, though, it is.
When you set fire on something, the piece becomes useless. The same thing rings true with crypto coin burn- the burn process renders the burnt coins completely useless.
However, the technical process is different as digital currencies launch and operate exclusively vertically. So, with staking crypto coins, the coin community takes out a set number of coins from circulation and they are permanently sent to oblivion.
How does the process work?
Well, the coin burn process is shouldered by the miners and developers of the coin’s blockchain network. To remove the coins permanently from the market, they send a set volume of crypto coins to a special wallet address. This wallet is called “dead wallet” as it is specifically designed to hold burnt coins. It’s a one-way route- the private keys of the wallet can never be accessed to retrieve the sent coins.
It must be stressed here that each crypto network follows a specific protocol to process the coin burn session.
A crypto coin burn session is always recorded on the coin’s blockchain ledger to make the whole process fool-proof.
Different types of coin burn
Different coins and blockchain networks follow different time-tables to execute a coin burn session.
- Periodic burn
A periodic coin burn is a coin burn process where a blockchain network burns down a set of native tokens at predetermined periodic intervals- say, at every quarter. These blockchains are armed with cutting-edge smart contracts that automatically start the coin burn procedure once the burn interval starts.
- Pre-transaction burn
There are some cryptos that schedule a coin burn session before each transaction. Now, obviously, the amount of token to be burnt in this case is certainly much lesser than that of a periodic burn. One such example is Ripple or XRP.
These tokens have been programmed to burn down a set volume of XRP tokens prior to each transaction. The process derives these tokens (for coin burn) from the transaction’s gas fees which are then sent to the burn wallet.
- ICO burn
Crypto and blockchain networks tend to burn down unsold coins that were nit sold in their ICO. This coin burn procedure assures stability for holdings for the investors who bought tokens at the ICO.
- Dividend burn
This coin burn process doubles up as a loyalty benefit for existing coin holders.
Some blockchain networks follow this repurchase-and-burn procedure wherein these platforms buy-back a set of their own native tokens from the open market. The tokens are purchased at the market rate only. Then, the tokens are burnt down. The process helps to create price appreciation that serves as dividend rewards and are offered to existing token holders.
Impact of coin burn
So, why do the crypto and blockchain networks need to follow a coin burn process?
The whole process echoes a very simple game.
When something comes with abundant supply, the demand gets reduced. It’s because you always have it around. Now, if you create a scarcity, and if the commodity or asset serves a major purpose, the scarcity will lead to high demand for the asset. High demand eventually propels up the price of the asset.
The same rings true for crypto coin burn philosophy. The burn process creates a surge in demand for the coin which eventually leads to a dramatic rise in price.
Better return for HODL investors
As mentioned previously, the coin burn process helps to shoot up the value of a crypto, leading to price hike. So, say, you have just invested in a set of Binance coins as a HODL investor. Now, the Binance Coin network follows a quarterly coin burn process. Put simply, the value of your holdings will keep on increasing consistently after every periodic burn.
Reduces risk of spam attack
The coin burn process also helps to keep a crypto network safer.
The burn procedure lessens the overall supply of a token. When you reduce the supply, it also cuts down on the volume of transactions- these two are directly proportional. And lesser transaction volume eventually reduces the scope and risk for spam attacks. It further helps to leave sufficient room for neat and ordered transaction count.
Trust factor for new investors
We have already discussed that crypto networks prefer to burn down unsold coins after the ICO session.
This coin burn process helps to uplift the credibility quotient and reputation of the crypto network. The burn process assures new investors that there will be no over-circulation with the remaining coins that might otherwise affect the value of their holdings
The coin burn helps to maintain stability for cryptocurrencies by preventing risks of price dip. Bitcoin does not follow coin burn. Ethereum too didn’t follow the burn process either, until the launch of Beacon Chain. Coin burning is especially familiar among altcoins.
If you are planning to amp up your HODLing value riding in coin burn impact, be careful about the coin you choose. Some coins are pure craze coins and won’t have much to offer, even if they are burning coins at a high scale. Always, invest in coins that serve a solid purpose and are backed by strong fundamentals.