Coin Burning Guide: Why, How and What in The World Does Lighting Tokens on Fire Mean?
There are certain things in the business world takes for granted. Slapping a sign saying “flash sale” will get people to buy. Putting timers on specials will get people to buy more. These are both examples of human psychology of scarcity being used to maximize profit.
The same holds true for cryptocurrency and it is a method known as burning. This is when coins are intentionally “lost” by a project in a number of ways for a number of reasons. Hodlers are the biggest recipients of burning as they are holding their coins while the supply is drying up. An immutable maxim of economics is that when supply is lower and demand stays constant, the price of an asset will go up.
So by burning currency, the price of a cryptocurrency asset will face upward pressure and increase in price. The actual method of burning coins (as opposed to losing them on a hard drive that was thrown away by accident) is for a company to create a wallet that receives coins. No one would have the private key for this wallet and those funds would be locked away forever.
That's all well and good for hodlers – but why doesn't everyone hodl then? What is the benefit of burning coins on a network and what advantages would someone get from burning coins? This article will attempt to explain the main reasons why a project would incentivize burning coins and what those projects stand to gain from such a concept.
Some coins have adopted the so-called Proof-of-Burn (POB) consensus method as opposed to the Proof-of-Work (or Proof-of-Stake) protocols. POB is a protocol that allows miners to increase their chances of mining a new block by sending already mined coins to what is frequently called a black hole address in the industry.
The greater a loss a miner is willing to undergo, the greater the chance that they will mine the next block instead of someone else. This particular consensus protocol has two advantages, namely that it requires a long-term commitment from miners and it attempts to keep the price of a coin relatively stable in the long run.
DDoS attacks are a real and present threat online and cryptocurrency is no different. Coin burning gives a particular cryptocurrency a mechanism that it can use to prevent spam transactions while at the same time allowing it to safeguard itself against DDoS attacks.
Some projects, for instance, integrate coin burning into their transaction validation mechanisms. This means that users are not required to pay miners, which can quickly become a problem if a coin's popularity skyrockets.
A small percentage of the transaction would be burned automatically, and this would, in turn, benefit the entire network. The total coin supply (in circulation) would very slowly decrease, propping up the assets' price in the long term.
ICO Growth Protection
Burning coins helps hodlers, as was seen before. This has been noted by any project that has been serious about its ICO. One way to keep people in the ecosystem and give them a psychological aid to hold on to their coins is to burn a part of the coins that were not sold during the ICO.
Since many a project knows how many coins they will issue publically and how many there will be overall, any coins left once an ICO is finished can be used for burning.
If there are too many unsold coins, and the price of the asset is on the rise, there could be suggestions of aggressive selling on the part of the project. This can be totally eliminated by burning all the coins.
However, if only a part of the coins are burned, and apart left for future expansion, then the project could kill two birds with one stone. Ensuring their capital funding for the future, while giving the market a psychological reason to hold onto coins at the same time is the gold standard for most projects.
These are just some of the reasons why projects will burn coins and with the innovations in cryptocurrency happening at breakneck speed, there could be other reasons that no can predict just around the corner.
It is all a matter of waiting to see what the next big evolution of cryptocurrency will bring – after all, when Bitcoin first started it's now meteoric rise, no one would have thought that burning coins would be an integral part of a startups plan, yet it is.