Coin burn: why destroy cryptocurrency?

Categories: Cryptocurrencies, NewsBy Published On: July 27, 20210 Comments

Coin burn is a practice used by owners of large amounts of cryptocurrencies to make them more valuable. The Binance blockchain uses this technique – and it will soon be the case for Ethereum.

It’s an expression you may have seen before, whether you’re interested in cryptocurrencies or not: the coin burn.

The phrase, which literally translates into French as “coin burn,” refers to a particular practice that, as the name suggests, involves destroying cryptocurrency units.

Why do coin burn?

This may seem counterintuitive, especially given the price some of them reach today and the energy needed for their production, but it’s actually a pretty logical reasoning for miners.

For them, it’s a matter of limiting the number of units of cryptocurrency in circulation, in order to be able to increase their price. Indeed, the rarer something is, the more valuable it becomes. The voluntary destruction of these units thus makes it possible to artificially draw the prices upwards.

Binance Coin (BNB) is certainly the best known cryptocurrency to use the coin burn.

Specialist company Stellar also chose to destroy the units of its XLM cryptocurrency in its possession in November 2019. By destroying over 55 billion units (out of a total of 85 billion in circulation), Stellar boosted the value of an XLM by 25% in one day.

How does the coin burn work?

The coin burn is actually a pretty simple practice. All the people in charge of the coin burn have to do is send a certain amount of cryptocurrency units to an eater address, i.e. a crypto wallet that does not belong to anyone, and that is locked. The wallet in question is an address that has no key, so no one will ever be able to access the cryptos stored there, and they are as good as destroyed.

However, there are not only advantages to the coin burn. The practice alone does not guarantee that the remaining cryptocurrencies will increase in value, especially if the blockchain is not very well known. And the associated benefits don’t necessarily last over time: after Stellar’s coin burn in 2019, the value of XLM gradually went back down, until it reached the pre-burn level again – and even went lower.

The proof of burn

Some blockchains that use coin burn use proof of burn, a special consensus protocol. Proof of burn gives a user the right to mine the next block based on how many units of cryptocurrency the user has burned.

Which Blockchains don’t do coin burn?

The Binance Smart Blockchain is the most prominent to use coin burn, but not all cryptocurrencies use this method. This is especially the case for bitcoin, which does not destroy units. Since the cryptocurrency is limited to 21 million units, coin burning would be completely counterproductive – especially given the price and amount of energy required to produce a single bitcoin.

For ethereum, things are different. The cryptocurrency does not currently practice a coin burn, but the rollout of Ethereum Improvment Proposal 1559 on August 4, 2021 will change that. For each future interaction on the blockchain, ETH will be destroyed, says the specialized site Decrypt. For now, for each transaction on the blockchain, a gas fee (fuel costs) that can reach very large sums is levied by miners. The deployment will allow to put a fixed gas fee on the blockchain, and to reduce the number of ETH available, which should please the investors according to Decrypt.

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