Coin burn or burning coins means sending some moments of the original cryptocurrency or some other currency to a public address from which these particular coins can never be spent, because the private keys of such an address are not available. This public address must be available in a blockchain so that anyone can view such a transaction.
Coin burn usually has the following goals :
- To create new tokens or coins (proof-of-burn algorithm);
- For awarding holders of coins or tokens;
- To destroy unsold tokens or coins after ICO.
So, the proof-of-burn algorithm is a distributed consensus method and an alternative to proof-of-work and proof-of-stake . The idea is that the miners / participants must show evidence that they burned some coins, i.e. sent them to a truly unavailable address. It does not consume any resources other than the burned underlying asset.
Consider the first goal of a burn burn – how this algorithm is used to create new tokens or coins
It is implemented, for example, in Counterparty (XCP) cryptocurrency. XCP was not lined up and was not sold on ICO.
Rather, it appeared using the proof-of-burn method. This means that a certain amount of bitcoins (BTC) was sent to an unavailable address, and in exchange for these BTC, Counterparty tokens (XCP) were generated in a Bitcoin block chain. You can see this by following the XCP Proof-of-Burn link.
This was done to avoid pre-mining or ICO, as well as to reuse energy that has already been spent on mining bitcoins .
Since the BTCs were burned, they will never be spent again, which gives the XCP some value. This method of coin production also provides a fair and equal opportunity for everyone (including the project’s founder).
The next use of coin burn is to reward tokens / coins holders.
Coin burn or burning coins by sending them to an inaccessible address is used by different cryptocurrencies. This is done to create an economic deficit, to benefit from this asset, just owning it. This method was developed because the rules in some countries, such as the United States, prevent different cryptocurrencies from paying the equivalent of dividends as a reward to asset holders.
Therefore, they created another way to reward their investors, and it is to create a shortage of supply, therefore, an increase in demand, which should be reflected in the price estimate of each token or coin that the investor is keeping.
For example, Binance uses this method every quarter for a BNB.
The next point where coin burn is applied is to destroy unsold tokens / coins after ICO
This is done to maintain fair play. Usually the price of a coin / token after ICO grows. And in the scenario where not all coins / tokens are placed via ICO, this gives the company a certain amount of free money that they can receive by selling the remaining coins / tokens on the exchange at a high price.
To avoid this scenario, unsold coins / tokens are sent to an unacceptable address.
Publication date 04/23/2019
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