Combustion of coins and tokens as a way to regulate emissions
The mechanism for regulating the emission of cryptocurrencies and tokens by burning is becoming more popular: it is used by small and large projects. In this article, we will tell how and why developers burn cryptocurrencies and tokens, as well as, as it affects their course, all crypto and simple investors.
Why do crypto projects burn coins and tokens
Burning coins (and tokens) is a conclusion of some number of crypto acts from circulation. During the burning, a certain part of the coins or tokens is transferred to an irrevocable public wallet without private keys – the so -called “address of the Euguer”. This wallet is available for viewing all users, but it is constantly frozen, that is, no one has access to it and to the assets on it. Thus, burning a coin is like destroying it, and you can’t use it anymore.
Fiat currencies controls the Central Bank. It regulates the rate of emissions, sets the base rate, releases debt securities, etc.D. This allows the Central Bank (with varying degrees of success) in manual mode to manage the amount of money, their turnover and cost in the economy.
There is no such regulator in the world of cryptocurrencies. The mechanism of the emission of coins is determined in advance and is prescribed in the project consensus algorithm. For example, in the Bitcoin blockchain, new coins appear every 10 minutes, once every four years the emission speed is halved (the so -called halving occurs), and the emission is limited – the total amount of BTC cannot exceed 21 million.
But most crypto projects have no restrictions on maximum issue. For example, in Ethereum and other popular projects can be produced as many coins as possible.
Combining coins is one of the ways to regulate emission and cryptocurrency course. Since the price of most cryptocurrencies is determined by the market route, that is, due to demand and supply, then with a large number of coins, demand is easier to satisfy. And if the supply exceeds demand, then the price of an asset or token will fall. Burning coins, developers reduce their proposal. If the demand for the asset is preserved at a high level or grows, then this creates a deflation mechanism – there are fewer coins, their price rises.
Also, combustion of coins can be used to protect the network from DDOS attacks and prevent slowing down the network due to spam transaction. For example, with each XRP transaction, it is burned from 0.00001 XRP – the more operations the user conducts, the higher the commission. This protects the cryptocurrency network from a large number of spam operations.
Sometimes developers burn coins to fix their own mistakes. For example, in July 2019, the Tether Steabelcoin issuer accidentally created 5 billion USDT and immediately burned them.
Coins are also used by the organizers of the https://gagarin.news/news/open-ethereum-is-no-longer-supported-by-the-developer/ ICO – they delete non -exposed tokens to increase the value of the assets that investors bought. For example, in July 2017, after the ICO conducted by the NEBLIO project, 80% of NEBL tokens burned. Such actions emphasize the transparency of the project and increase the trust of investors to the product, as they are sure that the team uses only the attracted funds to develop the project and does not plan to speculate on the tokens remaining with them.
How the burning of coins and tokens works
Absolutely any coin can be destroyed forever, and any crypto -user can do this. To do this, just forget, lose or throw off the private keys to the address at which there are digital assets – access to them will be lost forever. According to various estimates, thus about 3 million VTS were burned – their owners simply lost access to their wallets.
As for the developers of crypto projects, they have several ways to burn their coins.
Some projects buy assets from users and independently withdraw them out of circulation, blocked on the address without a private key. Such combustions are usually carried out regularly, fixed volumes, for example, once a quarter or per month. This mechanism is similar to a return ransom of shares by public companies – companies buy their securities from investors, reducing their supply in the market. This leads to an increase in demand for them and, as a result, prices, as well as arrived on one paper.
The combustion mechanism is used by crypto -rhines such as Binance, OKEX, Huobi, Kucoin, and Exmo among others. So, for example, Binance quarterly burns part of its native BNB coins. The volume of coins changes depending on the number of transactions made on the platform every quarter. On October 18, Binance conducted 17 BNB burning – this time about $ 640 million. The exchange will burn the coins until it reduces their initial proposal by half – up to 100 million BNB.
Periodic combustions are used by the IFINEX Inc stablecoin issuer Tether. The asset is provided by the US dollar: the issuer creates tokens when depositing funds in his reserves and burns an equivalent amount as funds withdraw.
Coins can also be programmed in smart contracts, and part of the coins will be burned automatically at each transaction-they are transferred to an irrevocable wallet. The burning speed depends on the number of transactions in the blockchain: the more operations, the more assets will be burned, and vice versa.
The combustion mechanism through the smart contract was launched in Ethereum in early August this year as part of the implementation of the EIP-1559 update. It divided the commission for the transaction into two parts: one part still goes to miners, and the other is burned. Developers believe that this will help to cope with the problem of high commissions on the network, as well as increase its stability and speed of work. The most important thing is that thanks to this, the broadcast can become a deflation coin – the proposal of ETT will be reduced, which will lead to an increase in its price. The more transactions on the network, the more coins it will burn. Earlier we told in detail why the EIP-1559 was activated and what are its long-term consequences.
Coin burning can be added to the consensus algorithm itself-this is how Proof-OF-Burn works (burning proof, POB). In it, miners send coins to an irrevocable address in return for the right to generate a new block and receive a reward for it. The more coins burned the miner, the higher his chances of getting a reward. Unlike the classic Proof-OF-WORK, POB-algorithm is much less energy-intensive and cheaper. Such a consensus algorithm is best suited to projects in which all coins are produced immediately. Therefore, it is not popular and rarely used, but still it can be found in projects such as, for example, Counterparty (XCP) or Slimcoin (SLM).
How burning coins affects the course
Obviously, in the long run, the reduction in the offer of the asset with the preserved demand for it will lead to an increase in its price. But in practice, too many variables affect the course of the asset, so if today the developers burned part of the coins, this does not guarantee that tomorrow their price will increase. The same Binance burns tokens every three months, but the BNB course follows the market – the next burning does not save from correction and does not raise the price of the asset.
Conclusion
The coin burning mechanism is becoming an increasingly popular way to control the issue. Most often it is used by small and beginner projects – this increases incentives for investors. But this mechanism is also popular among top projects, for example, in BNB and Ethereum. In the long run, it ensures a reduction in the offer of a digital asset, reduces its depreciation, increases interest in it and promotes the growth of its price.
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