What is coin burning and how does it affect the price?

What is coin burning?

This is the irrevocable withdrawal of a certain number of coins from circulation by the decision of the owner or according to a given algorithm. Special addresses and smart contracts can be used to burn assets. Also, this procedure can be performed automatically during transactions.

Retirement can be carried out by various entities: individuals, companies, marketplaces and decentralized applications. Burning is embedded in the algorithms of many cryptocurrencies.

When withdrawing from circulation, various sources of assets are used. Funds can be part of the profits of a custodial or decentralized exchange. Transaction fees can be burned, which is implemented in some cryptocurrencies. There is also a Proof-of-Burn (PoB) consensus mechanism, which implies the withdrawal of part of the validators’ assets from circulation.

The procedure is used, for example, to create deflationary currencies. Incineration may be used to distribute profits to the owners of the asset. It is also a tool that performs certain functions: reducing network load, spam protection, and implementing a special consensus mechanism.

How is coin burning technically implemented?

When transferring coins to an address that does not have a private key, they will be burned. It is possible to send funds to an erroneous or specially generated address, the creation of which is not difficult.

On various information resources, you can find addresses intended for burning coins. Latest exist on the bitcoin networkEthereum, as well as in other blockchains.

For example, there is a bitcoin address 1BitcoinEaterAddressDontSendf59kuE, used for this purpose. It has already accumulated a significant amount of funds. You can view the account balance and transaction details using blockchain explorer.

At the moment, there is no technology that allows you to pick up a private key from a known address of the recipient. This guarantees that the coins sent to such accounts will be irretrievably lost. Many use this method to destroy digital assets. Similar addresses and burning transactions can be found when analyzing various blockchains.

To destroy funds in modern networks, a special smart contract is used. There is a function in Ethereum burnwhich allows you to withdraw ETH from circulation, as well as tokens of various standards.

When burning, it is necessary to indicate the number of coins being withdrawn from circulation. If there are enough funds on the user’s balance, the smart contract will block the specified number of tokens, destroying them forever.

Details of one of these operations can be found at Etherscan. The transaction data contains information about the coins being withdrawn from circulation (in this case, BNB).

After pressing Decode Input Datayou can find out the details:

The number has 18 decimal places and shows that 1,623,818 BNB was burned. The execution of the smart contract guarantees the withdrawal of these assets from circulation.

In some cases, the burning of coins is embedded in the algorithm of the project or cryptocurrency. Removal from circulation is an additional operation in the transfer of assets. As a rule, the transaction fee is burned (partially or in full).

Miners can also withdraw coins from circulation using special software. This opportunity is implemented by not receiving transaction fees when confirming a block. If information about the transfer of funds to the miner is not included in the blockchain, these assets will not go to anyone.

Project Slimcoin one of the first to implement the Proof-of-Burn consensus mechanism. The algorithm requires miners to send coins to addresses for burning. The result of the transaction is a special hash that allows you to form PoB blocks. The latter alternate with Proof-of-Work (PoW) blocks. Burnt coins over time “decompose” (Decay). Technically, this is implemented using a multiplier that depends on the number of coins withdrawn from circulation, as well as on the time that has passed since that moment. For example, a burn transaction multiplier of 60 coins will triple in 1000 days. The same result is achieved when 20 tokens are destroyed after the specified time. Thus, 40 coins have “decayed” since the first transaction.

The probability of generating a PoW block is proportional to the computing power that was spent on the purchase of funds. By analogy with the Proof-of-Work algorithm, the probability of finding a PoB block also depends on the number of coins spent (burned). The algorithm allows you to abandon the purchase of computing equipment in order to obtain greater benefits. In return, it is possible to burn coins in order to receive a high income in the future without resorting to capital investments.

Where do incinerators come from?

Incinerated assets are withdrawn from circulation according to the voluntary decision of the owner. If the destruction of tokens is included in the algorithm of the project, the developers warn about it in advance. As a rule, this information is in the whitepaper. Therefore, the user may refuse to use a project that burns tokens (including as part of the commissions paid).

By burning, the owners pursue certain goals (declared or hidden). To achieve the desired result, sources of funds may be disclosed.

The project can burn part of its own income. This scheme is implemented in a number of crypto exchanges that use assets to purchase coins at a market price. Such actions are aimed at creating additional demand for the native token of the project. After the acquisition, the coins are burned. An alternative to a buyout is the withdrawal from circulation of funds owned by the trading platform.

Burning reduces the total supply. This has a positive effect on the value of the asset, subject to unchanged or growing demand.

Burning is used to withdraw commissions from circulation on various platforms, crypto exchanges and other projects. In August 2021, the London hard fork took place on the Ethereum network. One of his innovations is EIP-1559, involving the burning of part of the commissions. As a result, favorable conditions are created for ETH to become a deflationary cryptocurrency.

With the activation of EIP-1559, the base fee appeared, which changes according to a certain algorithm and differs for each block. Even during periods of heavy network congestion, its value is predictable and known in advance. This avoids the situation when transaction fees in neighboring blocks differ significantly. In the current implementation, the base commission is completely burned.

In addition to this fee, there is an additional priority fee. It gives the sender the first right to confirm the transaction. This fee, as well as the block reward, is paid to the miner.

Depending on network congestion, the total supply of ETH may decrease or increase. Its change in dynamics can be tracked using the service ultrasound.money. In this case, deflationary blocks may appear, for which the base fee will exceed the priority fee and the block reward. In this case, more funds are burned than issued. The occurrence of deflationary blocks is associated with increased network load (a large number of transactions). Detailed analytics can be found using the Internet resource Deflationary blocks.

Fee burning can serve a variety of purposes, including protecting the network from spam. In this case, the transaction fees are burned partially or completely. A similar mechanism has been implemented in Avalanche, Ripple and other projects.

Incineration was used by the project Neblio during the ICO. This operation made it possible to destroy coins unclaimed during the primary sale.

What projects periodically burn coins?

The Binance platform hosts quarterly coin burns. IN whitepaper it was planned to withdraw the native BNB token from circulation, for which 20% of the profit is used for the specified period. Burning will continue until the total supply is reduced to 100 million coins.

Withdrawal from circulation of tokens announced and highlighted on the platform. Initially, the destruction of coins was carried out on the Ethereum network, and their number was calculated based on spot trading volumes. BNB is now being burned on Binance Chain.

The development of the platform has led to the emergence of additional sources of income. Currently, the amount of funds burned is calculated based on the total trading volume. The developers also offer an improvement to the Binance Smart Chain, which, by analogy with Ethereum, involves burning part of the transaction fees.

iFinex-owned exchange Bitfinex is also phasing out coins. In 2019, the management company issued the UNUS SED LEO (LEO) token, the issue volume of which amounted to 1 billion coins. According to whitepaper, iFinex undertakes to buy back and burn LEO tokens on a monthly basis, using more than 27% of total revenues for this. The company allows monitor the withdrawal of coins from circulation in real time.

The non-custodial platform PancakeSwap also periodically burns coins. CAKE tokens coming from different sources are withdrawn from circulation.

Various projects regularly burn coins, providing detailed information about these events. To keep abreast of the planned destruction of coins, you can use one of the cryptocurrency calendars by performing a targeted search. For example, up-to-date information is provided by the service Coindar (when choosing a tag burning).

How does incineration affect the value of an asset?

Depending on the stated goals and the algorithm according to which the coins are burned, the operation can have a different impact on the price of the asset in the short and long term.

Exchanges and other projects that use part of the income to buy an asset on the market and then destroy it create the most impact. The price is closely related to the change in the balance between supply and demand. Accordingly, the regular purchase of coins stimulates the growth in value.

During the purchase or burning of a significant amount of funds, an abrupt increase in the asset rate is possible. In the long run, these actions allow you to create an additional price increase. Similar events will affect the market in a similar way. currency intervention.

Some projects hold a significant amount of funds in native tokens. They can use part of the profits by burning the coins they have. At the same time, the total supply decreases, but it is not required to purchase tokens. These actions create a positive news background, but compared to the buyback of coins, their impact is much lower. However, a decrease in supply can stimulate an increase in value.

The functioning of PoW cryptocurrencies is associated with the reward of miners, for which block rewards and transaction fees are used. The process of withdrawing commissions or validator funds from circulation cannot be considered separately. Under such conditions, combustion occurs in parallel with emissions. As a result, the number of coins can increase or decrease. It is also possible that the burned tokens are returned to circulation after some time.

The impact of such actions on the cost is indirect. As a rule, a significant decrease in the number of coins in circulation is good news, helping to increase the popularity and value of the asset. To understand the situation, it is necessary to analyze the dynamics of supply changes, as well as the number of deflationary blocks. This information can be found using specialized analytical resources.