☝️ Coin burning is when a specific amount of cryptocurrency or tokens is intentionally taken out of circulation by sending them to a special address where they cannot be accessed or used again.
👋 Connection to the real world?
Think of coin burning like a company buying back its own shares. This process boosts earnings per share by reducing the number of available shares in the market. It's similar to how central banks take physical currency out of circulation to control the availability and purchasing power of a national currency.
👨💻 How coin burning works?
Coins are sent to a burning address, and since no one has access to it, they can't be retrieved or used. The blockchain records every transaction, providing proof that the coins were sent to the burning address and effectively removed from circulation.
🫣 How projects burn coins?
Projects outline this in their tokenomics. Coin burning can happen once, in stages, or on a schedule. Developers can manually burn coins, or smart contracts can do it automatically. Some projects set aside coins for burning, while others buy coins from the market and send them to the burning address. Some also burn a portion of the transaction fees they receive.
🧐 What is Proof-of-Burn?
Proof-of-Burn is a blockchain consensus mechanism, similar to Proof-of-Stake, where coins secure the network. Instead of staking, holders burn a certain amount of coins. Ripple and Factom stand out among blockchains using this method.
😬 Why coin burning is necessary?
Coin burning creates scarcity, raising the value of the remaining coins. It helps control inflation, builds investor trust, and ensures protocol compliance.
Examples:
✌️ Limitations of the coin burning process
Coin burning doesn't always immediately increase prices and can be seen as manipulation, raising regulatory concerns.
👉 Consideration Before Investing:
Before investing in a cryptocurrency that employs coin burning, it's essential for investors to understand the project's tokenomics, the purpose of coin burning, and how it aligns with the project's long-term goals. This can help investors make informed decisions based on the potential impact of coin burning on the cryptocurrency's value.
🔄 Dynamic Nature of Coin Burning:
Coin burning practices can evolve over time. Some projects may adjust their coin burning strategies based on market conditions, community feedback, or changes in their overall vision. Staying updated on a project's whitepaper and official announcements can provide insights into any modifications to their coin burning approach.
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