What is coin burn? It’s not a term that absolute newcomers to crypto are likely to know well but as you get to know the world of cryptocurrency you’ll soon become familiar with such seemingly obscure terms.
Coin burn is the technical term for a process of, believe it or not, destroying cryptocurrency or rendering it completely unavailable. Why would anyone want to destroy a portion of their own crypto holdings, and why would enough of them want to do so that the practice has earned its own industry jargon?
A Brief History Of Coin Burn
And we DO mean..brief. Coin burning has, by some accounts, it’s origins with Binance Coin and Bitcoin Cash–these companies took steps to burn crypto tokens starting as early as 2017 with an eye on increasing the scarcity and the value of the coins.
The idea of offering a coin at very cheap prices on the coin’s debut, then burning a fair portion of those coins to increase scarcity (that’s a term you’ll see more than once here) and their value. No, the coin burn has not been around long.
For all intents and purposes, crypto coin burning is a new concept in the space, but it mimics certain practices in good old fashioned stock markets.
But as we’ll see below, there is definitely a precedent for this activity, just not online.
What Does Coin Burn Mean?
The explanation of coin burn requires an appreciation for the reasons investors are willing to accept the practice–and there are several.
The physical practice of coin burning happens when the owner of cryptocurrency like Ethereum, Dogecoin, Bitcoin, etc. send a user or project-specified number of coins to an non-accessible crypto wallet. This effectively removes those specific coins and their private keys from being used ever again.
How It Works
Crypto tokens sent in this fashion are said to have been sent to a “burn address” which is inaccessible–there’s no way to retrieve these coins once sent.
A coin burn functions a bit similarly to the practice of buying back stock–if a company goes public and begins to offer shares, the value of those shares may decrease over time if there are too many shares.
The company that starts re-acquiring those shares makes the value of the remaining stock in circulation go theoretically higher based on the creation of scarcity. You can’t buy as many of Stock XYZ because the company is buying up available shares and reducing the supply of them in the marketplace.
Why Coin Burn?
That scarcity issue is one motivation to perform a coin burn. But there are others. Coin burns can be a way to arrive at a consensus on the network among those who mine or mint crypto. Investopedia reminds us that one other use is as a method to validate blockchain data–proof of burn is meant as that validation and, as a method to discourage crypto fraud.
How? Some networks require crypto miners to burn some of that crypto in order to get continued permission to operate–no coin burn, no mining.
Part of the motivation behind the practice of coin burn may have to do with the shady practice in darker corners of the crypto world where some pretend to do a burn but instead of sending the crypto keys to an inaccessible crypto wallet, they purposefully send those keys to a wallet that IS accessible.
Another Reason To Burn
But there’s another motivation–mining virtual currency is a high power-cost situation. It requires a great deal of energy and potentially high utility bills to mine crypto by solving complex computer problems and issuing Proof of Work that this has been done.
The mining operation done in this fashion is NOT green, environmentally friendly, or (in terms of carbon neutrality and fighting climate change) not sustainable ecologically.
Coin burn answers that problem in a simple way. The Proof of Burn concept mentioned above where you don’t get permission to mine crypto without burning your own?
This is considered in some circles as an alternative to Proof of Work. When you burn your own crypto and submit Proof of Burn you are given permission to “write blocks” and perform your crypto operations in direct proportion to the amount of previous crypto “sacrificed” (our term) or burned.
Burning the crypto is NOT the energy-intensive operation that Proof of Work might seem by comparison.
And coin burn can also be used as a way to prevent spam, denial of service attacks, and more. Imagine the price of a certain transaction being modified to include a coin burn, or an activity on the network that requires you to perform a coin burn to gain access. It’s a “fee” of sorts though no fiat currency or cash money changes hands. It requires you to have coin to use AND coin to “burn” as the “price of admission” or price for permission to participate in a given project or transaction.
What Kinds Of Crypto Can I Burn?
Since there is no specialized software or hardware needed specifically to perform a coin burn, you can (at press time) burn ANY cryptocurrency at all. The problem is, burning it yourself or even burning in large numbers is no guarantee of a fixed outcome or beneficial result. Many coins are burned with absolutely no benefit at all, while others may be burned to the delight of loyalists who watch the value of their coins go up as the supply numbers for that particular coin fall.
Joe Wallace has covered real estate and financial topics, including crypto and NFTs since 1995. His work has appeared on Veteran.com, The Pentagon Channel, ABC and many print and online publications. Joe is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News.