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How can Hodlers benefit from a coin burn?
You’ve probably heard of this: “Scarcity is what makes it valuable”, and the same applies to the crypto world. Unlike fiat currencies, crypto is deflationary in nature. When a coin is scarce, its price tends to go up, because it’s human nature to grab when supply decreases. So theoretically, by intentionally reducing the total circulating supply of a coin, its value will increase.
That’s when ‘coin burning’ comes into play.
Some might be curious – ain’t cryptocurrencies digital tokens? How can they be burnt?
How Coin Burning Works
Coin burning, as the name suggests, literally refers to the process of permanently eliminating a portion of the coin from circulation by ‘burning’, hence reducing its total supply in circulation. This can be done by sending a certain amount of the coin to a public black hole address, the private key of which is unobtainable by anyone. Coins that are sent to the black hole address cannot be recovered or used, as they are logged and verified on the blockchain as ‘destroyed’.
But, why? Why would anyone be willing to burn the coins they mined or purchased?
- Mining Privileges & Rewards – For some coins, they adopt the Proof of Burn (PoB) consensus mechanism instead of the Proof of Work (PoW). In PoB, when miners send coins to a black hole address to burn, they would be rewarded the mining right in exchange for those burned coins. The more a miner is willing to undergo a loss, the higher the chance they stand to mine the next block. Over time, users will continue to receive rewards, which encourages long-term commitment while maintaining greater stability for the coin’s price, as they are less likely to sell or spend their coins.
- Expected Increase in Coin’s Value – The total supply for most cryptocurrencies is fixed. Taking OKB as an example, its total available supply is one billion tokens (1,000,000,000 OKB). According to the ubiquitous Law of Demand, if the demand for it increases, its price would go up since there is only a limited amount of OKB in circulation. We can then assume that if the supply of OKB decreases, the price would likely increase as there will be fewer OKB available to satisfy the demand. In this case, coin burning is deemed as an effective way to reduce the total supply in circulation, while increasing and stabilizing the value of a coin.
- Protection Against Spam – Coin burning also serves as a protection mechanism to prevent spam transactions and safeguard against Distributed Denial of Service Attack (DDoS). For some projects, they have integrated a burning mechanism for validating transactions. Users don’t need to pay fees to miners and a small amount of the transaction will be burnt automatically. In this way, the entire network would benefit as the total supply in circulation reduces gradually, which leads to an increase in the asset’s price in the long run.
- Reinforcing A Project’s Growth Prospect – During ICOs, the number of coins to be sold is usually determined beforehand. The remaining ICO coins that are not sold sometimes end up within the wallets of the issuing company. As the value of the coin usually goes up after the ICO, the company would hold an unfair amount of free money if they resell them in the market at the appreciated price.
By implementing a coin burning mechanism to burn those excessive ICO tokens, the company can reinforce its project’s growth prospect and build buyer’s confidence by keeping the market fair and square. Sometimes, periodic burning schedules are set for the company to buy back tokens from the open market and burn them.
OKEx is a world-leading digital asset exchange headquartered in Malta, offering comprehensive digital assets trading services including token trading, futures trading, perpetual swap trading and index tracker to global traders with blockchain technology. Currently, the exchange offers over 400 token and futures trading pairs enabling users to optimize their strategies.