Understand “Burning” in just 3 minutes

Among the galaxy of cryptocurrencies on the market, a certain number, including some of the largest capitalizations (ETH, BNB), have chosen to apply a “burn” mechanism in the governance of their projects.

But what exactly are we talking about with this term? How does this mechanism work? What is the point ? Presentation of an essential practice in the crypto universe.

What is a crypto burn?

“Burning” is an English term that literally means “to burn “. We also find this process under the expression “burning coins”.

It is a specific mechanism of the cryptographic ecosystem, according to which, ora certain amount of cryptocurrencies will be intentionally and above all permanently destroyed. Therefore, the purpose is to reduce the number of units of a cryptocurrency in circulation in order to reduce the total supply. It is, therefore, a process that can be described as deflationary.

The Binance exchange platform has long been used to this. In fact, when Binance was still part of the Ethereum network, it periodically initiated token destruction using smart contracts.

How does burning actually work?

A crypto “burn” will follow several stages.

  • The owner of a cryptocurrency who wishes to destroy a certain amount of his tokens will initialize the recording function.
  • the smart contract I’ll do some checking in particular, about the actual possession of these tokens and the number of tokens to be destroyed. If the applicant does not meet one of these conditions, the recording is not executed.
  • The tokens will be removed from the owner’s wallet and will be destroyed.. The total supply of this crypto will be updated in the database (block chain).

The token holder must clearly understand that the activation of this “Burning” function results in the permanent destruction of his tokens. The blockchain is there precisely to confirm this destruction and even there the proof of the destruction is recorded. This destruction mechanism is transparent and verifiable by all, particularly in ether scan.

NB: Generally, the user will be assigned a wallet address. But unlike a purse classic cryptocurrency, this wallet will only be able to receive cryptocurrencies and does not have private keys. In other words, once the cryptos are transferred, they permanently disappear from the market. we call these “dining room” or “burner” directions. We also talk about “dead wallet”.

read also Understand “Proof of Stake” in just 3 minutes

What is the point of “burning” chips?

Here we find the same principle and interest as the destruction of money in circulation in the traditional banking system with central banks. This allows, in particular, to guarantee the control and regulation of the currency or cryptocurrency in circulation.

In the cryptographic universe, there are also other reasons that can justify this “Burning”. Obviously, the main interest remainsoperate a shortage of the chosen cryptocurrency. There will be fewer tokens in circulation for a consistent demand. Therefore, economic logic would suggest that this would ultimately increase the value of this cryptocurrency.. This is a hypothesis that still needs to be confirmed over time.

Be that as it may, some developers of crypto projects voluntarily carry out “Burning” for this purpose.

Example : the famous co-founder of the Ethereum blockchain, Vitalik Buterin, received 50% of the total supply of SHIB (Shiba Inu) tokens at the launch of the project during 2020. The following year, Vitalik Buterin burned a good part of his SHIB. The number of SHIBs in circulation has thus increased from 1 billion to 590 billion. In the process, the price of SHIB hit new records.

Conclusion: burning is a process inherent to the cryptographic universe

This practice of “Burning” is the opposite of the issuance of tokens that can occur during block validation or as a reward for mining a cryptocurrency.

This mechanism is relatively common and responsive in the crypto ecosystem.. It is highly appreciated by investors, but despite all this it is in no way a guarantee of the valuation of the cryptocurrency. Indeed, the token holder must understand that the scarcity of a cryptocurrency cannot be enough to influence the price of this digital currency.

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