Edul Patel, CEO & Co-founder of Mudrex, said this is primarily done to control the price of the coin concerned. “Since all transactions are recorded on the blockchain and cannot be altered, everyone can verify that the coins were actually burned.”
Recently, Vitalik Buterin, the co-founder of Ethereum, burned more than 90 per cent of his Shiba Inu tokens. After the London Hard Fork update, close to $0.5 million worth of Ethereum is being burned every hour.
Which coins can be burned?
All cryptocurrency coins can be burnt. The decision to burn tokens is usually vested in the developer team of the coin. Sometimes, coin burns can be initiated by the core community also.
This process is highly similar to the idea of a publicly traded company buying back its stock, said Darshan Bathija, Co-founder & CEO, Vauld. “A project’s developers buy tokens back from the market or burn parts of the supply.”
How is a coin burnt?
The portion of the coins that is being burnt can be verified on the blockchain. These coins are sent to a wallet to which no one has access. “It can be done in several ways, most commonly by sending the coins to a so-called eater address. Its current balance is publicly visible on the blockchain, but access to the contents is unavailable to anyone,” said Bathija.
What is the need to burn a coin?
There are different reasons to burn cryptocurrency coins. It is known to directly incentivise and reward a project’s investor base. Coin burns directly affect the dynamics of supply and demand. The most notable objective is to create a deflationary effect. By reducing the overall number of tokens in circulation, these events make tokens scarce and boost the cryptocurrency’s valuation.
“It drives the coin price higher. It makes existing investors pretty happy as the value of their investments move northwards,” added Patel of Mudrex. “Miners of certain cryptocurrencies such as Bitcoin also become happy as the value of reward for their labour would have now increased.”