Tech

Coin burn: why do miners destroy cryptocurrency?

Coin burn is a practice used by owners of large amounts of cryptocurrency to increase their value. Binance’s blockchain uses this technique – and it will soon be the case for Ethereum.

It’s a phrase you may have seen before, whether you’re into cryptocurrency or not: the corner burn.

The expression, which literally translates into French as “coin burning”, refers to a particular practice which, as its name suggests, consists of destroying units of cryptocurrency. But why throw virtual money down the drain?

Why do corner burn?

The corner burn is an operation that consists of destroying units of cryptocurrency. This may seem counterintuitive, especially given the price some are fetching today and the energy required for their production, but it is actually quite logical reasoning for miners.

For them, it is a question of limiting the number of cryptocurrency units in circulation, in order to be able to increase their price. In fact, the rarer something is, the more valuable it is. The deliberate destruction of these units therefore makes it possible to artificially drive up prices.

Cryptocurrency // Source: Jeremy Zero / Unsplash

Binance Coin (BNC) is certainly the most well-known cryptocurrency to use the corner burn. The Binance platform regularly burns huge amounts of BNC in order to stabilize its price and better control it over the long term. Indeed, since the blockchain does not have a predefined Binance Coin number, it is very interesting for it to regularly destroy BNB – and it is what it does on a quarterly basis. During the last burn, which took place on July 18, 2021, 1,296,728 BNB were destroyed, or more than $ 393 million.

The specialist firm Stellar also chose to destroy the units of its XLM cryptocurrency in its possession in November 2019. By destroying more than 55 billion units (out of a total of 85 billion in circulation), Stellar increased the value of ‘a 25% XLM in one day.

How is the burn corner going?

The destruction of real banknotes is something easy to imagine, but how do you achieve such a result with cryptocurrencies?

The corner burn is ultimately a fairly simple practice. It suffices for those in charge of the burn coin to send a determined quantity of cryptocurrency units to a eater address (eating address), that is to say a crypto wallet that does not belong to anyone, and which is locked. The wallet in question is an address that does not have a key, which means that no one will ever be able to access the cryptos stored there, and that they are as if destroyed. The addresses of these wallets are public and the transactions can be viewed by anyone.

However, there are not only advantages to corner burn. Practice alone does not guarantee that the remaining cryptocurrencies will increase in value, especially if the blockchain is not widely known. And the associated benefits do not necessarily last over time: after Stellar’s burn wedge in 2019, the value of XLM gradually fell, until it again reached the level before the burn – and even went lower. .

The proof of burn

Some blockchains that use coin burn use the proof of burn (proof of destruction), a particular consensus protocol. The proof of burn works on the same model as the proof of work, but without knowing the same problems of energy consumption, explains the specialized site Investopedia.

The proof of burn gives the right to a user to mine the next block according to the number of cryptocurrency units that the latter has burned. For example, Slimcoin, a blockchain that uses this consensus protocol, allows miners who have burned a certain number of units to have the right to compete to mine more blocks, over a greater period of time – and so on. ultimately receive more cryptocurrencies as a reward.

Bitcoin // Source: Executium / Unsplash

Which blockchains do not burn coin?

Binance Smart Blockchain is the largest to use corner burn, but not all cryptocurrencies use the corner burn. This is particularly the case for bitcoin, which does not destroy units. As the cryptocurrency is limited to 21 billion units, the burning coin would be completely counterproductive – especially given the price and the amount of energy required to produce a single bitcoin.

For ethereum, things are different. Cryptocurrency does not currently practice the corner burn, but the deployment of the Ethereum Improvment Proposal 1559 on August 4, 2021 is going to make a difference. For each future interaction on the blockchain, ETH will be destroyed, specifies the specialized site Decrypt. For now, for each transaction on the blockchain, a gas fee (fuel costs) which can reach very large sums is levied by minors. The deployment will make it possible to gas fee fixed on the blockchain, and reduce the number of ETH available, which should appeal to investors according to Decrypt.

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