Cryptocurrency Burning: Is Control Over Digital Inflation Possible?
What is burning of coins?
Coin burning is a way for miners and digital currency developers to recall tokens or coins from circulation thus slowing down inflation rate or reducing total current coins.
How is this achieved? In the realms of digital currency it is next to impossible to control flow of tokens after they got mined. To recall them from circulation miners and developers acquire these tokens and redirect them to specific addresses with unavailable private keys. Without access to the private key nobody can reach for these tokens to use them in transactions. This is how coins get useless and in all senses get beyond the scope of circulating demand.
The concept of coin burning
Cryptocurrencies were not the first one to apply the idea of burning. In fact, the process resembles much the idea of redeeming company’s shares. Companies used cash to take up shares thus reducing their volume. This process may stabilize prices left in circulation and increase earning per share, with fewer allotted shares earnings-price ratio gets higher.
Coin burning has the same purpose. By reducing amount of tokens in circulation developers and miners try to make tokens more rare and, consequently, more valuable.
Burning coins in practice
There have already been at least two cryptocurrencies that tried to burn coins. Bitcoin Cash price went sky-high this spring when the Antpool company that mines the cryptocurrency declared, it sent 12% of earned coins to unavailable addresses. Given Antpool checks about 10% of transactions with Bitcoin Cash, this amount of tokens is pretty high. Thus Antpool slow down inflation rate for BCH, and this may contribute a lot to Bitcoin Cash uprise he have been witnessing over the last few weeks.
Still Binance Coin (BNB) also resorted to that strategy far earlier. BNB is official token for Binance crypto exchange and used for stimulating users by reducing transaction commission fees. As available data shows, during the first weeks of the year over 1.8 million BNB tokens were burnt. This happened again in April with another 30 million BNBs.
Of course, there are huge risks about burning coins. First, this does not guarantee that the remaining coins will gain more value. This doesn’t even reduce total number of tokens in circulation as it varies considerably all the time.
Bitcoin is striking example for the case when burning coins may not work. It is limited to 21 million tokens and some analysts say this level adds to BTC value. Nonetheless Bitcoin has already created new tokens with hard-forks for several times already. If Bitcoin forks again, far more tokens will come. So the idea that the number of Bitcoins has its limit is a little artificial.