Burning coins is a concept that involves the destruction of a certain number of cryptocurrency units.
In other words, we are talking about the process by which cryptocurrency miners or developers get rid of a certain number of tokens by sending them to addresses that are not accessible to anyone. The burning of coins is being implemented not because of the low viability of the project, but rather because of the desire of the creators of cryptocurrencies for great prospects.
This phenomenon is popular among projects with a large aggregate number of coins in circulation or in the absence of a limit on their issue. Thus, developers are trying to reduce the total number of available coins, while the created shortage affects the growth of their value.
The concept is similar to the process of redemption of its own shares by a public company in the traditional financial market in order to reduce the total number of securities in circulation, which potentially increases their value, and, accordingly, leads to an increase in profits.

What is the purpose of burning coins?

Creation of new coins (based on the proof-of-burn algorithm).


This algorithm allows miners to receive a reward after burning a certain number of coins.


Token holder reward.


Thanks to the artificial creation of an economic shortage of coins, their value increases, and, accordingly, the enrichment of investors who purchased them earlier.


Obstacle to inflation.


In the process of continuous mining, the number of coins in circulation shows non-stop growth, which, in turn, leads to their depreciation. A situation in which supply exceeds demand reduces the rate for cryptocurrencies. To avoid this, the developers regularly burn coins, the number of which exceeds the predetermined standards, thus maintaining the cryptocurrency rate at a stable level.


Unclaimed coins in ICO


If the project failed to distribute all the tokens issued specifically for sale during the crowdsale, then such coins are often subject to destruction and may be evidence of the team's “fair play”. An example of such a company is Neblio. After their ICO, the team promised to burn all their unsold coins, and they kept their promise.


Each project using the concept independently chooses the most appropriate method for destroying coins. So, some prefer to burn them in separate wallets, while others use special software or change the code by implementing a hard fork. It is also possible to program the system to burn the commission.

Cryptocurrencies using the coin burning method

The well-known Ripple network uses this method to maintain value. So, for each transaction in the Ripple network, a part of its commission is burned. Other cryptocurrencies using the coin burning method - Request and Stellar - their tokens, REQ and XLM, respectively, are burned with each new transaction on the network.


Another coin that burns regularly is the Binance cryptocurrency exchange coin, traded under the ticker BNB. Binance burns 20% of its proprietary cryptocurrency trading profits on a quarterly basis and intends to continue until the supply is reduced by 50% of the original issue, or 100 million BNB.


Representatives of the Bitcoin Cash project earlier this year announced that a part of the coins received from the network fees in the amount of 12% was transferred to an unreachable address. The relevance of Antpool's actions is due to the need to slow down the annual inflation rate for the BCH token.


The Iconomy project with its own cryptocurrency (ICN) burns investors' dividends, rewarding them with a higher value of their assets thanks to artificially created scarcity.

Conclusion

But the concept of burning coins has its risks. Some cryptocurrency enthusiasts may see coin burning as a sign that blockchain developers have finally found a way to improve the well-being of their investors, but the assumption that coin burning is guaranteed to positively affect the development of the project in the future may be wrong.

The problem is that if there was any way to guarantee that the coin's value would rise, it would make the process of burning coins a potentially intriguing method of creating value for existing token holders. But without such guarantees, the effectiveness of creating value and increasing the value of tokens by creating a scarcity remains in question, since the level of its mass adoption remains the main factor affecting the price of cryptocurrencies.