How can HODLers benefit from coin burn?
You’ve probably heard of this, “scarcity is what makes it valuable”, and the same applies to the crypto world. Unlike fiat currencies, crypto is deflationary in nature. When a coin is scarce, its price tends to go up, because it’s human nature to grab when supply decreases. So theoretically, by intentionally reducing the total circulating supply of a coin, its value will increase. That’s when ‘coin burning’ comes into play.
Some might be curious–ain’t cryptocurrencies digital tokens? How can they be burnt?
How Coin Burning Works
Coin burning, as the name suggests, literally refers to the process of permanently eliminating a proportion of the coin from circulation by ‘burning’, hence reducing its total supply in circulation. This can be done by sending a certain amount of the coin to a public black hole address, the private key of which is unobtainable by anyone. Coins that are sent to the black hole address cannot be recovered or used, as they are logged and verified on the blockchain as ‘destroyed’.
But, WHY? Why would anyone be willing to burn the coins they mined or purchased?
1. Mining Privileges & Rewards
For some coins, they adopt the Proof of Burn (PoB) consensus mechanism instead of the Proof of Work (PoW). In PoB, when miners send coins to a black hole address to burn, they would be rewarded the mining right in exchange for those burned coins. The more a miner is willing to undergo a loss, the higher the chance they stand to mine the next block. Over time, users will continue to receive rewards, which encourages long-term commitment while maintaining greater stability for the coin’s price, as they are less likely to sell or spend their coins.
2. Expected Increase in Coins Value
The total supply for most cryptocurrencies is fixed. Taking OKB as an example, its total available supply is one billion tokens (1,000,000,000 OKB). According to the ubiquitous Law of Demand, if the demand for it increases, its price would go up since there is only a limited amount of OKB in circulation. We can then assume that if the supply of OKB decreases, the price would likely increase as there will be fewer OKB available to satisfy the demand. In this case, coin burning is deemed as an effective way to reduce the total supply in circulation, while increasing and stabilizing the value of a coin.
3. Protection Against Spam
Coin burning also serves as a protection mechanism to prevent spam transactions and safeguard against Distributed Denial of Service Attack (DDoS). For some projects, they have integrated a burning mechanism for validating transactions. Users don’t need to pay fees to miners and a small amount of the transaction will be burnt automatically. In this way, the entire network would benefit as the total supply in circulation reduces gradually, which lead to an increase in the asset’s price in the long run.
4. Reinforcing A Project’s Growth Prospect
During ICOs, the number of coins to be sold are usually determined beforehand. The remaining ICO coins that are not sold sometimes end up within the wallets of the issuing company. As the value of the coin usually goes up after the ICO, the company would hold an unfair amount of free money if they resell them in the market at the appreciated price.
By implementing a coin burning mechanism to burn those excessive ICO tokens, the company can reinforce its project’s growth prospect and build buyer’s confidence by keeping the market fair and square. Sometimes, periodic burning schedules are set for the company to buy back tokens from the open market and burn them. For example, OKEx has implemented the OKB ‘Buy-back & Burn’ scheme starting May 4, 2019, where we will buy back and burn OKB every week in May, and then switch to quarterly burn starting from Jun 1, 2019. By reducing the total supply in circulation, we hope OKB supporters can benefit from the increase in and stabilization of the value of OKB.
As of May 10, 2019, we have already completed our first OKB Buy-back & Burn, with a total of 506,183.37 OKB were burned, reducing 0.17% of the total circulating amount.
For more details on the OKB coin burning schedule, you may refer to the announcements on our official website or OKEx App.
Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involves significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.
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