by Viko

CEO Denelle Dixon announced on November 4 that the Stellar Development Foundation has burned 55 billion of its XLM tokens, over half the cryptocurrency’s supply. Previously, there had been 105 billion XLM in existence, with 20 billion in circulation. With this burn, the supply has shrunk to 50 billion. You might ask what is a coin burn? Why is it done? How did the supply reduce to 1/5th of the older supply?

Coin burning is the process of permanently removing coins from circulation, reducing the total supply. Coin burn means sending some of the coins of a native cryptocurrency or some other currency to a public address — ‘eater address’, which is often referred to as a ‘black hole’ from which those particular coins can never be spent because the private keys of such an address are unobtainable. This process also gets recorded in the blockchain, and because of its immutable records, it serves as proof it would never be able to be used again without a private key, meaning no access to the coin. Typically, coin burning is done on a publicly known address. By having it done on a publicly known address, anyone can check at any time and validate that the coins have been burned.

Some altcoin developers have included it as a feature as a means to reduce the number of coins in circulation. Not only does it serve as a supply regulator, but also provides value to token holders, by raising the coin value. There are many motivations for projects to consider a coin burn structure.

  1. Coin burning reduces the total supply in circulation since the coin is intentionally destroyed; It is an effective method of increasing and stabilizing the valuation of coins and tokens.
  2. Coin burning acts as a natural mechanism that protects against Distributed Denial of Service Attack (DDOS) and prevents spam transactions from hindering the network.
  3. It is an effective tool to signal a firm commitment by a cryptocurrency project since the value of the tokens which the investors are holding is increasing.

You might be wondering if this is even legal. Coin Burning is completely legal, and it has been practiced by many well-known developers like BINANCE (BNB) and TRON (TRX), which are famous for burning their coins to reward their coin holders. Binance does this a few times per year: its 7th coin burn destroyed 830,000 BNB ($16 million) in this way. VeChain and TRON use a similar model as well. This strategy has one advantage: the size of the burn is largely determined by market forces and price action.

The downside is that these burns do not always attract a lot of attention, and the results can be minimal. After two years, Binance has burned about 6% of its BNB supply. TRON, meanwhile, intends to burn $20 million worth of TRX over one year, adding up to 1.7% of its total supply.

This is how the burn function works:

  1. The user calls a burn () function nominating the amount of coin one wants to burn.
  2. Token contract verifies the stated number of coins are available or not.
  3. If coins present, burn is completed.
  4. If they do have enough, then the coins will be subtracted from that wallet. The total supply of that coin will then be updated, and the coins will be burned.

The burning mechanism enacted by the foundation which backs a cryptocurrency has stirred the privatization or centralization debate in the industry. If an organization is in control of the supply of tokens for their own benefits, the shift from fiats (where central banks control the supply of currencies). Bitcoin and Ethereum are not issued by a central organization or project. Since these coins are mined by a community, there is no group capable of planning an official coin burn. Instead, rules and algorithms prevent too many tokens from being created in the first place. Coins can also be destroyed inadvertently, as occurs whenever individuals lose access to their wallet addresses. Some estimates suggest that up to 3.8 million BTC has been permanently lost. Even if this is accidental, it is effectively the same as burning 20% of Bitcoin’s supply. Some cryptocurrencies have managed to fine-tune their burning strategy in order to achieve a specific price. Tether and other stable coins continually burn (and create) tokens, and the end result is that stable coin prices always rest around the $1.00 market.

That’s not a bad thing, though: the full impact of coin burns should become more apparent over the next several years, assuming that cryptocurrencies stay dedicated to their strategies. Of course, coin burns could go out of style at any moment as well, so it’s hard to say exactly what will happen.

-Viko

Nov 8, 2019

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