What is Coin Burning?

Coin Burning is the process of permanently removing digital assets from circulation. Coin Burning is a technical function, executed by a smart contract, to permanently remove a nominated amount of coins from the circulating supply. All coin burns are recorded as the transactions on the blockchain. Projects, as well as regular coin holders, can burn coins. From time to time, projects will set aside a predetermined number of tokens to be burned with the intent to increase the scarcity of the coin supply. The “burns”, and the timelines in which they occur, are most commonly made with 100% transparency, allowing users to verify when a coin has been destroyed. In summary, burning a token requires the following process:

1. An asset holder will execute the contract, signaling a burn function, stating that they wish to burn a nominated amount of coins.
2. The smart contract will then verify that the person, entity, or organization has the coins in their individual wallet and that the number of coins stated is accessible. The burning mechanism only allows positive numbers.
3. If the owner doesn’t have enough coins, or if the stated number is invalid (e.g., 0 or -5), the burn function will not be executed.
4. If the owner holds the allotted amount proposed for the burn, the coins will be subtracted from that wallet. The total supply of that coin will then adjust, updating users that the coins were permanently burned.
5. When a user executes the burn function, the coins will be destroyed forever. It is impossible to recover coins after they have been burned, and with the help of blockchain technology, the proof-of-burn can be easily verified on a blockchain explorer.

Why Burn Coins?

There are numerous benefits to token burns. The most well-known advantage is that burns may influence the value of a coin by reducing the supply of tokens. XLM is a good example of a project burning a set number of coins. Each unit destroyed demonstrates that the tokens being burned impact the price of the token.

Projects can be influenced to burn tokens from the reduction in trade volume triggered by the burn. This decrease in volume lowers the chance of spam (DDOS) attacks, leaving the protocol with enough bandwidth for a more consistent and favorable transaction volume on the network.

Trust and confidence in the project is a key element. It can be common in the early stages of an ICO to experience the burning process after the token or coin has finally launched. The intention is to provide new investors with reliability that their funds will not be affected with over circulation.

Coin burns can also benefit miners because when any supply is depleted, mining rewards increase in relation to the total supply. When done efficiently, miners, investors, and the average coin owner all hold the potential to benefit from the results of a coin burned.