Onomy Protocol
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Onomy Protocol

Burn Baby Burn, Fiscal Inferno! What Is Burning in Crypto?

In crypto, burning is a mechanism by which tokens are destroyed forever. It’s usually to reduce the overall supply of a given token with the intention of increasing its scarcity and thus its value. It can also be used to restore balance to the mining or staking pool to stop early-adopters overpowering the network or reaping too many of its gains. It’s also an excellent marketing tool, as the flamboyant and sudden reduction in supply can pique participant interest through deflationary economics that keep the supply in check.

How to Burn Crypto

To burn a cryptocurrency, all one needs to do is send tokens to a wallet where no one knows the private key or a private key hasn’t been generated. This unusable address is called a burn wallet or eater wallet. The tokens can then never be accessed, effectively removing them from circulation. Sending coins to unsupported addresses will also burn tokens, e.g sending Bitcoin to an Ethereum wallet or vice versa. Many contracts have a burn function integrated, making the process programmatic.

Transaction Burns

Many protocols have some kind of burning mechanism in their functionality. For instance, each transaction made with a coin can burn a portion of the transaction fee. This, for example, is Ethereum’s approach. 1.3 million ETH was removed from circulation in 2021. This is to encourage price growth as adoption grows, and create a positive feedback loop between user uptake and value accrual. Having burning as part of a transaction fee also protects networks against DDoS attacks, as the requirement to constantly burn currency to do so makes it economically unviable for an attack to proceed.

Developer Burns

Burning is also done en masse by developers, who simply send a swathe of the tokens supply into the eternal purgatory. Burning actions like this are frequently done for marketing, as the rapid reduction of supply promotes user uptake as scarcity increases. This is what Shiba Inu did, but they ‘burned’ the supply by sending it to Ethereum’s co-founder Vitalik Buterin, who promptly truly destroyed the currency by sending it to a burn address after donating a portion to charitable causes.

Burn functions can also be built into smart contracts, allowing anyone to execute a burn function. BNB, when on the Ethereum network and not on its own chain, used a burn function to carry out its quarterly coin burns. BNB — even on its own chain — has pledged to continue burning BNB until 50% of the supply has been removed from circulation.

Proof-of-Burn

Burning is also used as an alternative consensus mechanism for blockchains. It allocates mining rights by making miners burn a portion of the tokens they already have, so to claim a block reward, they must spend money. Specifically, they must send tokens to a known public address. It forces miners to have more long-term investment in a blockchain and helps demonstrate their commitment to a chain. It makes the mining process costly, but by doing so deters possibilities of 51% attacks by making it economically unfeasible.

Proof of Burn is similar to Proof of Work but does not require excessive energy use to operate. Despite its advantages, it hasn’t gained much recognition, and no top 100 cryptocurrency at time of writing uses PoB as its consensus mechanism.

How Onomy Utilises Coin Burns

Onomy plans to use a burning mechanism in line with user adoption to contribute towards shared ecosystem growth. Onomy’s burn mechanism will be enacted through Keeper Bots and the DEX’s hybrid architecture. Put simply, the AMM acts as the counterparty of order book transactions, capturing spread between the bids and asks, which is then used to reward liquidity providers. A portion of these rewards are additionally used to incentivize a global set of participants to execute a buy & burn function that programmatically purchases NOM from the market and removes it from supply through burning. Such is the case on all instances of the Onomy Exchange, deployed on the Onomy Network and partner chains. Given the history of DeFi, it is highly likely bots will compete to execute the buy & burn function to earn the reward for doing so.

About Onomy

Onomy Protocol is a layer-1 Cosmos chain powering a multi-chain & intuitive DEX that combines AMM liquidity pools with an order book UI facilitating market, limit, and stop orders, alongside FX markets via its stablecoin minting system, and multi-protocol asset management through the multi-chain Onomy Access wallet.

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Onomy Protocol

Onomy Protocol

Offering the infrastructure necessary to converge traditional finance with decentralized finance.