Ethereum’s London Hard Fork, which includes the EIP-1559 upgrade, went live on the 5th of August, 2021. The upgrade primarily introduces a mechanism with the goal of reorganising the platform’s processing fees, among many other improvement proposals that came into effect. Users pay a base fee under the new system. This base fee is burned every time it is paid, hence, removing it from circulation. The network apparently burned 4,600 ETH, or about $12 million, in the first 24 hours after the upgrade.Burning the currency? — that does not really sound right, does it?
When we imagine something burning, we conjure up an image of things being zapped.
But as malicious and audacious the repercussions of burning a cryptocurrency might seem at first, as it essentially removes a substantial number of tokens from the trading circulation, thus leaving them useless and of no value, it actually has some quite opposite and useful effects which are even lucrative. To wrap our heads around this concept which is seemingly destructive but turns out to be beneficial and even lucrative, we must understand how Crypto Burning works:
When a cryptocurrency tokens are burnt, nothing is put to fire for real but instead what actually happens is that the tokens which are meant to be “burnt”, are sent to inaccessible wallets or addresses which are known as “eater addresses” or “blackholes”. No one has access to these addresses as their private keys cannot be obtained and hence those tokens are taken out of the trading circulation and rendered useless.So, how is it lucrative?
To understand how burning is lucrative, we need not to go any further than the basic demand and supply theory. By burning the tokens, a scarcity is created by reducing the number of tokens in circulation and sometimes even by limiting the supply, so if their demand increases, the price of the token shall increase as the supply is scant. Even if the demand does not increase but remains constant, the prices shall still increase because the existing demand has to be met with the lesser number of tokens.
Hence, it is also employed in capping the inflation of cryptocurrencies.
We referred to Ethereum’s London Hard Fork in the beginning and it also reinstates our aforementioned theory of manipulating the prices of assets by toying with the supply. The price of an ETH at the time of publishing the blog is $3,119.99, which is substantially greater than $2600, which was the price just before the changes came into effect.
It must be noted though that the burning of tokens does not always have the intended effects, it may also happen that the demand of the coins decreases and subsequently the price of the coins does not rise.
Coinburns are used for a variety of reasons in addition to tackling inflation.
And as ironic as it may sound, but burning the tokens also helps with the environment!
Proof-of-Burn (PoB), for example, is a novel consensus method that verifies transactions on the blockchain by burning tokens.
Miners must destroy a certain number of tokens to earn mining rights on PoB networks, which is analogous to staking coins in Proof-of-Stake (PoS) systems but the validators, on the other hand, are unable to access their tokens once they cease mining (as the coins have already been destroyed).
PoB addresses the popular Proof-of-Work (PoW) algorithm’s energy consumption issues by limiting the number of miners who can verify blocks and matching them with the quantity of crypto they have burned.
1. Burning of crypto tokens implies removing a substantial number of tokens from the trading circulation and sending them to inaccessible wallet addresses.
2. Burning helps in combating inflation of cryptocurrencies to a great extent through manipulating the prices of assets by toying with the supply.
3. PoB addresses the energy-consumption issues of the popular Proof-of-Work (PoW) algorithm by restricting the number of miners that can verify blocks and matching them with the amount of crypto they have burned.