Can you explain to me how the process of burning cryptocurrency actually works?

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8 months ago

Hey there, I’ve been hearing a lot about the practice of cryptocurrency burning. It’s often described as a mechanism to regulate supply and demand, but the process remains a mystery to me. Why would anyone want to destroy their coins, let alone why would this be beneficial for the currency? It seems completely counterintuitive and I’m struggling to wrap my head around it.

Specifically, I’m wondering about the exact process that takes place when coins are burned. Are they literally destroyed or are they simply taken out of circulation and locked away forever? Another thing I’m curious about is how the value of the remaining coins increases when some are burned? Is it just based on the simple principle of supply and demand or is there more to it?

Moreover, I’ve heard that token burning can stabilize or increase a coin’s price, but isn’t that price manipulation? It somehow seems like a game strategy and that’s both interesting and a bit worrying. I’m trying to see if there’s an ethical concern here or if it’s a normal part of running a cryptocurrency.

Finally, I’d like to get some clarification on who exactly decides to burn coins? Is it the developers? The stakeholders? And if the decision is up to the stakeholders, how is that decision made? Is it a vote, or is there another decision-making process at play? Any light you can shed on these questions will be highly appreciated!

Answers:

0 Votes
8 months ago

Cryptocurrency burning is a simple concept where the coins are sent to an unusable account, effectively removing them from circulation, which is a bit like locking them away forever. The idea behind it is to regulate supply, and yes, it’s based around simple supply and demand principles. When there’s less of something, its value can increase if the demand stays the same or goes up. In the crypto world, this can potentially stabilize or increase a coin’s price, but it’s not really seen as price manipulation because it’s a publicly stated part of many crypto project’s plans. The decision to burn coins can rest with the creators of the cryptocurrency, or with stakeholders, and how the decision is made can vary. Sometimes it’s built into the crypto’s code, other times a public announcement is made, or there might be a vote. So all in all, it’s just a mechanism to manage supply and demand, not only game strategy or anything unethical.

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8 months ago

Building a little on what ‘underwrite’ said, think of burning crypto like a company buying back its shares. It’s a way to manage the overall supply, and if done properly, it can leverage supply-demand dynamics to increase the value of the remaining coins. It’s important to note though, that this doesn’t automatically mean the price will go up. The market conditions, sentiment, and Use-cases of the crypto also play significant roles.

As for your concern about price manipulation, this is a legitimate thought and it’s valid to be wary. However, burning tokens isn’t privately done – it’s announced clearly beforehand, most of the time, is actually embedded in the protocol’s rules. Decisions on token burns could be made based on some predefined rules or by stakeholder voting, this actually depends on the mechanism deployed by the crypto project.

Your question about who gets to decide when coins are burnt is also another variable. For some projects, it is the developers, for others – it’s a community-based decision reached through consensus. Some might use automated smart contracts that burn a portion of the fees or tokens when certain conditions are met. Always make sure to research and understand the burning mechanism of a cryptocurrency before investing.

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