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Crypto in plain English

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April 25, 2022

What is Coin Burning?

Welcome to the cryptohunt jam where we spend one minute a day to explain crypto. In plain english.

In the last two episodes we explained how halving slows down the rate at which new Bitcoins get put into circulation.

Halving, however, is very specific to just a few blockchains, the most popular ones are Bitcoin, Bitcoin Cash, and Litecoin.

Other blockchains use a mechanism called burning to achieve the same: It takes coins of circulation. But how do they do that and why?

Many crypto currencies are built with the idea of deflation in mind. Deflation simply means that the supply of available currency decreases over time which can in turn increase the value of those coins by creating scarcity over time. 

Deflation could be by design for currencies that are explicitly set up to do this, or by personal motivations of large holders.

Burning is one way to achieve deflation. While it sounds dramatic, in most cases coins just get sent to a special wallet that doesn’t have an owner. Nobody has the key to it, so they can never be used again.

Who burns these tokens? Often, burning is built into the protocol of a blockchain itself. Set in code, it happens whenever the conditions are met. Ethereum for example burns some of the fees whenever a transaction happens.

In other instances, developers behind the tokens, or just owners decide to burn their holdings. The inventor of Ethereum famously burned almost $7bn in Shiba Inu, which he got sent without being asked for permission, because he felt it was unfair to have that many.

And that’s it on Burning and Deflation! And next time we’ll talk about the economics of mining Bitcoin!

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