But before that, I need to explain the proof-of-burn mechanism using which the coins are burnt. Also, there are many types of proof-of-burn but here I will provide just one simple explanation. Proof-of-burn is a method for distributed consensus and an alternative to proof-of-work and proof-of-stake.
It can also be used to bootstrap one cryptocurrency off of another. This is expensive from an individual point of view, just like proof-of-work, but it consumes no resources other than the burnt underlying asset. Source: Bitcoin Wiki. And in some cases, you also get the special right of mining blocks in weight of the coins that you have burnt. Think of it as a virtual mining set-up. This simple form of proof-of-burn that I explained above is implemented in Counterparty cryptocurrency XCP.
Rather, it came into existence by using a proof-of-burn method. This was done to avoid pre-mining or ICOs and also to reuse the energy which is already spent in mining a Bitcoin. Consider it like exchanging Gasoline for CNG where both are the fuel. This is designed because rules in certain countries like the USA discourage different cryptos to hand out direct dividends as rewards to their token holders.
Therefore, another way of rewarding their investors is by creating a scarcity of supply, hence driving the demand up which is bound to reflect in price appreciation of each token or coin that the investor is holding. Read more about Binance token-economics of coin burn here. This is done to maintain fair-play. Coin burn or proof-of-burn has several applications, depending upon different scenario you want to use it for.
Also, there are quite a few cryptocurrencies that have implemented the proof-of-burn directly to avoid ICOs or token sales. And there are many out there like Binance that frequently and purposely burn coins to reward their token holders. That is it from my side in this article.
If you are looking for more awesome content from CoinSutra , join our Telegram channel to get instant updates. Harsh Agrawal is the Crypto exchanges and bots experts for CoinSutra. He has a background in both finance and technology and holds professional qualifications in Information technology. After discovering about decentralized finance and with his background of Information technology, he made his mission to help others learn and get started with it via CoinSutra.
I am hoping to check out the same high-grade blog posts by you later on as well. HI, This article is pretty impressive. I am new in blockchain and want to learn how the whole thing works. I have a question regarding Burn coin. The blockchain is the primary database of a cryptocurrency. It holds all transaction-related information on blocks and those blocks act as the data storage units of the blockchain.
A block is written only when the blockchain nodes agree on a set of transactions that the nodes consider valid. Due to the autonomous and decentralized nature of the blockchain network, an automated mechanism is required to ensure that the participating nodes agree on only the valid transactions. This important task is performed by consensus-mechanism algorithms. The most well-known type of consensus-generating algorithms are called proof of work POW.
In a POW system, miners are rewarded for updating the blockchain. This entails using computing power to solve a mathematical equation and results in a monetary reward. Bitcoin, the original and most popular cryptocurrency, uses a POW system. However, a POW approach requires costly mining hardware devices and this method is hampered by high power consumption. Because the POW method is so resource-intensive, it's not very efficient.
Consequently, POW currencies, including Bitcoin, aren't very useful as a fungible instrument. Proof of stake POS is another algorithm that allots mining rights to miners proportional to their stakes held in the cryptocurrency. Unfortunately, the more complex construction of POS systems makes them more vulnerable to attacks, and because benefits flow increasingly to the largest coin holders, in a POS system, the richer you are, the richer you get.
Proof of burn POB is an alternative consensus algorithm that tries to address the high energy consumption issue of a POW system. They are then granted the right to write blocks in proportion to the coins burnt. Iain Stewart, the inventor of the POB algorithm, uses an analogy to describe the algorithm: burnt coins are like mining rigs. In this analogy, a miner burns their coins to buy a virtual mining rig that gives them the power to mine blocks. The more coins burned by the miner, the bigger their virtual mining "rig" will be.
To burn the coins, miners send them to a verifiably un-spendable address. This process does not consume many resources other than the burned coins and ensures that the network remains active and agile. Depending upon the implementation, miners are allowed to burn the native currency or the currency of an alternate chain, such as Bitcoin.
In exchange, they receive a reward in the native currency token of the blockchain. You can send out transactions to the network that will burn your own cryptocurrency coins. This promotes regular activity by the miners, instead of a one-time, early investment.
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