Bitcoin Cash has rallied as much as 90 percent in the past week, eclipsing the entire crypto market and making Bitcoin’s 10-plus percent rise pale in comparison. It recently came to light that one of its biggest mining pools has been burning BCH coins – so what is the process of coin burning, and what are the motivations to do it?
The renegade chain splintered from the main Bitcoin chain over 8 months ago to fulfill the ‘original vision’ of Satoshi Nakamoto to create a new asset for transacting rather than a store of value. Its creator, the outspoken Roger Ver, is the closest thing to Elon Musk in cryptoland: prolific on social media and antagonistic to his doubters. He protests that “the old, pro-freedom, economically and philosophically literate radicals have been replaced by a bureaucracy of charlatans who destroyed Bitcoin so they could cling to their power.”
Without framing it as an explanation for the Bitcoin Cash (BCH) rally, the sharpest rise the past week coincided with the announcement on Twitter by one of the currency’s miners, Bitmain’s Antpool, that it was burning 12 percent of the coins it earned through mining.
What is coin burn?
Coin burn is the process of sending a blockchain’s intrinsic token to a wallet address that can’t be retrieved or spent because the private key to that address is unobtainable (ie a black hole address). There are several reasons to do so: (i) as a Proof of Burn (PoB) consensus algorithm that make new coins (ii) to reduce supply to reward token holders with a higher return (iii) to destroy unsold coins after an ICO.
To avoid classification and thereby regulation as a security, cryptocurrencies avoid paying a dividend to their investors so coin burn is possibly the only way to repay their loyalty.
Bitmain in its announcement justified the action thus: “While having active users spending BCH is very important for the ecosystem, having investors who hold BCH is also a fundamental requirement for maintaining a strong economy. Without these holders, BCH’s exchange value loses significant support. We believe that they too should profit from the growth of BCH by their continued stake in the Bitcoin Cash ecosystem. The transaction fees earned by miners are an important growth indicator of the BCH ecosystem, and if a portion of the fees are burnt, it is effectively miners sharing revenue with the entire BCH network.”
Bitmain CEO Jihan Wu is an advocate for Bitcoin Cash and a proponent of it being used as a form of payment before a store of value. Bitmain currently mines around 7-10 percent of all BCH in circulation and Wu has asked other miners to follow his lead and burn a portion of their fees.
What is proof-of-burn (PoB)?
Like Bitcoin’s proof-of-work (PoW) and Ethereum’s upcoming proof-of-stake (PoS), proof of burn is another permutation of a blockchain consensus algorithm that relies on a miner ‘proving’ that they have sent a PoW-mined currency (such as bitcoin) to a black hole address; in return they are issued a newly-minted currency on that particular blockchain. One such example is the Counterparty coin (XCP) that came into existence neither through mining nor ICO, but by burning bitcoins.
There are several types of PoB consensus algorithms and several reasons to build a cryptocurrency on it. One good reason is that an issuer may want to avoid an ICO or token sale; they also may want to avoid the heavy workload of PoW mining in their currency and reuse the energy already spent mining.
Whatever the reason for Bitcoin Cash’s coin burning the net effect is incentivizing users and holders to stay loyal and not sell out.
Whether that’s because of an egalitarian-leaning at Bitmain or for fear of the currency losing relevancy, as some have suggested, to Bitcoin’s Lightning Network – the second layer protocol that promises to solve the scalability problem by reducing the workload of the nodes and making microtransactions far quicker and cheaper.