How XRPs are burned
XRP burning occurs through a process in which validators agree and approve the burning of tokens through a consensus mechanism. The consensus mechanism for crypto coin burning is called proof of burn (POB), and it highly resembles the popular proof-of-work system, only that it doesn’t have the usual high energy requirements of POW. It permits validators to mark the blocks that need to be burned and approve the process. No actual burning happens, but the process is called so since it renders the coins useless. To burn crypto, validators forward them to a burning wallet, usually outside the network. Since XRP coins are already pre-determined, this process has no energy requirement. Token burning usually takes place outside its native chain in exchange for a reward in the blockchain coin that facilitates the burning.
SpendTheBits, Lightning Network’s main competitor, has built its infrastructure on the XRP ledger to enhance speed and lower fees while transacting in BTC. Through SpendTheBitsXRP, coins are destroyed with every successful bitcoin transaction. Keep in mind that these bitcoin transactions take place using the synthetic version of Bitcoin, such as xBTC.
XRP Burn Rate
The XRP burning rate as of 29th October 2022 was about four tokens per minute, which adds up to about 2.1 million coins annually. As adoption increases, this rate is expected to rise to as high as 100 XRPs per minute, which will accumulate to a total of 52 million coins every year. The number of annually destroyed tokens may seem high, but our calculation shows that it would take about 50,000 years for the current supply to be depleted, including the one in escrow. On the other hand, if adoption rose significantly, causing the burn rate to get out of hand, Ripple community members can vote to have changes made that would either lower the rate or introduce an alternative system of keeping the network agile.
The company CTO, David Schwartz, hinted in a Tweet that the community could vote for a change of system requiring the burning of all the 45+ billion coins the network hold in escrow. This was after the tech firm, which owns 50% of the total supply, came under fire for selling out part of the tokens. Since the community manages the network, there is nothing Ripple can do if such a vote is made successfully.
The Purpose of burning XRP
It’s still unclear whether validators will vote for the burning of tokens in escrow. For now, XRP burning is meant to counter spam and distributed denial-of-service attacks (DDOS) and keep the network active. Burning also helps to control the inflation of XRP while monitoring the available supply. However, if the vote goes through, XRP burning will occur in bulk, driven by the intention to reduce total supply and raise value due to demand imbalance. This is similar to the process by which listed public companies buy back their shares to lower circulation and increase share prices.
The Ripple network currently has a minimum transaction cost of 10 drops, which is 0.00001 tokens. You might pay more in a few instances depending on the load. For stability, the price is designed to increase and decrease according to the network load. In addition, XRP partners will increase the use of the network as a bridging platform for liquidity and instant cross-border payment. This is expected to make the payments more expensive. On the other side, the cost will always remain lower than other cryptos like Ethereum and Bitcoin because that is one of the competitive edges of Ripple.
What happens with the burned XRP?
Despite the name, no actual XRP burning happens. The term is coined from the fact that tokens are rendered useless after the process. For XRP burning to start, validators approve a certain amount of the crypto to be sent to burn addresses outside the network. A burn address is a digital crypto wallet with no private key. So, once you send tokens to it, they can’t be accessed forever. For that reason, they are alternatively referred to as eater addresses. The tokens are hence permanently cast out of the total supply and can never be added back.
What is the effect on the XRP Price?
Currently, XRP burning is not for profit. A burn rate of 4 coins per minute is too low to cause significant changes. On the other hand, reducing the supply of an asset essentially raises its value if demand remains constant. For example, when a country’s central bank wants to increase the price of its currency, it may cut down its supply and take some of the money already in the market. In the same perspective, bulk burning could be a strategy to raise the price of XRP. However, this is not guaranteed. In November 2021, Stellar (XLM) cut down its total amount of coins by 50%. Although its price shot up for a few days, the momentum quickly died. XRP has many use cases. Once banks and major financial institutions come on board fully, the burn rate will be high, ultimately reducing the amount of token supply versus demand. This will see the coin’s price gain value immensely.
There is no guarantee that price will increase due to XRP burning. However, the coin’s use case is something to consider if you want to project its future price. The token is the only currency for fee payment on the Ripple network. It’s also the primary medium for exchanging and sending money. The company has already partnered with key financial players, including Bank of America, SBI Holdings, MoneyGram, and the National Bank of Fujairah. As the only viable competitor for the SWIFT international payment network, it goes without saying that if the demand for the token rises, its price will appreciate in the same proportion. The only hurdle the company faces is the SEC lawsuit, where the commission accuses Ripple of illegally selling XRP as a non-registered security. Without the case, expect XRP to rise to as high as $14 by 2030.
XRP can be an excellent investment for speculators. Remember that you might lose all your money if the court hands SEC victory in the ongoing lawsuit. On the other hand, investors stand a chance to rake in insane rewards if Ripple wins the case. Even if the company emerges victorious, conduct proper analysis and make informed decisions before pumping your money into the coin.
XRP burning takes place through SpendTheBits. Every time a Bitcoin transaction happens through SpendTheBits, a small portion of XRP that is supposed to be collected as fees is burned.
Burn addresses are unstable crypto wallets with no private key and are used to burn cryptocurrencies. Once a digital coin is sent to these wallets, it’s gone forever and can never be recovered.
XRP doesn’t need to burn tokens to function. However, the activity is necessary to keep the network stable and healthy by reducing the chances of system failure due to spam and DDOS.