A token burn is the act of permanently taking coins or tokens out of circulation. This is typically achieved by sending them to a special unusable wallet, which is called a “burn address” or “eater address,” that has no private key. After tokens are sent to a burn address, they cannot be accessed, and accordingly permanently reduces the total supply.
There are several reasons projects and developers burn tokens. A common goal of burning tokens is to create scarcity. It is similar to a company buying back its own shares (which can increase the value of remaining shares if demand remains stable or increases when supply decreases). Binance Coin (BNB) and Shiba Inu (SHIB) for example hold regular “burn events” where a portion of tokens are destroyed in their economic model.
Burns can also serve some practical purpose. For instance, Ethereum introduced a mechanism in 2021 that is called (EIP-1559) that automatically burns part of every transaction fee to manage inflation.
Token burning is generally seen as a good thing, but it is not a guarantee that price will move up, which depends on demand and overall market sentiment. Nevertheless, burns are still a common way of managing supply and signaling longer-term faith in a project.
Your completely free resource hub designed to boost your knowledge of cryptocurrencies