Simply put, Token burning is when a project permanently destroys a specific number of tokens/coins in circulation. It reduces the number of tokens that are available from the supply.
While many cryptocurrencies including BTC and ETH do not have burning programmes, other projects like Ripple use this strategy.
Why would someone burn tokens?
Removing an asset from circulation ultimately helps to control the value and availability of the coin, this is a method used in stocks as well. It leads to deflation and causes the purchasing power in the remaining amount of coins in circulation to increase. The law of supply and demand means that if we reduce the supply, which we are doing with a token burn, we increase the price.
This is why some cryptocurrency developers deliberately burn tokens with the goal to increase their value and decrease accessibility. Whilst developers have many other factors in play to help them achieve theri goals, token burning is one of the ways that projects add value to their tokens.
How does burning work?
Cryptocurrency wallets allow users to send and receive cryptos to and from other wallet addresses. There are also wallet addresses created that are only able to receive cryptocurrency, cryptos are ultimately burned when sent to these addresses as they can not enter circulation supply ever again. These wallets are called ‘burner addresses’ or ‘eater addresses’ and they do not have private keys, meaning that any cryptocurrencies sent to these addresses can not be accessed. Burning cryptocurrencies does not consume any resources, unlike minting them.
Minters of tokens are often assigned a task to burn them, in exchange for it, they earn a reward in the token they burnt.
While burning tokens via sending them to a burner address is the main method used by many entities, Ripple (XRP) uses different methods such as limiting the number of transactions that are allowed on the network or taking the gas fees away to enforce faster transactions, this reduces the circulating supply of XRP on every transaction.