Token burning, also known as coin burning, is the deliberate action taken by the coin's makers to "destroy," or withdraw from circulation, a certain amount of tokens from the total available tokens. There are many reasons to burn tokens in this manner, but the most common purpose is to minimize inflation.
During a coin burn, the tokens are algorithmically eliminated from circulation by sending their outputs to a public address known as an "eater address." The keys to this public address are kept secret and are not available to the general public. As a result, once the tokens are sent to this address, they are unrecoverable and unusable because no one has access to the private keys.
While it might sound drastic, burning tokens does not actually disintegrate them, but it does make them useless in the future. The method entails the developers of the project repurchasing or withdrawing available currency from circulation by removing it from circulation. To do so, the signatures of the tokens are stored in an irreversible public wallet that is open to all nodes but perma-frozen. The status of these coins is made public on the blockchain so that everyone in the network is aware of what's going on and the senders can be open about it. If someone has access to the private key, the network will be alerted as soon as they attempt to remove.
The token burning mechanism has proved to be a successful method of preserving a balanced crypto-ecosystem in the short time since it became popular. With time, it is fair to assume that future cryptocurrencies will inevitably follow this mechanism, given its numerous advantages, especially in the early stages of a coin's growth.
So why burn token?
There are a number of reasons why people burn coins, but the most common reason is to take tokens out of circulation so that the ones that remain become scarce. Since the supply of tokens has been reduced, the unit price of the tokens may rise.
Increasing demand by Reducing Supply
Although larger blockchains like Bitcoin and Ethereum don't typically use this tool, altcoins and smaller tokens are commonly used to restrict the number of coins in circulation, offering investors more incentives.
Standard fiat currencies are not typically "burned," but the flow of available currency is limited in other ways. Token burning is similar to equity buybacks, which are used by publicly traded firms to minimize the amount of stock available. Token burning, on the other hand, has a number of implementations and serves a variety of purposes.
Burning a token as proof of work done
Proof-of-burn (PoB) consensus, which is focused on users destroying their tokens to obtain mining rights, is a common mechanism that developed from token burning. Proof-of-work is still a popular choice, thanks to Bitcoin's support, but it consumes a lot of resources and can be prohibitively expensive. PoB seeks to solve this problem by limiting the number of blocks miners can check (and add to the blockchain) to the number of tokens they've burned. They effectively build virtual mining fields that can expand as more tokens are burned.
Dividends are received in an indirect manner.
Dividends are profits returned to shareholders by a project or corporation. Safety token holders have the option of collecting dividends from the project's developers. But what happens to other token holders who do not actually carry security tokens? Token burn offers a solution to pay dividends to token holders indirectly. Developers put deflationary pressure on the token by removing a portion of the supply by either buying back and burning tokens or removing existing tokens held by the company.
Others:
In certain cases, token burns may result from error correction, such as the case for Tether. To avoid destabilizing its 1:1 peg with the US dollar, the company created $5 billion in USDT by accident and had to burn it.
ICO/IEO unused token burning – when an ICO or an IEO has tokens left over from its token sale, developers can opt to burn them rather than retain them as a liability.
Conclusion
There are plenty of event wherein token burning has occurred. Examples of this are XLM and BNB. And it showed a significant rally on their price.
