Token burning in cryptocurrency refers to the process of permanently removing a certain quantity of tokens from circulation. This is achieved by sending these tokens to a wallet address that is inaccessible and can never be used for transactions. This specific wallet address, often referred to as a burn address or eater address, is designed in such a way that no one holds the private key to it, thereby ensuring that the tokens sent to this address are irretrievable and effectively removed from the market.
Token burning is a deliberate action taken by the token creators or holders, usually as part of a mechanism to control the supply of the token and, in turn, influence its value. By reducing the total supply of tokens, token burning can potentially increase the scarcity of the remaining tokens, which, according to supply and demand principles, could lead to an increase in the token's value if the demand remains constant or increases.
Token burning is used in various contexts within the cryptocurrency world. Some projects burn tokens as part of a deflationary tokenomics model, others might do it to correct issues or mistakes in token distribution, and some use it as a way to share profits with token holders (by reducing supply and potentially increasing value). Token burns can be a signal of a project’s commitment to creating value for its holders and can impact investment decisions.