What is a token burn?

Think of a business that withdraws and permanently destroys some of its vouchers: the remaining ones can still be used, but the destroyed ones never come back to the till. A token burn works much the same way, except the process happens digitally and is recorded on the blockchain.

There are two common methods. The first is a dedicated function in the smart contract that removes tokens from a balance and reduces the recorded total supply. The second is sending them to a burn address, from which they can’t be spent. In the second case, the contract’s total supply counter may stay unchanged, even though those specific tokens have been taken out of use.

For example, if there are 1,000 tokens and 100 are destroyed through the burn function, 900 remain. Burning can be carried out manually by a project’s team or automatically under the protocol’s rules, such as burning part of the transaction fees.

Why it matters

Burning affects a token’s economic design, i.e. its tokenomics. It can limit supply or offset part of the issuance of new tokens. It doesn’t guarantee a price rise: demand, utility and liquidity still matter. If more tokens are issued than are burned, total supply can still end up growing.

With NFTs, burning usually removes the specific token from ownership and circulation, possibly as a condition for minting another one. It doesn’t mean that the image or file it pointed to is deleted as well.

What to watch out for

We look first at what is being burned and where it comes from. A large burn from reserves that weren’t circulating doesn’t have the same effect on circulating supply as withdrawing tokens that were already on the market.

An announcement isn’t enough: the transaction and the mechanism can be checked through a block explorer. Also, an unknown address isn’t automatically a burn address. A real burn is irreversible, while a simple transfer to another wallet is not a burn.