Currencies such as coins and tokens are circulated and their prices change under the influence of the market. In the case of Bitcoin, the supply is increased by minting coins through a cycle every 10 minutes, and the amount of coins issued is halved after each halving that is repeated every 4 years. While there is a function to adjust the issuance amount in advance like Bitcoin, there may be cases where it is necessary to reduce the amount of coins in circulation at an appropriate time. The function required to reduce the continuously increasing number of coins through issuance is called Coin Burn.
The first is due to the scarcity of coins. When a coin is burned, the total supply of coins will eventually decrease, and the scarcity will increase compared to before burning due to a decrease in the amount of coins in circulation. It is not always the case, but sometimes a coin that has increased in scarcity value due to burning will increase in price value. This is similar to the case of a publicly traded company reducing the number of shares in circulation by repurchasing its own shares to reduce the number of shares in circulation.
The second is for the purpose of securing fairness for the coin. If there are coins remaining from the ICO or token sale process, the foundation may sell them to obtain unjust profits. Since the process and results of coin burning are all disclosed and recorded on the blockchain, the foundation or community that manages the coin will proceed with burning the coin for fairness.
Finally, burning is intended to eliminate value of the currently existing coin before issuing new coins or tokens. In the case of new token conversion, it is necessary to transfer the value of the existing coin to the new coin. If the existing coins remain in circulation as they are, it may cause confusion in the market and damage credibility. For this reason, when issuing new coins, it is necessary to burn the existing coins.
The method of burning differs depending on the method of coin or token. Coin means the currency required by the mainnet, and token means currency issued by smart contract. For more information on this, see the link below.
Coins are created as a reward for maintaining the blockchain through consensus among participants such as miners and validators who contribute to maintaining the mainnet. When these network members agree to burn coins, they form a consensus on the amount of coins to burn and update the status. For example, when the total issuance of the network is 100, members update the software with 50 coins as the total number issued. This is called Proof of Burn.
Since the token was issued on a smart contract, it can be burned by changing the state of the smart contract. In order to remove the quantity of tokens managed by the smart contract, it is to transfer ownership of the tokens to an address where it is possible to receive tokens but cannot send from it. If you don't know the private key, the sent token will be unusable because you can't get the token out of the address.