In August 2021, Ethereum introduced EIP-1559 to help reduce gas fees, make transactions more efficient, and make Ether more scarce through burning. Token burning refers to the act of removing tokens from a cryptocurrency’s total supply.
When a user was transacting, Ethereum’s base transaction fee would be sent to the network and burnt rather than going to miners’ pockets. Less than a year after EIP-1559 was introduced, $2.9 billion in Ethereum (2.5 million ETH) had been burnt. This was trackable on Watch the Burn which is no longer active post-Merge.
Burning is done by sending the predetermined amount of tokens to a wallet that does not have a known private key and is outside the network. The wallet, known as a burner or eater address, is only equipped to receive assets. When tokens are sent here, they’re rendered inaccessible. The aim of token burning is to remove them from circulation, altering their availability and impacting their value. Increasing value is usually the reason why protocols burn tokens. The less supply the token has, the more demand there is, thus, the more value it garners. This is the theory behind token burning, which is similar to traditional financial companies buying back their shares. By reducing the overall supply of a cryptocurrency, the aim is to drive up the token’s demand.