Strategic crypto burns can contribute to a balanced and sustainable cryptocurrency ecosystem by preventing oversupply and dilution of value.

A token burn event happens in the following order:

1.A cryptocurrency holder will call the burn function, stating that they want to burn a nominated amount of coins.

2.The smart contract will then verify that the person has the coins in their wallet and that the number of coins stated is valid. The burning mechanism only allows positive numbers.

3.If the person doesn’t have enough coins, or if the stated number is invalid (e.g., 0 or -5), the burn function won’t be executed.

4.If they do have enough, then the coins will be subtracted from that wallet. The total supply of that coin will then be updated, meaning that the coins were permanently burned.

If you execute the burn function to burn your coins, they will be destroyed forever. It's impossible to recover coins after they are burned, and thanks to blockchain technology, the proof of burn can be easily verified on a blockchain explorer.

Coin burning exists for several reasons, often tied to the fundamental economics (tokenomics) of a cryptocurrency project:

1.Supply control

One of the most common reasons for burning crypto is to control inflation and the overall supply of tokens. With a limited supply, the hope is to increase the value of the remaining coins. 

2.Increase scarcity

By reducing the circulating supply, coin burning creates scarcity, which can potentially contribute to price appreciation. 

3.Align incentives with token holders

Token burns can also be used to align the incentives of project owners with those of coin holders. When project teams are responsible for reducing supply, they can potentially increase the overall value of the tokens held by their community. 

4.Rewarding holders

Some projects burn coins as part of a buyback program, buying coins from the market and burning them to return value to holders and the community.

5.Maintaining network security

Certain consensus mechanisms like Proof of Burn (PoB) use coin burning as an alternative method to validate transactions and secure the network.

6.Eliminate unused or lost tokens

Coin burning can also clear out old or unused tokens, streamlining the network and ensuring greater resource efficiency.

While token burning can have a number of benefits for cryptocurrency projects, there are also risks and limitations to consider. In this section, we’ll explore some of the potential downsides of token burning, including:

1.Inefficient use of resources

Token burning can require significant resources, such as funds to buy back tokens from the market. In some cases, these resources may be better used elsewhere, such as for product development or marketing.

2.Regulatory risks

Token burning can potentially raise regulatory concerns, as it may be seen as a way to manipulate the price of a cryptocurrency. 

3.Limited impact on the price

Token burning may not always have a significant impact on the price of a cryptocurrency. If the market perceives the token burning as a one-time event, the price may not be affected in the long term. Additionally, if the overall demand for the token decreases, the price may not rise even if the supply is reduced.

4.Lack of transparency

Some projects may engage in token burning without providing adequate transparency around the process. 

5.Limited benefits for token holders

While token burning can benefit projects in various ways, it may not always benefit token holders. For example, if a project burns a large portion of its tokens but fails to generate significant revenue or user adoption, the remaining tokens may not increase in value.