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The way the Xbox power and eject buttons work is simple to understand using the schematic to the side. When the button is not being pressed, the pin on the PIC chip (which receives the power and eject signals) is '''HIGH''' (V = Vcc). When the button is pressed, the PIC pin is connected to ground causing the signal on the pin to become '''LOW''', and the Xbox powers on. The trace which can become corroded does not run directly from the switch to the PIC chip, but rather from the '''signal resistor''' to the PIC chip. By looking at the schematic, you can see that if that trace is broken, neither Vcc nor ground can connect to the pin, and so its state is left 'floating'. This is what causes the Xbox to power on and off randomly.
What causes the trace to become corroded is unclear, although it is generally believed to be a manufacturing defect which left contaminants on the board. The corrosion seems to start from the edges of the motherboard and work its way inward, which is why the power trace, the outermost trace on the board, is affected first. If the corrosion is allowed to spread, the eject button and LEDs will later begin to malfunction.
* [http://fillwithcoolblogname.blogspot.com/2011/02/1st-gen-xbox-trace-corrosion-repair.html http://fillwithcoolblogname.blogspot.com/2011/02/1st-gen-xbox-trace-corrosion-repair.html] - This is the guide that this article is based on.