I have just experienced a similar event - a Hornby A4 'Herring Gull' with Hornby's original full fat DCC sound decided to go 'pop' and emit large amounts of smoke. It had just had a brief satisfactory run on DCC round my layout with sound on and was sitting stationary by a platform while I ran another loco when it occurred. I quickly removed it from the layout and upon removing the tender body found it had melted the inside of the tender. I then put a blanking plug in and it ran perfectly again (on DC only, of course). There would therefore seem to be nothing else wrong with the loco, e.g. no shorting out, to cause the decoder to burn up.
The decoder, ESU Locksound V4, was badly burnt around one major component on the board which had obviously caught fire. I don't understand why this happened and consider it dangerous - I was glad I noticed the smoke before any further damage had been done to the loco (or my house). I bought the loco about 3 or 4 years ago and I haven't run it for a couple of years, but surely this shouldn't happen. I am thinking of sending the chip to Hornby but don't know if they will show any interest or offer a replacement.