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BNB Auto-Burn: What It Is and How It Works

Posted on Feb 5, 2024
BNB Auto-Burn: What It Is and How It Works

Coin burning is a strategic approach implemented by many cryptocurrency projects to diminish their coin supply permanently, introducing a deflationary effect on the currency. This practice is pivotal in the cryptocurrency ecosystem for managing supply and enhancing value.

Binance, the world's leading cryptocurrency exchange, has adopted this strategy through two distinct mechanisms aimed at halving its native token, BNB's total supply, in the long term. The first method involves burning a portion of the BNB utilized as transaction fees on the BNB Chain, a process introduced with the BEP-95 upgrade. The second method consists of executing quarterly BNB burns, a tradition that has seen significant amounts of BNB removed from circulation.

Originally, these quarterly burns were calculated based on the trading volume of BNB on the Binance platform. However, in December 2021, Binance evolved this approach by introducing the BNB Auto-Burn system. This new mechanism autonomously determines the quantity of BNB to be burned each quarter, basing its calculations on the BNB price and the blockchain's activity level. This adjustment has added a layer of transparency and predictability, benefiting the BNB community. Additionally, the BNB Pioneer Program allows for the reimbursement of users who've unintentionally lost tokens, which can then be included in the burn totals.

As of Jan 2024, Binance successfully executed its 27th BNB auto-burn, removing 2,020,381 BNB from circulation, which was valued at approximately $620 million at the time. To date, there have been 27 such burn events, cumulatively eliminating 52,453,740.01 BNB from the ecosystem.

Binance's goal with these burns is to decrease the total BNB supply to 100 million tokens, aligning with the vision set forth at its launch in 2017. The exchange commits to this deflationary strategy as a means to enhance the token's value and scarcity. The BNB Chain, previously known as the Binance Smart Chain and Binance Chain, facilitates this process by supporting smart contracts and decentralized applications (DApps), with BNB at the core of its operations and governance.

The BNB Chain comprises the BNB Beacon Chain, which manages governance functions like voting and staking, and the BNB Smart Chain (BSC), which is compatible with Ethereum's tools and DApps, thereby maintaining a vibrant ecosystem for BNB utility.

This comprehensive understanding of BNB's role within the blockchain ecosystem, its burn mechanisms, and the strategic intent behind these actions, underscores the innovative approaches Binance employs to sustain and enhance the value of its native cryptocurrency.

What Is a Coin Burn?

Coin burning is a critical strategy employed by cryptocurrency projects to permanently remove a portion of their digital currency from circulation, effectively reducing the total supply. This process, akin to a company repurchasing its own shares, aims to induce a deflationary effect on the coin's economy, potentially enhancing its value for remaining holders. However, unlike traditional financial buy-backs where the purchased assets may still exist and be retained by the company, burned coins are forever eliminated from circulation, rendering them unusable for trading or any other purpose.

Binance Coin (BNB), the native cryptocurrency of the Binance ecosystem, has been at the forefront of implementing this mechanism. Since its inception, Binance has committed to periodically burning BNB coins to decrease its total supply to 100 million, half of its initial supply of 200 million. These burns were initially based on trading volume within the Binance exchange but have evolved with the introduction of the BNB Auto-Burn system in December 2021. This new system adjusts the quantity of BNB to be burned each quarter, depending on the coin's price and the Binance Chain's block generation metrics, enhancing transparency and predictability for the BNB community.

BNB employs two main burning mechanisms. The first is through the collection and destruction of BNB used as gas fees on the BNB Chain, a feature introduced by the BEP-95 update. The second mechanism is the quarterly BNB burn events, which have now transitioned to the more transparent and predictable Auto-Burn system. This approach not only ensures a gradual reduction in BNB's total supply but also incorporates a method for users to participate in the burning process indirectly, such as through the BNB Pioneer Program, which allows for the reimbursement of lost tokens under certain conditions.

Coin burning has gained popularity across various projects within the decentralized finance (DeFi) ecosystem, including Ethereum, which began burning a portion of transaction fees with the London hard fork upgrade in 2021. By sending coins to a designated address from which they can never be retrieved, projects ensure these tokens are irrevocably removed from the available supply, mirroring the deflationary practices seen in traditional financial systems but with a permanent effect unique to the digital currency world.

This practice not only helps in regulating the coin's supply but also plays a significant role in the broader blockchain ecosystem by providing a mechanism for maintaining or potentially increasing the coin's market value over time, benefiting the community and holders through a carefully balanced supply and demand equation.

How is BNB burned?

Coin-burning mechanisms employed by Binance for BNB include two primary strategies:

Real-time Burning Mechanism (BEP-95)

Initiated as part of the Binance Evolution Proposal (BEP)-95, this real-time burning mechanism targets the reduction of BNB's total supply by utilizing a portion of the gas fees on the BNB Smart Chain (BSC). Since its implementation in 2021, BEP-95 has consistently facilitated the destruction of approximately 1,200 BNB daily, reflecting an increase from previous years due to heightened network activity.

Changpeng Zhao, the CEO of Binance, introduced BEP-95 aiming to expedite the reduction of BNB's supply, which was progressing slower than anticipated. By allocating a segment of the transaction fees collected by block validators to be burned, this mechanism ensures a steady depletion of BNB, independent of the specific targets set for total supply reduction.

BEP-95's operation is intrinsically linked to the BSC's functionality, guaranteeing its continuance even after achieving the milestone of burning 100 million BNB. The ongoing progress of BEP-95 burns is monitored and can be followed through dedicated tracking services available online, such as the BNB Burns Tracker Bot on social media platforms.

Quarterly Auto-Burn

The second strategy involves Binance executing programmed quarterly burns, where a predetermined quantity of BNB is repurchased from the market and subsequently annihilated. The inaugural burn took place in October 2017, resulting in the destruction of 986,000 BNB. Adjusted for the current period, the most recent burns have seen significantly larger quantities of BNB being eliminated, in line with the growth of Binance's operations and the expansion of BNB's ecosystem.

These quarterly burns are strategically planned based on Binance's financial outcomes and are transparently pre-announced. Factors determining the exact amount of BNB to be burned include Binance's profitability, the circulating supply of BNB, and the blockchain's activity levels measured by the production of blocks over the quarter. This approach is designed to methodically decrease the circulating supply of BNB, aiming for a long-term target of under 100 million BNB, aligning with Binance's commitment to enhancing the value and scarcity of its native cryptocurrency.

What is BNB auto-burn?

The introduction of the BNB auto-burn mechanism marked a significant evolution in the strategy for managing the supply of Binance Coin, aligning with the transformation of Binance Chain and Binance Smart Chain into the unified BNB Chain. This strategic move was aimed at enhancing the intrinsic value of the BNB token while laying down a foundation for sustainable and secure growth within the BNB ecosystem over the long term.

Previously, Binance orchestrated quarterly BNB burns that were directly tied to the trading volume of BNB on their platform. This practice was overhauled in December 2021 when Binance transitioned to the BNB auto-burn system. While the auto-burn events continue to occur on a quarterly basis, the criteria for determining the amount of BNB to be burned have shifted away from trading volume metrics.

The auto-burn mechanism autonomously calculates the volume of BNB to be incinerated each quarter, with this calculation based on the prevailing BNB market price and the quantity of blocks produced on the BNB Chain during the period. This methodology introduces a new layer of transparency and predictability, contrasting with the variability of the previous volume-based burns.

Binance asserts that this revamped burning strategy not only enhances the transparency of the BNB token economics but also contributes to the stabilization of the BNB market price by mitigating potential price volatility. The BNB auto-burn aims to systematically reduce the total supply of BNB in circulation, thereby potentially increasing its scarcity and value over time. This approach is reflective of Binance's commitment to fostering a robust and flourishing ecosystem for BNB, ensuring that it remains a key pillar in the broader cryptocurrency landscape.

How does BNB auto-burn work?

The BNB auto-burn mechanism is an intricate process that leverages on-chain data from the BNB Chain to determine the appropriate amount of BNB to be eliminated each quarter. This advanced method ensures the quantity of BNB burned is dynamically adjusted, factoring in the BNB Chain's operational metrics and the prevailing market conditions.

Specifically, the auto-burn formula is designed to respond to the supply and demand forces of BNB, enhancing the token's scarcity and potential value over time. An increase in the burn rate is triggered when BNB's market price experiences a downturn, a strategic approach to counteract price volatility and bolster the token's market stability.

Distinct from the earlier method where burns depended solely on Binance's trading volumes, the current auto-burn mechanism emphasizes transparency, objectivity, and verifiability, aligning with the Binance community's demand for a more transparent and predictable burn process.

The objective is to persist with the auto-burns until Binance achieves a significant milestone: reducing the total BNB supply to 100 million tokens. This is executed through a predetermined formula:

B = Total BNB to be burned

N = Number of blocks produced on the BNB Chain in the quarter

P = BNB's average market price during the quarter

Considering the BNB Chain's average block time of approximately 3 seconds, the network generates around 1,200 blocks per hour. This translates to an estimated 2,592,000 blocks over a quarter, with variations arising from the specific number of days in each quarter.

The average price of BNB (P) is calculated using data from reputable oracle providers like ChainLink, with median values determined over intervals of 10,000 blocks, or roughly every 8.3 hours. The range of daily price fluctuations is usually between 10% and 20%.

A constant factor (K), initially set at 1000, acts as a stabilizing anchor for the calculation. The BNB Chain community has the authority to propose adjustments to \(K\) through BEP (Binance Evolution Proposal) submissions, followed by community votes, ensuring the mechanism remains adaptable and aligned with the ecosystem's evolving needs and consensus.

Incorporating real-time blockchain activity and market data, the BNB auto-burn mechanism represents a forward-thinking approach to tokenomics, aiming to secure long-term stability and value for BNB holders through a methodical reduction of the token's supply.

What Is the Bnb Pioneer Burn Program?

In 2020, Binance unveiled the BNB Pioneer Burn Program, an initiative aimed at offering support to users who inadvertently lost their BNB tokens. This program enables individuals who fulfill specific conditions to request the return of their lost BNB, which Binance compensates for by deducting from the scheduled auto-burn quota. The eligibility criteria for such claims include:

  1. Losses involving tokens either wrapped (like WBNB) or pegged (such as BTCB) that are facilitated by Binance's "Token Canal" Project.
  2. Tokens that were mistakenly sent to BEP20 contract addresses that have been authenticated on bscscan.com, ensuring these losses are recognized as irrevocably removing the assets from active circulation.
  3. Losses resulting from genuine errors valued above 1,000 USD but not exceeding the amount designated for the forthcoming quarterly BNB Auto-Burn.

For the tokens meeting these conditions, their equivalent value is allocated to the beneficiaries from the tokens set aside for the upcoming auto-burn. This approach ensures that the mistakenly lost tokens are effectively considered part of that quarter's burn total, aligning with Binance's commitment to transparency and user support within its ecosystem. This mechanism not only provides a safety net for users but also integrates these losses into the broader strategy of managing BNB's supply dynamics.

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