Staking basics

BNB Auto Burn?

Shivendra Singh

Apr 14, 2023 • 5 min read

BNB Auto Burn is a mechanism through which there is an automatic burn of the BNB tokens which are used to pay for transaction fees on the Binance Smart Chain (BSC) network. The amount of BNB burned is decided on the basis of factors such as the price of BNB, the number of blocks generated on BSC, and the number of BNB tokens staked by validators.

The BNB Auto Burn was introduced in December 2021 and is designed to reduce the total supply of BNB tokens over time. It is intended to make the BNB token more scarce and valuable with time.

The BNB Auto Burn is a transparent process audited by a third party. The results of the audits are published on the Binance website.

Some people believe that BNB Burn is a positive development that will help in increasing the value of BNB tokens while others think it’s a waste of BNB tokens and that the tokens could be better used for the development of the BSC network.

Only time will tell if the BNB Auto Burn mechanism will be successful in increasing the value of BNB tokens. However, it is clear that the Burn mechanism is designed to make the tokens more scarce and valuable.

Also Read: What Is Cryptocurrency

What is BNB & How Does it Work?

Binance Coin (BNB) is a utility token that is used in the Binance ecosystem. BNB has a number of uses, including:

Paying for transaction fees on the Binance ecosystem
Staking to secure the BNB Chain
Exchanging goods and services on Binance.com

BNB works by using a Proof of Staked Authority (PoSA) consensus mechanism which is a blend of both Proof of Staked (PoS) and Proof of Authority (PoA). In PoSA, validators are chosen for producing blocks based on the amount of BNB that they have staked. However, validators also need to pass through a verification process that ensures that the validators are reputable and trustworthy.

Also Read: What Is A Dao

How is BNB burned?

There are 2 ways BNB is burnt, Quarterly Burns and Real-time Burns. The Quarterly burns and Real-time burns are conducted to make BNB more scarce and valuable over time. Following are the ways in which BNB burns are intended:

Quarterly Auto Burns: Binance burns a portion of the BNB tokens which it earns as profits every quarter. The amount of BNB burned is determined by a formula that takes into account the number of blocks generated on Binance Smart Chain (BSC), the price of BNB, and the number of BNB tokens staked by validators.
Real-time burns: Binance also burns a portion of the gas fees which are collected on BSC in real-time. The amount of BNB burned is determined by a formula that takes into account the price of BNB and the number of gas fees that are collected.

The quarterly burns are transparent, open for everyone to see, and audited by a third party. The results of the audits are published on the Binance website. The real-time burns are also transparent, but they are not audited by any third party.

Some major events BNB burn timeline are:

The quarterly BNB burns started in July 2017
The real-time burns began in November 2021
The BNB burning mechanism is bound to continue till the total number of BNB token reaches 100 million

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Advantages of BNB Auto Burn

Some of the major advantages of BNB Auto Burn are:

Deflationary: The BNB Auto Burn mechanism reduces the total amount of BNB tokens over time which makes the BNB token more scarce and, theoretically, more valuable.

Transparency: With audits from world-class third-party audit firms, BNB ensures that the process is fair and that no one is able to manipulate the system in their favor.

Predictability: With a periodic quarterly BNB Auto Burn mechanism, users know how many BNB tokens will be burned each quarter which is based on a simple and transparent formula. This gives users the stability and predictability of the BNB ecosystem.

Community-driven: The BNB Auto Burn mechanism was recommended by the BNB community and is supported by Binance which shows that there is a strong demand for the mechanism and that it is in the best interests of the BNB community.

Also Read: ERC-4337

Disadvantages of BNB Auto Burn

Volatility: The BNB Auto Burn mechanism increases the volatility of the BNB price as the supply of BNB tokens is constantly decreasing, leading to sudden price movements and users might have issues trusting the network.

Uncertainty: We don’t know the long-term impact of BNB Burn on the token’s price. Just like any cryptocurrency, there might be uncertainty in the BNB price after the burn. Therefore, we should always have knowledge about the Burning mechanism and its effect.

Centralization: If there is an increase in BNB token price due to the BNB Auto Burn mechanism, it also could lead to the centralization of the BNB ecosystem. This is because the majority of BNB tokens could only be held by a small number of whales.

Overall, the BNB Auto Burn mechanism has both advantages and disadvantages. It is advised to consider the above factors carefully before deciding whether or not to support the mechanism.

Also, if you're looking to liquid stake your BNB tokens where you can earn staking rewards as well as at the very same time access the DeFi protocol, Stader Labs can be a good option where you will get Stader's BNBx in return for your staked BNB tokens.

Also Read: Blockchain and Web3

Frequently Asked Questions:

Q) What is the purpose of BNB Auto Burn?

Ans) The main objective of BNB auto burn is to lower the total supply of BNB tokens over time till the total supply of BNB tokens reaches 100 million making BNB more scarce and more valuable going by the math. However, these are just speculations, the effect of BNB auto burn is going to be more clear in the longer term.

Q) How is the amount of BNB to be burned determined through auto burn?

Ans) The amount of BNB to be burned through the auto burn is determined by a formula that takes into account the following factors:

BNB Price
Total blocks generated on the Binance Smart Chain (BSC)
Constant price anchor, k which was initially set as 1000

The formula is designed to ensure that the amount of BNB burned is proportional to the price of BNB. This means that when the price of BNB goes up, the amount of BNB burned also goes up.

Q) What are the benefits of BNB auto burn for Binance and its users?

Ans) There are a number of benefits of BNB auto burn for Binance and its users, including:

Increased scarcity: The BNB Auto Burn mechanism reduces the total supply of BNB tokens over time, which makes BNB more scarce and, in theory, more valuable.
Increased demand: The BNB Auto Burn mechanism creates a demand for BNB tokens, as users will want to buy BNB in order to participate in the burn as it is likely that with burn there could be a spike in the BNB price.
Stability: The BNB Auto Burn mechanism provides stability for the BNB ecosystem, as it ensures that the supply of BNB tokens is constantly decreasing.
Transparency: The BNB Auto Burn mechanism is transparent and audited by a third party, which ensures that the process is fair and that no one is able to manipulate the system.

Overall, the BNB Auto Burn mechanism is a deflationary mechanism that reduces the total supply of BNB tokens periodically over time, which makes BNB more scarce and theoretically, more expensive. It also creates a demand for BNB tokens and stabilizes the BNB ecosystem.