With the recent announcement of the quarterly burn of BNB tokens, you must be asking yourself, what does that mean? Well, there are many like you trying to find that out.
Burning cryptos are an essential part of keeping the network active. That's no different for Binance Coin. Previously, they used to burn coins quarterly. However, last year, BNB introduced the BEP-95 method. They've followed it up with BNB Auto-Burn this year, to make the burning more effective and transparent.
Both of them are pretty big stuff, so let's unpack them together here.
When it comes to cryptocurrency exchanges, there's nothing bigger than Binance exchange. Binance Coin or BNB comes into the picture as a crypto, which you can use on this exchange for trading and paying fees.
Launched in 2017, with a strict limit of 200million tokens, BNB started its journey on the Ethereum network. However, it's become a part of the native Binance blockchain since then. During its ICO, BNB offered 10% of the tokens to angel investors. Another 40% was set aside for their team. The remaining tokens went to the participants.
Apart from on-chain transactions, BNB is also a popular medium for payments. It has its uses across various businesses and exchanges, including Binance. However, Binance can't exert any control over the acquisition or use of BNB.
Uses of BNB
Like any other cryptocurrency, the use of Binance Coin is multi-faceted and goes way beyond BSC. Some of them include:
Trading - BNB is excellent crypto to have for trading. You can use it to trade other cryptocurrencies like Bitcoin or Ethereum across different exchanges. There are no inhibitions other than the restrictions set by each exchange.
Transaction Fees - BNB also serves as a great option for transactions. BSC promotes using Binance Coin on its exchange and offers you great discount offers for using it.
Credit Card - BNB is also a viable option when making your crypto credit card payments.
Other Payments - BNB offers an alternative payment option for merchants. You can use it to pay customers and remove the need for cash, thus bringing more flexibility.
Spending on the Internet - Binance coin gives you a significant degree of financial freedom. You can use it to book flights, reserve hotels, or even pay for virtual gifts.
Investments and Loans - With cryptos starting to become mainstream, different platforms now permit you to invest in assets using BNB. In the same vein, valuable cryptos like Binance Coin can help you get a loan, using it as collateral.
What's Coin Burn?
Even though BNB has only recently announced the new protocol, coin burn is more common than you think it is.
An easy way to understand "Burning" is permanently removing a certain number of tokens from circulation. That usually means transferring the coins to a "burn address." It's effectively a wallet from which you can never retrieve the coins.
Much like your email address, users of cryptos also have a designated address. That is your wallet address. The cryptocurrency network recognizes this address which you can use for sending or receiving tokens.
A "burn address" is a wallet that can only receive tokens. The wallet that you use for crypto transactions has private keys. That enables you to access your stored coins. However, there are no such keys for a "burn address," which means the coins are gone forever.
Why is Coin Burning Practical?
Central Banks of most countries often adjust the currency in circulation to control the currency's purchasing power. Burning tokens, which is just another asset, is meant to achieve a similar effect.
The deflationary effect is potentially beneficial for the holders of the coin. As more and more coins get removed from circulation, the token starts to become scarce and less attainable. With fewer tokens in circulation, the valuation of the remaining coins naturally begins to soar. That means more profit for the holders. BNB announcing its AutoBurning Protocol indicate its intention to lower the total supply of the coins, eventually to under 100 million tokens.
The second reason behind burning coins includes keeping the network healthy and agile. For all its utility, PoW (Proof of Work)is exceptionally energy-intensive and not at all efficient. PoB or Proof of Burn attempts to check the high energy consumption associated with mining by letting miners burn the tokens.
Burning involves sending the tokens to a "burn address." The only energy required in this process is for mining the tokens before they're burnt. It prevents the high consumption of resources and rewards the miners with a currency token on the blockchain.
Finally, burning coins periodically also ensures a healthy mining balance within the mechanism. It prevents early adopters from gaining an unfair advantage over new users.
The time that's required to create a coin through PoW comes down with the mining of each new block. That means miners have to be constantly engaged. They can't sit back after mining just one coin. Instead, they need to keep mining new ones while simultaneously burning the old coins. As more tokens get created, a new PoW makes it increasingly difficult to mine new ones. That makes the entire process much more democratic as early investors or mining farms cannot continue to hold the majority of coins.
How to burn Binance Coin?
Binance Coin was initially launched with a supply of 200 million BNB. However, since July 2017, it has continued to shrink its total supply, with the ultimate goal of bringing it below 100 million BNB.
BNB is looking to carry it out using two major methods. The first process is the BEP-95, while the other involves BNB Auto-Burn.
What's the BEP-95 Burning Mechanism?
BEP-95 came into action after the CEO of Binance recognized the need to accelerate the rate of burning. It adds a simultaneous burning mechanism to BSC. Validators collect a gas fee from each block that's burnt automatically by Binance Smart Chain. With more people using BSC, the rate of burning BNB is only going to be accelerated.
The mechanism is governed by the "burn ratio." The Validator signs off a transaction for transferring the gas fee and invokes the deposit function. The deposit function implements the burning logic within it, thereby moving the gas fee to the burn address.
The proposed setting of the "burn ratio" is at 10%. However, the BSC Validators can change it through a proposal vote, using their voting power.
How is BNB Auto-Burn going to work?
Until this point, the BNB burns were determined by the trading volume on Binance Exchange. However, the new Auto-Burn Protocol is about to change that and bring transparency and predictability within the community.
Henceforth, the burn amount will be adjusted automatically. Auto-Burn is going to take into account specific metrics. That includes the price of the BNB, which would reflect the supply and demand dynamics of the token.
Auto-Burn brings in greater objectivity in the mechanism and is a step in the right direction. Unlike the quarterly burns that were dependent on the trading volume, Auto-Burn calculates the amount by processing the on-chain data. It will be in operation until the supply of BNB coins slips below 100 million.
BNB Auto-Burn is going to operate according to the following formula.
Over here, B stands for the BNB coins to be burned.
N is the number of blocks produced on the Binance Exchange during the respective quarter. P denotes the average price of one BNB token against USD.
K is the constant price anchor (It'll be set at 1000 initially).
Will there be an Auto-Burn history?
Checking the details of past burns won't be a problem under the new regulations. All of the burn events will be made available for public access on the blockchain. The events will also be accessible to the BSC community on the Binance website and BNBBurn.info.
Ever since its inception, BNB has never stood still. It has continued to evolve as a utility token. One big reason for that is the support and feedback of the community behind BNB.
The two new burning methods seem to repay that trust. They have heralded a new phase in the evolution of BNB that enhances the mechanism and brings transparency within it.