Burn Fee

A burn fee enacts a deflationary monetary policy by reducing the total token supply. This contrasts with inflationary models that increase supply via block rewards. The process is often algorithmic, linking burn rates to network activity (e.g., transaction volume) to create predictable, transparent scarcity. For example, Ethereum's EIP-1559 burns a base fee with every transaction, permanently removing ETH from circulation.

By reducing supply against static or growing demand, burn fees are designed as a value accrual mechanism for remaining token holders. The economic theory suggests that the value of each remaining token should increase proportionally, assuming all other factors remain constant. This creates a direct link between network usage (which fuels the burn) and potential token appreciation, aligning incentives between users and long-term holders.

Burn fees act as a fee sink, providing a destination for transaction fees that is not a central entity. This addresses the critique of traditional fee models where miners or validators capture all fees, which can lead to wealth concentration. Burning the fees instead removes value from the system entirely, which can be seen as a benefit to decentralization and a method to offset inflation from block rewards.

All burns are verifiable on-chain. Tokens are sent to a burn address (e.g., 0x000...dead), a publicly known wallet for which no one holds the private keys. This ensures:

• Immutability: The action cannot be reversed.
• Auditability: Anyone can audit the total burned supply via a block explorer.
• Trustlessness: No central party is required to certify the destruction; the protocol's code executes it.

The trigger and rate of burning are defined by protocol-specific rules. Common implementations include:

• Transaction-Based: A portion of every fee is burned (e.g., Ethereum, BNB Chain).
• Buyback-and-Burn: A protocol uses its revenue to buy and burn tokens from the open market.
• Algorithmic Stability: Burns (and mints) are used to maintain a peg, as in some algorithmic stablecoin designs. The specific rules are critical to understanding the token's economic model.

Burning is the inverse operation of token minting. Understanding both is key to analyzing tokenomics:

• Minting creates new tokens, increasing supply (e.g., block rewards, liquidity mining).
• Burning destroys existing tokens, decreasing supply. A protocol's net emission rate is the balance between its minting schedule and its burn rate. Many modern chains use burning to achieve a low or negative net emission.

The Shiba Inu ecosystem uses burn fees as a core deflationary tool. Protocols like ShibaSwap and associated layer-2 solutions (Shibarium) implement transaction fee burns. A percentage of fees generated by network activity is used to buy back and permanently burn SHIB tokens from the circulating supply.

• Mechanism: Fee revenue funds buy-and-burn events.
• Purpose: To systematically reduce the vast initial token supply.

Following its collapse, the Terra Classic community enacted a 1.2% burn tax on all on-chain transactions. This tax applies to transfers and swaps of LUNC and USTC, with the taxed amount sent to a dead wallet for burning. The goal is to drastically reduce the hyper-inflated supply.

• Mechanism: A tax parameter applied at the protocol level.
• Outcome: A community-driven supply reduction policy.

Some blockchains use burn fees as a consensus mechanism. In Proof-of-Burn (PoB), miners/validators prove commitment by permanently destroying (burning) native or alternate chain tokens. This burned value grants the right to mine or validate blocks, securing the network without high energy costs.

• Examples: Slimcoin, Counterparty (burned BTC to create XCP).
• Concept: Burning acts as a virtual mining rig.

Many NFT marketplaces implement burn fees on secondary sales. A portion of the royalty or transaction fee is used to buy and burn the platform's governance token. This creates a deflationary model, aligning token value with platform usage and volume.

• Examples: LooksRare historically burned LOOKS tokens with trading fees.
• Effect: Fees reduce token supply, potentially increasing scarcity.

A transaction fee is the base cost paid to a network to process a transaction. It compensates validators or miners. A burn fee is a specific type where this cost is permanently destroyed rather than paid out.

• Purpose: Secures the network and prevents spam.
• Mechanism: Paid in the network's native token (e.g., ETH for gas, BTC for priority).
• Contrast: Unlike a burn fee, most transaction fees are redistributed to network participants.

On Ethereum, a gas fee is the transaction cost, denominated in gwei (a subunit of ETH). With EIP-1559, a portion of this fee, the base fee, is burned, making it a canonical example of a burn fee.

• Components: Total Fee = (Base Fee + Priority Tip) * Gas Used.
• Burn Mechanism: The base fee is permanently destroyed, reducing ETH supply.
• Impact: This burn creates a deflationary pressure, contrasting with pre-EIP-1559 fees that were entirely paid to miners.

A token burn is the deliberate, permanent removal of tokens from circulation by sending them to an irretrievable address. A burn fee automates this process as part of transaction economics.

• Methods: Can be a one-time event (e.g., supply reduction) or a continuous mechanism (e.g., per-transaction burn).
• Objective: Increase scarcity and potentially the value of remaining tokens.
• Key Difference: A burn fee is a recurring, protocol-level burn triggered by network activity, not a manual, one-off event.

Deflationary tokenomics refers to a cryptocurrency's economic model where the token supply decreases over time. A burn fee is a primary mechanism to achieve this.

• Mechanism: Continuous removal of supply via transaction fees or buyback-and-burn programs.
• Goal: Create scarcity, counteracting inflation from staking rewards or token issuance.
• Examples: Binance Coin (BNB) uses quarterly burns; Ethereum's base fee burn introduces deflationary pressure based on network demand.

A validator reward is the compensation given to network participants (validators or miners) for securing the blockchain. This is the typical destination for non-burned transaction fees.

• Composition: Often includes block rewards (new issuance) and transaction priority tips.
• Contrast with Burn Fee: In a pure burn fee model, fees are destroyed, not paid as rewards. Hybrid models (like Ethereum) burn the base fee but pay a priority tip to validators.
• Economic Impact: Burn fees shift value from validators to all token holders via supply reduction.

The fee market is the economic system that determines transaction priority and cost through user bidding. Burn fees fundamentally alter this dynamic.

• Traditional Model: Users bid higher fees to incentivize miners (e.g., Bitcoin).
• Burn Fee Model: A protocol-set base fee is burned, creating a predictable cost floor. Users add a separate tip for priority.
• Outcome: Burning the base fee removes it from the circulating supply, making the fee market a direct lever for monetary policy.