Fee Burn

BNB Chain employs a quarterly auto-burn mechanism based on its price and the number of blocks produced. The goal is to reduce the total BNB supply from 200 million to 100 million tokens.

• Calculation: The amount of BNB burned is determined by a formula tied to BNB price and chain performance, not directly from gas fees.
• Real-Burn vs. Auto-Burn: Transaction gas fees are burned in real-time (real-burn), while the larger quarterly adjustments are the auto-burn.

Avalanche burns 100% of the transaction fees on its C-Chain (Contract Chain), which is Ethereum-compatible. This applies a constant deflationary pressure on the AVAX supply.

• Fee Structure: All fees paid in AVAX for transactions and smart contract interactions are permanently burned.
• Governance: Fee parameters can be adjusted through on-chain governance votes, allowing the community to manage the burn rate.

Following Ethereum's lead, Polygon implemented its own version of EIP-1559 on its PoS chain. A significant portion of the MATIC spent on gas is burned with each block.

• Purpose: Aims to create a sustainable economic model and counter the inflationary emissions from validator rewards.
• Effect: Creates a deflationary counterbalance, making the net issuance of MATIC dependent on network usage levels.

Fee burn is not just a tokenomic feature; it has profound effects on network security and value accrual.

• Value Accrual: By reducing supply, fee burn can increase scarcity, potentially benefiting long-term holders (the "ultrasound money" thesis).
• Security Budget: It shifts the security model from pure block rewards (inflation) to being funded by actual network usage (burned fees), which is considered more sustainable long-term.

Fee burn contrasts with other common fee distribution models. Understanding the trade-offs is key.

• Vs. Fee Distribution: Some chains (e.g., earlier Ethereum) distribute all fees to validators/miners. This is purely inflationary.
• Vs. Treasury Funding: Other protocols (e.g., some DAOs) divert fees to a community treasury. Burn removes value permanently; treasury redistributes it.
• Hybrid Models: Some networks use a split, burning a percentage and distributing the rest.

A fee burn permanently destroys a portion of the native tokens collected as transaction fees, reducing the total and circulating supply. This creates a deflationary pressure that, all else being equal, can increase the scarcity and potential value of the remaining tokens. It is a direct alternative to distributing fees to validators or miners, instead benefiting all holders proportionally through reduced supply.

• Process: Tokens are sent to a verifiably unspendable address (e.g., 0x000...dead) or a smart contract that locks them forever.
• Objective: To align network security incentives with token value, making the protocol's success beneficial for holders even if they are not active stakers.

Ethereum's EIP-1559 upgrade implemented the most significant fee burn mechanism, burning the base fee component of every transaction. This transformed ETH's monetary policy, making it potentially deflationary during high network usage.

• Mechanics: Users pay a base fee (burned) + a priority fee (tip to the validator).
• Impact: Since its launch in August 2021, over 4 million ETH has been burned, effectively offsetting a significant portion of new ETH issuance from staking rewards.
• Rationale: It improves fee estimation predictability and creates a deflationary equilibrium where network usage directly reduces supply.

Fee burn is a primary method for a protocol's token to accrue value directly from its own ecosystem activity. It addresses the "cash flow" problem for governance or utility tokens that don't natively generate revenue.

• Value Capture: The burned value is effectively distributed to all token holders via supply reduction, similar to a share buyback.
• Demand-Supply Dynamics: It creates a direct link between network demand (transaction volume) and token scarcity. High usage leads to more burning, increasing the token's scarcity premium.
• Contrast with Inflationary Rewards: Unlike staking rewards that dilute non-stakers, burning benefits all holders equally, promoting a holder-centric model.

By burning fees instead of paying them all to validators, protocols can better align long-term security with token value. This reduces the need for excessive block rewards (inflation) to pay for security.

• Security Budget: A valuable token is a more secure staking collateral. Burning enhances token value, which in turn strengthens the security of Proof-of-Stake networks.
• Reduced Sell Pressure: Converting all fees to validator income creates constant sell pressure. Burning mitigates this by removing tokens from the market.
• Sustainable Model: It aims for a security model funded by the utility of the network (fees) rather than perpetual new issuance.

Fee burn mechanisms vary in design and trigger. Common implementations include:

• Fixed Percentage Burn: A set percentage (e.g., 50%) of every fee is burned (used by Binance Coin (BNB) in its auto-burn mechanism).
• Targeted Supply Burn: Algorithms adjust burn rates to meet a target supply or inflation rate.
• Buyback-and-Burn: Protocols use treasury revenue to buy tokens from the open market and then burn them (common in DeFi governance tokens).
• Gas Token Burning: Specific to networks like Ethereum, where the gas fee token (ETH) itself is burned.

While popular, fee burn mechanisms are not without critique and design trade-offs.

• Regressive Taxation: It can be seen as a regressive tax, disproportionately affecting small, frequent users.
• Validator Incentive Reduction: Excessive burning can reduce validator/miner rewards, potentially harming decentralization if not balanced with other incentives.
• Speculative Focus: May over-emphasize token price over fundamental utility, attracting short-term speculation.
• Effectiveness Debate: The economic impact is contingent on high, sustained network usage. In low-activity periods, the deflationary effect may be negligible.