Note: The first section of this article explains Binance Coin's original destruction function while the token was on the Ethereum network. Binance Coin is now on the Binance Chain, so the destruction function is different. However, this information remains applicable to all current ERC-20 tokens that support the destruction feature.
Tokenization is the process of permanently removing cryptocurrencies from circulation, thereby reducing the total supply. To explain how this works, we will use Binance Coin (the former ERC-20 BNB) as an example. The previous contract for BNB, while it was on the Ethereum network, is available here.
When Binance Coin was still part of the Ethereum network, Binance performed periodic token burns using a smart contract, a function known as the burn function. BNB destruction events must occur quarterly until 100,000,000 BNB are destroyed, which represents 50% of the total amount of BNB ever issued (200,000,000 BNB).
The quantity of BNB tokens to burn is based on the number of transactions carried out on the exchange over a 3 month period. So, after each quarter, Binance destroys BNB based on overall trading volume.
However, it appears that a considerable number of people still do not understand how token destructions are executed. This article aims to provide relevant information regarding the burn function and quarterly BNB destruction events.
How does it work?
Basically, a token destruction takes place in the following order:
A cryptocurrency holder will call the burn function, indicating that they wish to destroy a given quantity of tokens.
The smart contract will then verify that the person has the tokens in their wallet and that the number of tokens indicated is valid. The destruction mechanism only allows positive numbers.
If the person does not have enough tokens, or if the number indicated is invalid (for example, 0 or -5), the burn function will not be executed.
If the settings are valid, the tokens will be deducted from the wallet balance. The total supply of this token will then be updated, meaning that the tokens have been burned permanently.
If you run the destroy function to destroy your tokens, they will be destroyed forever. It is impossible to recover tokens after they have been destroyed, and thanks to blockchain technology, proof of destruction can be easily verified on a blockchain explorer.
In other words, the Binance Coin contract has a feature called burn function, which is accessible to anyone at any time. By calling this function, you can permanently remove a specified quantity of tokens from the circulating supply. As mentioned, each token destruction event is recorded as a transaction on the blockchain. The destruction mechanism is transparent and anyone can verify that the tokens have been destroyed.
As soon as a quarterly token destruction takes place, Binance makes an official announcement specifying the quantity of BNB tokens that have been destroyed (based on the trading volume for that quarter). You can check all ERC-20 BNB destruction transactions on an Ethereum blockchain explorer like Etherscan. Destruction transactions are public, irreversible and permanently recorded on the blockchain.
On Etherscan, you can see the details of a destruction transaction in the Input Data area.
If you click on Decode Input Data, you can check the amount of BNB that was destroyed. The number includes all 18 decimal places, so in this example, 1,623,818 BNB were destroyed.
The current BNB destruction function
Since the launch of the Binance Chain, BNB ERC-20 tokens have been gradually exchanged with native Binance tokens (BNB BEP-2). This means that BNB destruction events are now taking place on the Binance Chain and not on the Ethereum network.
It should be noted that all BNB ERC-20 token destructions were “replicated” on the Binance Chain to ensure that the total supply was the same. Thus, the 11,654,397 BNB ERC-20 tokens that had been destroyed on the Ethereum network were also destroyed on the Binance Chain (just after the launch of the main network). You can check this specific transaction on Binance Chain Explorer. You can also view the total amount of BNB in circulation.
The current mechanism for destroying BNB is no longer based on a smart contract, but on a specific command executed on the Binance Chain. More details can be found on the Binance Chain Docs page.
As of April 2022, Binance has completed 19 BNB destruction events. In total, 36,723,852.37 BNB were destroyed, reducing the total supply by 18.36% (now at 163,292,674.61 BNB).
History of BNB destructions (quarterly token destructions).
