Buyback-and-Burn System Development

Buyback-and-Burn System Development

Buyback-and-burn is deflationary mechanism: protocol uses part of revenue to buy its own token on market and destroy it. BNB, MKR, GMX — all use variations of this mechanism. Implementation requires clear on-chain logic, proper DEX router choice and protection against sandwich attacks.

How The Mechanism Works

Basic scheme: protocol fee -> buyback contract -> swap on DEX -> burn. Key decisions:

Funds source: protocol commissions (trading fees, lending fees, mint fees). Usually contract accumulates USDC/ETH, buyback triggers by schedule or when threshold reached.

DEX for swap: Uniswap V3 via Universal Router or Swap Router 02 — most liquid option for Ethereum/L2. On BSC — PancakeSwap. For large buybacks, routing through multiple pools is important.

Burn mechanism: token.transfer(address(0xdead)) or token.burn(amount) if function exists. Sending to 0xdead — not true burn in terms of totalSupply(), but accepted standard. True burn via _burn() decreases totalSupply.

Buyback Contract

// SPDX-License-Identifier: MIT
pragma solidity ^0.8.20;

import "@uniswap/v3-periphery/contracts/interfaces/ISwapRouter.sol";
import "@openzeppelin/contracts/token/ERC20/IERC20.sol";
import "@openzeppelin/contracts/token/ERC20/utils/SafeERC20.sol";
import "@openzeppelin/contracts/access/Ownable2Step.sol";
import "@openzeppelin/contracts/security/ReentrancyGuard.sol";

interface IBurnable is IERC20 {
    function burn(uint256 amount) external;
}

contract BuybackAndBurn is Ownable2Step, ReentrancyGuard {
    using SafeERC20 for IERC20;

    ISwapRouter public immutable swapRouter;
    IERC20 public immutable paymentToken;  // USDC/ETH/WETH
    IBurnable public immutable projectToken;
    address public immutable BURN_ADDRESS = address(0xdead);

    uint24 public poolFee = 3000;          // 0.3% pool, configurable
    uint256 public maxSlippageBps = 200;   // 2% maximum slippage
    uint256 public minBuybackAmount;       // minimum trigger threshold

    event BuybackExecuted(
        uint256 paymentAmount,
        uint256 tokensBought,
        uint256 tokensBurned
    );

    constructor(
        address _router,
        address _paymentToken,
        address _projectToken,
        uint256 _minBuybackAmount
    ) Ownable(msg.sender) {
        swapRouter = ISwapRouter(_router);
        paymentToken = IERC20(_paymentToken);
        projectToken = IBurnable(_projectToken);
        minBuybackAmount = _minBuybackAmount;
    }

    function executeBuyback(uint256 amountIn, uint256 amountOutMinimum)
        external
        nonReentrant
        onlyOwner
    {
        require(amountIn >= minBuybackAmount, "Below minimum buyback amount");
        require(
            paymentToken.balanceOf(address(this)) >= amountIn,
            "Insufficient balance"
        );

        paymentToken.approve(address(swapRouter), amountIn);

        ISwapRouter.ExactInputSingleParams memory params = ISwapRouter.ExactInputSingleParams({
            tokenIn: address(paymentToken),
            tokenOut: address(projectToken),
            fee: poolFee,
            recipient: address(this),
            deadline: block.timestamp + 300, // 5 minutes
            amountIn: amountIn,
            amountOutMinimum: amountOutMinimum, // protection from sandwich
            sqrtPriceLimitX96: 0
        });

        uint256 amountOut = swapRouter.exactInputSingle(params);

        // Burn purchased tokens
        projectToken.burn(amountOut);

        emit BuybackExecuted(amountIn, amountOut, amountOut);
    }

    // Calculate minAmountOut off-chain via Uniswap SDK before calling
    function getMinAmountOut(uint256 amountIn)
        external
        view
        returns (uint256)
    {
        // This is view-helper for front-end, real calculation via quoter
        // quoter.quoteExactInputSingle() outside contract
        revert("Use Quoter contract off-chain");
    }
}

Protection Against Manipulation

Sandwich attack — main threat to buyback transactions. MEV bots see pending buyback in mempool, insert their swap before it (increasing price) and immediately after (locking in profit). Protection:

• amountOutMinimum: never set to 0. Calculate via Uniswap V3 Quoter with 1-2% buffer.
• Flashbots / MEV blocker: send buyback transactions through private mempool (Flashbots Protect, MEV Blocker from CoW Protocol).
• Splitting into parts: instead of one large buyback — several smaller with interval. Reduces impact and makes predictability lower.
• TWAP pricing: compare swap price with Uniswap V3 oracle TWAP price. If deviation > N% — revert.

// Price check via Uniswap V3 TWAP oracle
function checkPriceDeviation(uint256 amountIn, uint256 amountOut) internal view {
    // Get TWAP for last 30 minutes
    uint32[] memory secondsAgo = new uint32[](2);
    secondsAgo[0] = 1800; // 30 min ago
    secondsAgo[1] = 0;    // now

    (int56[] memory tickCumulatives,) = IUniswapV3Pool(pool)
        .observe(secondsAgo);

    int56 tickDelta = tickCumulatives[1] - tickCumulatives[0];
    int24 twapTick = int24(tickDelta / 1800);

    // Calculate expected amountOut by TWAP
    uint256 expectedAmountOut = getAmountFromTick(twapTick, amountIn);

    // Allow deviation not more than 3% from TWAP
    require(
        amountOut >= (expectedAmountOut * 97) / 100,
        "Price deviation too high"
    );
}

Automation and Triggers

Two approaches to triggering buyback:

Keeper-based (recommended): Chainlink Automation or Gelato Network. Smart contract defines condition (checkUpkeep), keeper calls performUpkeep. Decentralized, no trusted server needed.

// Compatibility with Chainlink Automation
function checkUpkeep(bytes calldata)
    external
    view
    returns (bool upkeepNeeded, bytes memory)
{
    upkeepNeeded = paymentToken.balanceOf(address(this)) >= minBuybackAmount;
}

function performUpkeep(bytes calldata) external {
    require(
        paymentToken.balanceOf(address(this)) >= minBuybackAmount,
        "Condition not met"
    );
    uint256 balance = paymentToken.balanceOf(address(this));
    uint256 minOut = _calculateMinOut(balance);
    executeBuyback(balance, minOut);
}

Schedule-based: daily/weekly buyback by time. Simpler for community communication, but less capital efficient.

Transparency and Reporting

Community should see every buyback. Recommended metrics for public dashboard:

All data comes from on-chain BuybackExecuted events — no additional infrastructure needed, just event indexing.