> For the complete documentation index, see [llms.txt](https://documentation.bakerdao.io/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://documentation.bakerdao.io/mechanics/baking-and-burning.md).

# Baking and Burning

## Baking

**Mechanism:** Users can bake `$BREAD` by depositing `$BERA` into the protocol's smart contract.

**Fee:** A `2.69%` fee is applied to each baking transaction. Fees are added to the protocol, increasing the `$BERA` backing per circulating unit of `$BREAD.`

**Dynamic Baking Cap:**  a baking cap is determined each week. If the cap was reached in the previous week, the baking cap increases by `50%`, allowing for new `$BREAD` baking. If the cap was not reached, then it remains unchanged. The initial supply cap is `6.9 million` `$BREAD`.

**Master Baker:** The controller of the dynamic baking cap, and can impose whitelists on baking in order to benefit the protocol. This is an ongoing administrative function.

## Burning

**Mechanism:** Users can redeem `$BERA` by burning `$BREAD.`

**Fee:** A `2.69%` fee is applied to each redemption. 

<figure><img src="/files/eYlN5RsZI60xMAZN5UEO" alt=""><figcaption></figcaption></figure>

\*`2.69%` baking and burning fee incurred on each Bake and Burn. `65%` of fee increases `$BERA` backing, `35%` is directed to Protocol Treasury for bribes and OpEx.

## Example

* Let's assume there are `100` `$BREAD` tokens in existence, and there is `100` `$BERA` tokens backing them in the contract. That means the exchange rate between them is 1:1, giving a price of `1` `$BERA` per `$BREAD`
* There is a `2.69%` bakng fee, so to bake the next `$BREAD` token a user must pay `1.0269` `$BERA`. Of the fee collected, `65%` or `0.017485` `$BERA`, is added to the backing
* There is now `101` `$BREAD` in circulation and `101.017485` `$BERA` in the backing. The new exchange ratio is now approximately `1.0001731188` `$BERA` per `$BREAD`
* This exchange rate still increases in `$BREAD`'s favor if there is a burn. Let's assume a user burns `3` `$BREAD` to redeem `$BERA`. There is a `2.69%` burning fee. Of the fee collected, `65%` or `0.052455` `$BERA`, is added to the backing
* There is now `98` `$BREAD` in circulation and `98.06994` `$BERA` in the backing. The new exchange ratio is now approximately `1.0007136735` `$BERA` per `$BREAD`.
* The backing always increases, regardless of a Bake or Burn occurring.

```
[User Deposits 1.0269 BERA]
         |
         v
+---------------------------+
|  BREAD Token Smart Contract |
+---------------------------+
         |
         |---> Adds to Contract Backing:
         |        - 1.00 BERA (Base Amount)
         |        - 0.017485 BERA (65% of Fee)
         |
         |---> Distributes Fees:
         |        - 0.004035 BERA (15% of fee) to PoL Bribes
         |        - 0.00538 BERA (20% of fee) to Treasury
         |
         |---> Bakes 1 BREAD Token
         v
[User Receives 1 BREAD Token]
```