My daughter will be turning 3 in a month and she had had a "binky" since she was a baby. Just before she turned a year we decided that the binky should only be used for sleeping, and therefore had to stay in the crib. So it was only given to her for naps and bedtime (and really really long car rides!).
Somewhere along the way, she settled on 1 binky and that was the only one she ever would accept. For numerous reasons, it never seemed like a good time to get her to give it up - I was living at my mom's for a while, I was working overnights, we were moving, etc. - and it really helped her go to sleep without a fuss. Then finally things stabilized, and we started talking to her about the Binky Fairy. I would let her know that when she was ready, the Binky Fairy would come take her binky, because she was a big girl, and big girls don't need binkies - only little babies need binkies and the Binky Fairy would give her binky to a little baby that needed it. The Binky Fairy would leave her a wonderful big-girl present in its place. She seemed to understand, but she was not about to give it up on her own.
Problem was, the thing was getting really gross, since it was the only one she would take. And she kept wanting it at other times besides sleep-time - whenever she got upset or stressed out about anything, she would start crying and screaming for her binky (she also has a stuffed bear as her main security object, and he's not going anywhere). It was just getting ridiculous and I realized that as much as I would have loved for her to have just finally decided on her own that she was ready to give it up, it wasn't going to happen. So I got a little decorated box and one night at bedtime, I said, hey, how about we leave your binky for the Binky Fairy tonight? You can put it in this special little box and we will leave it on your windowsill! And she said, okay! She just went right along with it and went to sleep without it without any fuss at all. In the morning, there was a soccer ball and a toy drum waiting for her from the Binky Fairy (which she had wanted, she's a bit of a tomboy!) and a letter thanking her for her binky. She thought that was pretty cool. And I thought, wow, that was easier than I thought it would be.
And then the second night, it was a different story. I think reality hit and she was like, what, you mean binky doesn't come back? She flipped out - "I want my binky! Binky Fairy bring binky back! Don't want baby to have binky, is MY binky!!!"
And my heart just broke, because she had really really loved that thing, and it was like she had lost her best friend. But I stood firm, no back sliding, because otherwise the whole thing would have lost all credibility. And she settled down, and went to sleep. The third night she asked about it again, got a little whiny, but still went to sleep without any issues (it helps that we have a routine in place, including brushing teeth, stories, and cuddles).
That was 3 weeks ago. Since then, she has asked about a couple of times, wondering where did Binky go? I would remind her it was the Binky Fairy, and she would giggle and say, "Oh, yeah!" She still talks about the Binky Fairy taking her binky and sometimes says she misses Binky, and I tell her, that's okay, I know you miss Binky, but you are a big girl now and you don't need Binky. I think she's been a little worried that her teddy bear will disappear too, and I've reassurred her that he won't (if she wants to sleep with it until she goes to college, I don't care - my stepson had his bear until he turned 12!).
Of course, she may end up needing therapy when she's 30, all stemming from the loss of her Binky at the tender age of 34 months, but oh well. :)~
Just for the record, she has not taken to sucking her thumb instead - I think they know there is a difference and they are not going to just suck on anything. I can understand your concerns though - I was a thumb sucker for a long time and as a result had to go through a lot of orthodontic work to get my overbite corrected!
I've known a few parents that gathered up all the pacifiers, tied them to balloons, and let them go - so when they were gone, they were gone and that was that. Not sure about the environmental impact with that one, but it still seems kind of cute.
All little kids need to believe in magic - that's part of what makes kids so wonderful. Besides, let the Binky Fairy take the heat and be the bad guy, not you. ;)