Binance Smart Chain 101: Everything You Need to Know About BNB.

The Binance Smart Chain token (BNB) is more than just another token developed by a centralized exchange. Unlike other tokens developed by exchanges, Binance has built its own blockchain and created its own ecosystem.

The Binance Smart Chain is now the second-largest such blockchain outside of Ethereum.

The BNB token is regularly in the top five of cryptocurrencies by market cap with a price that fluctuates between $200 and $500 per token. While it has some advantages over Ethereum, BNB is far from perfect.

The Binance Smart Chain has a massive market cap and growing ecosystem, but is it really all that great?

The Problem BNB is Trying to Solve:
Ethereum is Inefficient

We’ve heard the story, Ethereum is great but faces high gas fees making it a barrier to entry for new users. The company behind BNB, Binance wanted to onboard users more easily into their own ecosystem. How can one of the largest exchange make getting into crypto and DeFi easier?

The cost of Ethereum gas still regularly ignites “gas wars” when popular NFTs are dropped. The people that pay the most in these gas fees get the hot new NFT – a process that doesn’t really help the average retail investor or enthusiast. While Ethereum 2.0 is in development, there is an imminent need to provide alternative DeFi, NFT, and gaming solutions.

The Solution: Build A New Blockchain

Why work to develop a Layer-2 solution when you can start fresh? In some ways, Binance and many other later blockchains benefit from seeing the way that Ethereum and Bitcoin have played out. Understanding the uses, limitations and pain points allowed Binance to develop the BNB token and the Binance Smart Chain. It serves a few specific services:

• Sending and receiving digital assets
• Controlling the issuance of its own token BNB
• Smart contracts that allow for the creation of Binance-based altcoins

Looking at BNB and the Smart Chain in more detail, we can see its potential value and compare it to Ethereum and other Layer 1s.

Low gas fees, Fast transactions

Binance uses the Tendermint Byzantine fault tolerance consensus mechanism, which is a form of the Proof-of-Stake algorithm. That means users can “stake” their own share of tokens to help validate transactions on the blockchain. This is less energetically wasteful than Proof-of-Stake and significantly faster. Since there are fewer machines competing with each other, the gas fees are significantly lower than Ethereum’s (5 Gwei vs 110 Gwei according to bscscan.io and etherscan.io). Instead of paying between $40 to $80 in fees for simple transactions, with the Binance Smart Chain, users pay less than $1.

Compatibility with other Blockchains

While the Ethereum ecosystem is massive, you can’t connect it directly to Solana or another blockchain. In contrast, the Binance Smart Chain is compatible with the Ethereum Virtual Machine and supports coins across different blockchains. That means there are more potential users, higher token liquidity and more value.

Instead of rolling out dApps on Ethereum, many Solidity developers simply use the Binance network instead. Otherwise, it is also easy to port over an Ethereum dApp into the Binance Smart Chain. Since the transaction fees are much lower, it becomes cheaper to run these applications. Especially in the DeFi and the NFT space, this becomes important to attracting retail investors.

A Brief History of the Binance Smart Chain

Binance originally launched its token BNB in July 2017 for use as a utility token on its exchange, promising to provide discounts to holders that used it as a payment method. Two hundred million tokens were created after launch, with half being sold to the public and the rest shared with founders and investors. It was launched originally as an ERC-20 token but was migrated to the Binance Chain, in 2019. BNB became a token built on the Binance standard BEP-2.

The Binance Smart Chain was launched in September 2020, improving on its first iteration and making it possible to connect with other blockchains. The company that developed the smart chain, Binance, is one of the world’s largest centralized exchanges but it has been subject to a lot of scrutiny.

In fact, one of the biggest knocks against the Binance Smart Chain and the BNB token is the fact that it is relatively centralized and the exchange itself is constantly embroiled in scandals, legal or otherwise. While Binance is behind more than $10 billion in daily crypto trades, its CEO is relatively secretive and at one point, even planned to make an exchange called Tai Chi in the US to help people evade compliance and geographic restrictions.

The company operates through a network of subsidiaries, including Binance. US for American customers to avoid further legal scrutiny. Nonetheless, the company is currently being probed in the United States for money laundering violations. More troubling, the price of BNB is propped up by Tether (USDT), a stablecoin being investigated because it probably isn’t really pegged to a US dollar.

This is just the tip of the iceberg – as the company faces several scandals, it puts the Binance Smart Chain at risk as it’s tied to the company’s success.

How Does Binance Smart Chain Work?

Binance issues the BNB tokens through the Binance Smart Chain. Using BNB tokens while trading on Binance or one of its subsidiaries can reduce some of the trading fees. Everything on the blockchain is evaluated through a form of Proof of Stake called Proof of Staked Authority (PoSA), which then grants rewards to the validators.

PoSA

This method of validation combines delegated Proof of Stake with Proof of Authority, similar to the EOS blockchain. Validators put up a stake of BNB tokens for the chance to validate transactions and add them to the blockchain. Rather than allowing anyone to stake their BNB, they are instead split into 21 delegates that become the validators for the network. With Proof of Authority, the validators are chosen or picked by Binance, after vetting them to ensure that they aren’t trying to add fraudulent data to the blockchain. This gives it a speedy 3-second block generation time compared to 13 for Ethereum and 10 minutes for Bitcoin. However, this of course is a highly centralized model for a blockchain.

Milestones and Developmental Stages

• 2017: Launch as an ERC-20 token ($0.11)
• April 2019: Migration to the not-so-smart Binance Chain as a BEP-2 token ($16)
• April 2020: Launch of the Binance Smart Chain
• May 2021: All-time high ($690)
• February 2022: Price hovering around $400

As of February 2022, BNB is fourth among all cryptocurrencies according to market cap. The cap is estimated at $65 billion and in addition, there are currently 165 million tokens in circulation. The top five DeFi apps on the Binance Smart Chain generate more than $150 million in trade volume over the course of 24 hours. The next 8 generate more than $5 million each per dApp Radar.

Buying and Storing BNB

Buying BNB

The easiest way to get into BNB involves buying it from Binance.us or Crypto.com. It is not available on Coinbase, Newton, or Kraken. Larger exchanges may have higher fees but they also often have proven track records and reliability.

Here’s a quick comparison:

Storing BNB

After you purchase BNB, you have a few options:

1. Leave it on the trusted exchange

2. Move it into your own private crypto wallet where you can earn by staking it

Your wallet can come in two flavors – cold wallets that are disconnected from the internet and hot wallets which have some network access. Many cold wallets connect these very same wallets to store your crypto but will need to connect to your computer when you want to use it. Cold wallets are great for long-term storage.

If you are going to be using BNB for regular trading and transactions, it makes more sense to keep it in a hot wallet.

Where to store BNB:

The Case for Investing in Binance

Binance is one of the fastest blockchains and has an almost negligible transaction fee. It is compatible with Ethereum and other blockchains and supports its own ecosystem of altcoins and dApps.

Since the Smart Chain is similar enough to Ethereum, it is easy to port Ethereum dApps to Binance, where transaction fees will be much lower. Plus it gives you discounts when you’re trading on Binance.

Disadvantages of BNB

While BNB saves energy by opting for Proof of Stake instead of Proof of Work, it does so at the expense of heavy centralization. There are 21 validators on the network and the currency is essentially tied to the Binance company and exchange. Binance has gotten in trouble with regulators all across the world – a problem for anyone holding BNB.

Since the token is tied up with the company, any large issues that they run into will also affect the price and utility of BNB. This level of centralization basically defeats the purpose of the blockchain.

In addition, 20% of the entire trade volume is in a BNB/USDT liquidity pool. Tether has failed time and time again to provide evidence that their stablecoin is actually backed by the US dollar. In addition, Binance holds 17 billion USDT, allowing it leverage to purchase even more assets and take out crypto loans using the USDT as collateral. Since the business model is so tied to Tether, even a 20% decline in the price of Tether will greatly disrupt the price of BNB and its markets.

Conclusion

The BNB token was created by the crypto exchange Binance and it plays an important role in the Binance Smart Chain ecosystem. 

The method of Proof-of-Stake involves both delegation and proof of authority, resulting in a fast and efficient blockchain, albeit highly centralized.

The Binance Smart Chain is compatible with many other blockchains including Ethereum, making it easy to port dApps into it.

Despite the success of the BNB token, the close relationship between the Binance exchange and Tether is very troubling. 

While BNB may have short-term utility in providing discounts on the Binance Smart Chain, it is not a stable long-term investment due to Binance’s reliance on USDT. 

All opinions. No advice. Do your own research.