Binance Coin (BNB) hosted on BINANCE Chain is an exchange-based cryptocurrency facilitating Binance’s ecosystem of products, both centralized and decentralized. BNB has many use cases, but within the Binance ecosystem it is primarily used as a utility token that allows users to receive discounts when paying for trading fees. Binance Smart Chain (BSC) uses Proof-of-Stake Authority to achieve consensus with only 21 nodes validating transactions on the network. Every 24 hours, the validator set is updated based on who stakes the most BNB tokens.
Binance Coin Strengths
- BNB has clear utility and benefits within the Binance exchange ecosystem in the form of trading fee discounts
- The parent company Binance is already one of the largest and fastest-growing companies in the crypto industry
- As Binance rolls out more features like staking, leveraged tokens, DEXs, etc, there will be more utility for BNB
Binance Coin Weaknesses
- BNB is an entirely centralized token controlled by a for-profit company with little utility outside of trading cryptocurrencies
- Binance has already demonstrated questionable character on several occasions when dealing with BNB and customer’s funds
- BNB is exposed to greater catastrophic downside risk due to greater than 80% of BNB being either owned or custodied by Binance
- Binance has engaged in “regulatory arbitrage”, claiming to have no permanent headquarters, in an unprecedented attempt to avoid restrictive regulatory laws
- BNB token could be subject to US security laws as it is solely controlled by a private company
Important Links
- White paper
- Website
- Github
- Block explorer
- Wallets - Ledger and TREZOR
- Where to buy? Binance
BNB was originally an ERC-20 compliant Ethereum token with an initial coin offering (ICO) in mid-2017. Users holding ERC-20 compliant tokens were swapped for an equivalent number of BEP2 BNB tokens upon Binance Chain’s launch in early 2019. With the launch of Binance Chain, a decentralized exchange (DEX) was built atop the network to enable customers to maintain custody of their funds. The BNB token is used as “gas”, similar to Ethereum, to pay for transaction fees.
Binance Chain will soon reorganize into a parallel structure with Binance Chain and Binance Smart Chain to enable smart contract functionality, as announced in April 2020.
Binance Chain (BC) is a closed-source, digital asset blockchain hosting Binance’s DEX which is based on Tendermint and has instant finality. BC has three components: the cross chain module, the oracle module, and the consensus mechanism, which is Proof of Stake and Tendermint BFT.
Binance Smart Chain (BSC) will be a dApp smart contract environment and with three components, including the consensus mechanism, which is Proof of Staked Authority, an Ethereum Virtual Machine, and the Build-In System Smart Contract. Block time will be 5 seconds. BNB holders govern the BSC network by holding validators accountable, a model that becomes more effective the more the user base grows.
BNB is a utility token facilitating Binance’s centralized and decentralized products.
The BNB initial coin offering (ICO) occurred mid-2017 with a sale of 100,000,000 BNB tokens of 200,000,000 sold at about $0.15 USD/token.
BNB enjoys some notoriety as a speculative token, fueled by its role in the Binance ecosystem and an equity-like buyback and burn system. Binance originally, in its whitepaper, committed to buying back 20% of profits and burning the tokens, creating a deflationary nature, until the token supply reaches 100,000,000 from the current 179,000,000. The current supply reduction is tracking at about 6,000,000 tokens per year. However, in March 2019, Binance discreetly edited the original wording in the whitepaper to remove the “20%” benchmark without publicly disclosing the change. The lack of transparency surrounding the changes to the monetary policy highlights the trusted nature in an exchange token and should serve as a red flag for investors.
Binance incentivizes BNB use through numerous means. One example is a reduction in exchange trading fees if paid in BNB, and other trading fee discounts based on volume and total BNB stake. The original fee reduction was 50% but was reduced to 25% in July 2018. It further reduced to 12.5% in 2019, then 6.25% the year after, until year five, at which point there will no longer be discounts. Another example is exclusive access to Launchpad, a token launch platform in the form of an initial exchange launch (IEL) rather than an ICO, which would receive regulatory scrutiny. A third example is a generous referral program, which changes frequently and usually requires a significant BNB balance to benefit from referrals.
BNB is fundamentally a token facilitating the products offered by the private company Binance. All governance is controlled by Binance. For example, the initial validators of Binance Chain were “trusted members of the Binance community,” likely team members, and were not selected through a decentralized consensus mechanism.
Most recently, Binance’s announcement of the decentralized Binance Smart Chain has been challenged as a centralized replication of an “already crowded” smart contract space.
The Binance Smart Chain will use a Proof of Staked Authority consensus mechanism, a Delegated Proof of Stake and Proof of Authority crossover. A limited quantity of validators will produce blocks, with validators taking turns, similarly to Ethereum’s Clique. 21 total node operators, elected by BNB holders, will govern the blockchain similar to the EOS’s notorious Delegated Proof of Stake system which has been plagued by cartel-like behavior, vote-buying scandals, censorship, and centralization.
The Binance Smart Chain is intended as a Ethereum-like dApps marketplace, with incorporated Ethereum dApp compatibility. However, BSC is in no way designed for an open, permissionless, decentralized blockchain network akin to Ethereum but instead has created a closed sandbox environment that is compatible with Ethereum dApps.
Binance has not proven a meaningful commitment to decentralization and users/investors should not expect otherwise. BNB’s path will be determined by what is best for the profit-driven greater Binance ecosystem.
As a fairly centralized tool facilitating the financial products for a for-profit company, many of the challenges inherent in decentralized blockchains are not relevant to BNB. However, the opposite is also true. BNB is not an open-source blockchain and is controlled by a private company. There is no argument that BNB users incur extreme centralization risk when holding BNB. With greater than 80% of BNB either owned or custodied by Binance, the potential catastrophic downside risk for the token becomes even greater. Exchange hacks are an ever constant threat as are failed crypto businesses. The BNB token is exposed to both of these (regular) downside events unlike a traditional cryptocurrency like Bitcoin or Ethereum.
Highlighting BNB’s centralization risks was the discovery in January 2020 that Binance discreetly edited the original wording in the BNB whitepaper to remove the “20%” burn benchmark without publicly disclosing the change. Binance made the unannounced edits nine months prior in March 2019. The lack of transparency surrounding the changes to the monetary policy highlight the trusted nature in an exchange token and should serve as a red flag for future investors.
In another example of Binance going back on their own word, in May 2020, Binance reneged on their original stance concerning the controversial Justin Sun-supported Steem hardfork and began supporting the fork essentially controlled solely by Justin Sun. Binance originally declined to support the network upgrade, saying they “do not condone this type of behavior,” and then only to announce support a few days later.
In a mark against the company’s operational security, hackers stole $40 million USD in a single transaction from high net worth accounts on Binance in May 2019. The funds were not recovered. Additionally, a hack of Binance’s former third party Know-Your-Customer (KYC) provider leaked 60,000 users ’ sensitive personal data including photos, physical addresses, and crypto amounts putting many in potential harm’s way as future targets for theft, cyber or physical. In response to the negligence, Binance gave lifetime VIP memberships to those affected for their very site that just proved itself irresponsible and unsafe to use.
Another key risk variable when discussing BNB is the regulatory risk from governments. Binance, in its short three year history, has moved headquarters from China to Japan to Malta in an attempt to avoid regulation. Most recently, Binance has taken the stance that there is not a Binance headquarters after news broke that Malta denied their application under its jurisdiction. This represents an inordinate amount of regulatory risk as businesses must fall under some jurisdiction. It is unprecedented for a legitimate business to not submit to some regulation scheme. In addition, the BNB token could be susceptible to US security laws, discussed in greater detail in the Regulation section.
Binance, in just three short years, has become one of the largest cryptocurrency exchanges in the world with over 15 million users, and it is one of the crypto industry’s first unicorn companies. Binance’s speed, innovation, and adoption have made it, along with its CEO CZ, a household name in the crypto community. It is this scaling and the network effects that enabled Binance to create the BNB token and catapult it into a top coin by market cap. As a result of Binance’s success, BNB has ranked in the top 10 cryptocurrencies by market capitalization as of mid-2020.
The centralized Binance exchange leads the world in exchange volume with over $3 billion USD in daily trades. Binance launched four regional crypto-to-fiat exchanges in 2019, including Binance.us for the USA. Binance’s decentralized exchange, DEX, in 2019 reached a record of $520 million USD volume in one day and is the top decentralized exchange by volume.
Additionally, Binance sent shockwaves across the crypto world with the purchase of CoinMarketCap, the most visited site in the industry. This acquisition unsurprisingly resulted in Binance receiving the most web traffic amongst all exchanges in Q1 this year. This is but one of seven acquisitions Binance has made previously. Other purchases include Swipe.io, DappReview, and TrustWallet.
Binance rapidly adds products and user functionality with BNB use heavily incentivized. This is in addition to the numerous base pairs, token support, and fiat entry and off-ramps provided. Binance caters to crypto users of all experience levels. The Academy arm caters to the true novice, the Research arm for more advanced, and the leveraged products for even the most sophisticated user. This, coupled with their extensive coin listings and presence in 180 countries, allows Binance to target nearly every crypto user across the globe. Binance also offers a plethora of supplemental materials to help customers with their BNB journey including a block explorer, BC documentation, wallet instructions, etc.
This growth is bullish for both Binance and the BNB token. Transaction fees are discounted for BNB users, making BNB ownership — even if never used for any other purpose or speculation — an easy choice for Binance users. In another example, participation in token launches is almost always in the BNB base pair. Because the use and adoption of BNB are in the best interest of the company, Binance will do all that it can to make it as omnipresent and easy to use as possible within the sphere of Binance products. However, outside of Binance’s products, BNB offers little upside compared to other cryptocurrencies.
