Investing Filter

Table of Contents

🤔 What is Binance smart chain?

Binance smart chain blockchain was built as an alternative to Etherium by Binance. The blockchain has smart contract functionality and is much faster than Etherum.

Binance developers forked the code of Etherium to develop Binance smart chain. Hence it also supports Ethereum Virtual Machine (EVM), which allows it to run Ethereum-based applications like MetaMask.

Binance smart chain aims to overcome Etherium’s limitations(scalability trilemma).

Scalability trilemma was first described by Vitalik Buterin, the co-founder of Ethereum. It states that it is very difficult to develop a blockchain that has all the three features:

  • Scalability
  • Security
  • Decentralization

A developer can choose a maximum of 2 of the desired qualities.

Binance smart chain achieved scalability and security by compromising decentralization.

💡 What role does BNB token play ?

BNB is the native cryptocurrency of Binance smart chain. It has following uses:

  • On Binance platform:
    • Trading fee discount: Users can pay trading fees in BNB tokens on the Binance trading platform to receive discounts of up to 75%.
    • Participate in Binance exchange initial coin offering: Users holding 100-500 BNB tokens have a better chance of winning the lottery to participate in initial coin offerings of new cryptocurrencies.
    • Referral program: BNB holders receive commission of up to 40% by referring others to the Binance platform.
    • Community vote: BNB holders get to vote on which coin to be listed on the Binance platform.
    • BNB crypto trading pair: Users can trade cryptocurrencies in BNB trading pairs on Binance trading platform.
    • Payments: Users can use Binance card having BNB tokens to make payments at a number of places.
  • On Binance smart chain:
    • Transaction fee: Users have to pay BNB tokens as transaction fees to include their transactions on Binance smart chain.
    • Delegation: BNB holders can delegate their tokens with validators to participate in the block validation process and earn a part of block reward.

📝 Origin of Binance smart chain

  • Changpeng Zhao founded Binance crypto exchange in China in 2017. But had to move to Japan because of crypto ban by the Chinese government.
  • In 2018, Binance became the world’s largest crypto exchange by trading volume and number of users.
  • Binance team launched Binance coin(BNB) as an ERC20 token in an ICO to be used as discount token for trading fees on the Binance platform.
  • The team launched Binance chain in April 2019. The chain did not have smart contract functionality but allowed users to transact using BNB tokens. Binance chain also had DEX(Decentralized Exchange) that allowed users to swap BNB to other cryptocurrencies.
  • Binance team launched their second blockchain: Binance smart chain, which had smart contract functionality in September 2020.
  • Users can migrate their tokens from Binance chain to Binance smart chain using the Binance bridge.

👴🏻 Changpeng Zhao - Founder

  • Zhao was born on September 10th, 1977 in China’s Jiangsu province.
  • In the late 1980s, he moved with his family to Canada when he was 12 years of age, settling in Vancouver, British Columbia.
  • His parents were teachers in China, his father worked as a university instructor before he was branded a “pro-bourgeois intellect” and exiled to rural areas shortly after Zhao’s birth.
  • In his teenage years, Zhao helped to support his family by working a number of service jobs like McDonald’s.
  • Zhao attended McGill University in Montreal, Quebec, where he majored in computer science.
  • After graduating, Zhao received an internship in Tokyo working for a subcontractor of the Tokyo Stock Exchange, developing software for matching trade orders.
  • He then worked full-time for four years at Bloomberg Tradebook where he was a developer of futures trading software.
  • In 2005, he moved to Shanghai where he founded Fusion Systems, known for “some of the fastest high-frequency trading systems for brokers.
  • Beginning in 2013, he worked for various cryptocurrency projects including Blockchain.info and also served as chief technology officer of OKCoin.
  • In 2017, Zhao left OKCoin to launch a cryptocurrency exchange Binance.

😌 What problems does it solve ?

  • EVM compatible: Binance team forked Etherium code to develop Binance smart chain, making it EVM(Etherium virtual machine) compatible. Developers can easily migrate their apps from Etherium to Binance smart chain. Existing tools like metamask etc are also interoperable with Binance smart chain.
  • No downtime: Node operators running 24 X 7 ensure the network is always online.
  • Cheap: Transaction fees on Binance smart chain are negligible as compared to Etherium.

Note: This may increase as more apps are built on Binance smart chain, but can also reduce if the team is able to scale Binance smart chain even further.

  • Speed: Binance smart chain blocks are finalized in less than a second, whereas it takes about 5 minutes on Etherium for a transaction to be considered final.
  • Scalability: Binance smart chain can handle thousands of transactions per second.
  • Efficiency gains: Projects building on Binance smart chain do not have to run servers and hire an army of network engineers.

🤖 How does it work ?

Binance smart chain

Binance smart chain works on proof-of-authority consensus mechanism.

The blockchain has 21 validators chosen by the Binance team which can mine and verify new blocks, unlike Etherium which has thousands of miners.

One out of the 21 validators with maximum staked BNB tokens is chosen every day to mine new blocks. Other validators are responsible for verifying the blocks mined by the selected validator. In return, validators are compensated with BNB coins(paid by users as transactions fees) for their service.

Limited number of validators make the blockchain centralized but fast, scalable, and cheap.

Binance chain

Binance chain was launched by Binance team in 2019. The blockchain had decentralized exchange to swap cryptocurrencies and transact crypto assets but did not support smart contracts.

Binance chain to Binance smart chain bridge

Binance Smart Chain is connected to Binance Chain by two relayers:

  • The BSC Relayer passes communications from Binance Chain to Binance Smart Chain (such as token transfers, refunds, or staking transactions).
  • The Oracle Relayer monitors events on Binance Smart Chain and broadcasts the transactions to Binance Chain.

This two‐way connection enables cross‐chain transfers and connects the two networks into one interoperable system.

🏛️ Governance model

Binance smart chain is maintained and updated by Binance team.

Binance team can be a single point of failure in the future:

  • Government regulation
  • Making changes to protocol like increasing the max token supply, etc.

There are no plans to decentralize the governance of the Binance smart chain in the future.

😨Competitors

  • Tezos

and many more.

🤑 How much money does the project have for future development ?

  • The project raised $15 million during ICO in 2017.
  • Binance team was allotted 50% of BNB token supply.
  • Binance is a wildly profitable company, having access to the best talent and technology across the planet.

Controversies and hacks

  • The decentralized transaction protocol BXH was attacked on Binance Smart Chain [BSC]
  • Spartan protocol built on Binance smart chain was hacked in May 2021. The protocol lost more than $30 million.
  • Pancake bunny swap, a yield aggregator on Binance smart chain was hacked in May 20, 2021.

Although Binance team is not responsible to ensure code quality of every app deployed on their Binance smart chain, still the hacks damage the complete crypto ecosystem.

😨 Risks and challenges

  • Centralization: The project compromised decentralization to achieve greater speed and scalability:
    • There are just a handful of nodes validating blocks.
    • Binance team maintains and updates the codebase of Binance smart chain.
  • Binance team made a tradeoff by giving up decentralization to achieve greater speed. However many solutions have been developed that achieve scalability without compromising decentralization like Etherium 2.0, Cardano, Polkadot etc. Why will developers choose to deploy their apps on Binance smart chain when they have better solutions that do not make compromises.
  • Binance team could have added smart contract functionality to the Binance chain itself, instead of making a new blockchain and bridging them.
  • Many cheaters have launched their tokens on Binance smart chain by copy-pasting the open-source code of Etherium projects and running away with millions of dollars in ICO.
  • Competition: There are many crypto projects that are able to achieve much higher scalability than Binance without compromising on decentralization.

💰 Tokenomics

BNB token have max supply of 200,000,000 tokens which have been distributed as follows:

Token Inflation

BNB is a deflationary token. Binance team buys and burns BNB tokens from 20% of their profits every three months. They will continue to buy and burn tokens till the time circulating supply of tokens reach 100 million BNB token.

Demand pressure

Token’s price increases due to demand pressure.

Demand pressure on ALGO will come from:

  • Transaction fees: Users will acquire and pay BNB tokens to validators to include their transactions in Binance smart chain blockchain.
  • Staking: BNB holders can also stake their tokens with validators to get a portion of the transaction fee.
  • Binance company: They buy and burn BNB tokens from 20% of their profit every 3 months.
  • Speculators: They will acquire BNB tokens for future price appreciation.

🧐 Indicators to watch out for

  • Number of daily transactions is growing:
  • Unique addresses are growing:
  • Binance Youtube channel is growing:
  • Twitter following is growing:

👋Final remarks

I will not be investing in BNB even if it has fixed supply and deflationary tokenomics because:

  • Centralization: What is the use of blockchain if it is not decentralized. The binance company could have just run 1 server instead of running 21 nodes. There is a reason why Etheirum 2.0 is taking several years to scale.
  • Regulatory risks: Binance company has made elaborate corporate structure but still they can be charged under various rules for selling unregistered securities etc.

😊 Do further research

You can continue your research by using following resources:

Further reading