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The Fuel Of The Binance Ecosystem.
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BNB powers the Binance ecosystem and is the native asset of the Binance Chain. BNB is a cryptocurrency created in June 2017, launched during an ICO in July, and initially issued as an ERC-20 token. Designed to be used for a fee reduction on the Binance exchange, its scope was extended over the years.
BNB powers the Binance Chain as itsnative chain token. For instance, it is used to pay fees on the Binance DEX, issue new tokens, send/cancel orders, and transfer assets.
BNB is also powering the Binance Smart Chain, which is an EVM-compatible network, forked from “go-ethereum”. It supports smart contracts and relies on a new consensus mechanism: Proof-of-Staked Authority (PoSA) consensus (“Parlia”), which incorporates elements from both Proof of Stake and Proof of Authority. BNB is used for delegated staking on the authority validator, leading to staking rewards for users and validators.
Besides its on-chain functions, BNB has multiple additional use-cases such as fee discounts on multiple exchanges (e.g., Binance.com), payment asset on third-party services, and participation rights & transacting currency on Binance Launchpad.
At the core of the economics of BNB, there is a burn mechanism leading to period reductions in its total supply (~ every three months). From its initial maximum supply of 200 million, burns are expected to continue until the supply reaches 100 million.
1. What is BNB?
BNB was initially issued as an asset to function within the Binance website and its broader ecosystem. At its core, BNB has been used for the following functions:
Exchange fee discount: since the launch of Binance, transaction fees on the exchange paid in BNB have been subject to a discount. Initially, BNB provided a 50% discount on transaction fees, but it was later reduced to 25% as per the original whitepaper.
Unique participation rights: BNB can be used for additional services on the exchange, such as participation rights to Launchpad events (IEOs) and tickets for community listing voting rights.
Quote currency on Binance: BNB has been used as an asset for trading cryptocurrencies on Binance. It has been one of the first quote assets on the exchange, alongside stablecoins (e.g., USDT), BTC, and ETH.
Third-party uses: BNB can be used on multiple platforms and services that are independently run by global companies. Its third party set of use-cases ranges from booking websites to financial services. For the full breakdown, please visit the BNB use-cases page.
BNB powers the Binance Chain as itsnative chain token. Some of its on-chain use-cases related to the Binance DEX, and its function as gas fees on the Binance Chain. For instance, it is used to pay fees on the Binance DEX, issue new tokens, send/cancel orders, and transfer assets.
In addition, the newly launched Binance Smart Chain introduces several additional use-cases for BNB. Binance Smart Chain is the EVM-compatible side-chain of Binance Chain, where BNB operates as the ether-equivalent on Ethereum and is thus used to pay for gas fees (e.g., for transactions, for smart-contract execution).
2. Binance Chain’s key features
2.1 Tendermint BFT consensus with an application layer
Binance Chain relies on the Tendermint BFT consensus and Delegated Proof of Stake (DPoS) with a dedicated application layer that runs upon it. As of today, the vote delegation feature is not open for users.
Binance Chain is built on forks of Tendermint and Cosmos SDK. Specifically, Binance Chain is made on a revised edition of the Tendermint consensus while leveraging its P2P networking logic.
At any given state, the following information is being recorded:
Account and balances: the balance (i.e., the number of tokens) of each asset is composed of 3 different parts: locked, frozen, and available. It is recorded on all accounts.
Fees: it represents how much fees were paid in the previous block.
Token information: what are the tokens, along with their respective information (frozen supply, etc.)
Trading pairs: the list of all the trading pairs on Binance DEX.
Tick size and lot size: various information related to the trading engine of Binance DEX.
Governance information: information about the validators, and governance mechanism of the Binance Chain.
2.2 Native token standards
At the core of Binance Chain, assets are stored as tokens on the network, under the BEP-2 standard.
The native BEP-2 token standard
Each BEP-2 token is represented by the following set of information:
Source address: each token has a dedicated owner, represented by an address.
Token name: it represents the long name of the token - e.g. "Binance USD".
Symbol: each token has a specific ticker (e.g., BUSD) used to distinguish one from the other.
Total supply: this number represents the total number of issued tokens at a given time.
Mintable: this boolean property refers to whether the token can be minted in the future (which would lead to an increase in the total supply).
Any user can issue or list a token for a specific fee that is specified in the documentation.
While BNB is a BEP-2 asset, BNB also operates as the gas fee of the Binance Chain and is used for transaction fees, issuance costs for new assets, minting and burning costs, trading fees, and other features (e.g., freezing, unfreezing).
The BEP-8 mini-token standard
In addition to its native utility token standard, Binance Chain also supports a mini-token standard: BEP-8.
This token standard allows issuers to list the “Mini-BEP2 token” without voting but can only be listed against BNB or BUSD.
Some of its use-cases could include small enterprise tokens of utility and/or shares, on-chain point system, community tokens, and Intellectual Property (IP) tokens.
Compared to BEP-2, BEP-8 tokens offer multiple advantages:
Cheaper (than BEP-2) to issue tokens, as it takes less network resources.
Self-managed listing process: the process to list a BEP-8 token is fully self-managed. Hence, it does not need to get validators to vote to list against BNB, nor against BUSD.
However, as a result, there are restrictions such as it is impossible to list a BEP-8 token as a quote asset, supply limitations (maximum is 1,000,000 units), etc.
2.3 A native on-chain matching engine: Binance DEX
Binance DEX is the first decentralized application running on Binance Chain and runs natively on the network.
At its core, Binance DEX is built on the following premise: “the most efficient and low-cost way to perform trading and price-discovery is to use a single order book”.
Hence, Binance DEX’s order book is managed and replicated across all full nodes with a single deterministic matching logic. Unlike other decentralized exchanges with off-chain matching, Binance DEX’s matching process is built into the Binance Chain natively.
Some of the benefits include:
Transparency: since all transactions occur on-chain, it is possible to easily filter orders from any user, making it transparent for any third-party to analyze orders.
Front-running resistance: unlike some Ethereum-based DEX, order matching is not dependent on gas fees. In the event of network congestion, some DEXs can face gas-arbitration where traders front-run others. Binance DEX is resistant to such practices.
Speed: since orders are matched on a FIFO-logic natively on-chain with 1-second blocktime, the order process is almost instantaneous and makes the process seamless from the perspective of users.
However, Binance DEX’s matching engine is built on a different logic than centralized exchanges like Binance.com.
The matching engine is an auction-based mechanism such as that any new block, candidates for the matching process are:
New orders get confirmed by being accepted into the latest block.
Existing orders that come in the past blocks before the latest, and have not been filled or expired.
Since the match-time is one block with 1-block finality, Binance DEX has effectively, under normal conditions, a 1-second matching process.
2.4 Atomic swaps and Hashed Time-Locked Contract (HTLC) functions
BEP-3 is a technical standard proposed and implemented on Binance Chain in late 2019, introducing a mechanism for smart contracts to be achieved through the use of Hashed Time-Locked Contract functions and other interoperability mechanisms.
This mechanism allows atomic swaps to operate on the Binance Chain, with EVM-compatible networks like Ethereum.
The process is typically handled in a 5-step process:
Approve the ERC-20 token to swap the contract address.
Initialize swap transactions.
Send HTLT transaction.
Send HTLT claim transaction.
Claim the ERC-20 token.
3. Binance Smart Chain’s key features
Binance Smart Chain is Binance Chain’s side-chain, forked from “go-ethereum” (an implementation of the Ethereum protocol in GOlang), which allows full support of smart contracts and other programmable features.
The Binance Smart Chain combines several features from Delegated Proof-of-Stake (DPoS) and Proof-of-Authority (PoA) for consensus finding.
At its core, this consensus algorithm called Parlia is built on a network of 21 validators and delegators, who vote for validators.
In Binance Smart Chain, any party can attempt to become a validator, assuming they meet (1) the hardware requirement to run the network, (2) manage their own keys, (3) guarantee a high uptime and (4) own and stake at least 20,000 BNB. Similar to other DPoS blockchains, BSC validators receive network fees for validating blocks.
As of writing, the top 21 validators with the largest number of BNBs staked are selected every day and eligible to validate and produce blocks on the Binance Smart Chain.
Delegators can vote for validators, allocating BNB to increase the validator’s capacity to produce blocks, while receiving some of the rewards from network fees. This election is repeated every 24 hours. At the end of the period, the staking status decides what the top 21 highest nodes with votes to become the validator set for the next period are.
In addition, Binance Smart Chain introduces a slashing mechanism to prevent bad behavior and other issues: e.g., prevent double signature, penalties for being offline, etc.
For instance, BSC’s slashing mechanism allows any individual to submit a “slashing request” on Binance Chain, assuming they are able to bring the proof that the malicious validator produced two block headers with the same height and parent block.
3.2 EVM-compatibility and smart-contract support
Binance Smart Chain is fully EVM-compatible and naturally supports smart contracts.
Hence, high-level languages, like Solidity and Vyper, can be used to write a set of contracts that can be compiled into bytecode and deployed on the Virtual Machine, using tools like Remix or Truffle. This makes it easy for developers to port some of their decentralized applications onto the Binance Smart Chain.
3.3 A dedicated cross-chain transfer and communication protocol
Binance Smart Chain is not only EVM-compatible, but also features a communication protocol with Binance Chain, that is built based on the Cosmos SDK, allowing BEP-2 tokens (e.g., BNB, BUSD) to be migrated between the two networks, making them interoperable without the need for a trusted party.
At the core of the cross-chain transfer system, there are:
An Oracle Relayer: each validator must run an oracle relayer responsible for monitoring blockchain state changes. If the cross-chain communication packages are submitted, each validator needs to submit a vote for the request. Once a ⅔ majority is attained, cross-chain actions are performed.
A Binance Smart Chain relayer(BSC Relayer): its function is to relay “cross-chain packages” between the Binance Chain and the Binance Smart Chain.
An Oracle Module built-in Binance Chain: its function is to allow validators to reach a consensus on something, like cross-chain transfer operations.
A Cross-Chain Module on Binance Chain: its function is to allow the transfer of assets between the Smart Chain and the Binance Chain.
A Built-in System with a set of smart contracts: Binance Smart Chain incorporates a set of smart contracts by default for different purposes (see below).
Binance Smart Chain supports Binance Chain’s native token standards like BEP-2 and BEP-8 through a process named “Token Binding”defined in the “Bind” package.
For instance, BEP-2E are BEP-2 tokens running on Binance Smart Chain. They incorporate more methods than usual ERC-20 token standards (on Ethereum):
symbol(): retrieve the token symbol on Binance Chain
decimals(): retrieve the number of the token decimal digits
owner(): retrieve the BEP-2E contract owner’s address. It is initialized in the BEP-2E contract constructor. This allows any binding action to be verified on whether the action emanates from the original BEP-2E owner.
Other cross-related smart contracts on the Binance Smart Chain include “Transfer”, “Refund”, “BSC staking”, and a “Governance” package.
4. Economics and supply
BNB supply was initially set at 200,000,000 coins. As mentioned in its whitepaper, BNB’s supply will be reduced to 100,000,000 units, a decrease by -50% of its original supply, owing to a burn mechanism.
Every three months, Binance burns several BNBs based on its revenue. Owing to this burn mechanism, the supply of BNB is gradually decreased, increasing its scarcity.
4.2 Economics of Binance Chain
Binance Chain economics relate to fees on the network, including trading fees associated with Binance DEX, transaction fees (e.g., transfer asset fees), and other function calls (e.g., freezing, issuing calls).
In Binance Chain, 11 validators are in charge of the network operations due to the use of a Delegated Proof-of-Stake (DPoS) consensus mechanism.
4.3 Economics of Binance Smart Chain
In the Binance Smart Chain, BNB runs similarly to how ETH runs on Ethereum: it is the native asset of the BSC.
In BSC, BNB is used to:
Pay gas for transfer, to deploy, and interact with smart contracts.
Perform cross-chain operations, e.g., transfer assets between Binance Smart Chain and Binance Chain (through the cross-chain channel discussed in the previous section) require BNB. It provides incentives for relayers to contribute to validate any cross-chain transaction.
Staking: users can vote for validators, through a vote delegation process, to collect staking rewards. Similarly, validators can run nodes and compete to receive rewards from transaction fees from users.
While the economics of BSC remain similar to other networks, fees would be collected by both validators and delegators.