31
Jan
20

Binance Coin (BNB) explained – The cryptocurrency of the worlds biggest digital asset exchange

If you have been involved in the crypto-space for some time, then you must have heard of Binance. In fact, the chances are that you have built the majority of your portfolio through them. Binance Coin (BNB) is the coin issued by Binance and is used to make transactions within the exchange. Originally it was built on the Ethereum blockchain but has since moved on to its own Binance chain. In this article, we will get to know more about BNB. However, before we do so, let’s familiarize ourselves with Binance itself.

 

Binance and CZ

 
Changpeng Zhao, the founder and CEO of Binance wearing a black hoodie with the binance logo written in front. He is on stage and smiling. The background is blue and black.
 

Exchanges play a critical role in the ecosystem as they act as a portal between the fiat world and the crypto world. Exchanges mainly fall under two categories:

 

  • Fiat-to-crypto: In these exchanges, you can buy cryptocurrencies with fiat money. Coinbase is an example of this exchange. The variety of cryptocurrencies available in these exchanges is pretty low.
  • Crypto-to-crypto: These exchanges, on the other hand, allows you to buy cryptocurrencies with other cryptocurrencies. While they may not be as beginner-friendly as fiat-to-crypto, they have a large variety of cryptocurrencies available. Binance is an example of a crypto-to-crypto exchange.
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    We simply can’t talk about Binance and Binance Coin without bringing up their enigmatic founder Changpeng “CZ” Zhao. Born in Jiangsu, China, to a family of educators, CZ moved to Vancouver, Canada, in the late ’80s after they were temporarily exiled from China.

     

    CZ got into the blockchain space through Blockchian.info and then moved onto OkCoin as its CTO, before leaving them in bad terms. That was when he started his own company – Binance. In less than a year, the company grew at such a staggering pace that CZ ended up becoming a billionaire.

     

    The popularity of Binance

     

    As of writing, Binance managed to conduct $842,652,240 worth of transactions over the last 24 hours. To give you another idea about its popularity, consider the following facts.

     

  • Back in 2018, the number of users on Binance exceeded the population of Hong Kong!
  • On their busiest day, $10 billion worth of cryptos was exchanged on the platform. That’s a staggering $110,000/sec
  • On that very same day, their matching engine handled 3.5 billion requests that day which equates to 40,000 requests per second
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    So, why is Binance so popular?

     

  • Binance is extremely easy to use
  • The commission fee is low when compared to other exchanges. In fact, it is even lower if you use Binance Coin.
  • Trading on Binance is very fast.
  • Their platform is easy to use
  • At any point, you can look at your whole portfolio and see its value in USD or BTC.
  • Binance offers 2 BTC withdrawal limit per day for unverified accounts, so as soon as you make your account, you can start trading.
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    Ok, so till now, we have read about Binance and CZ. So, let’s get into BNB.

     

    What is Binance Coin?

     

    Binance Coin’s main utility is to allow users to pay the fees charged by Binance for their services. The fees include – trading fees, exchange fees, and listing fees. Binance usually charges a trading fee of 0.1%, but if users pay these using BNB, then they can claim a discount. The discount rates are predetermined every year. The discount is halved every year, which means:

     

  • July 2017: 50%.
  • July 2018: 25%.
  • July 2019: 12.5%.
  • July 2020: 6.75%.
  • July 2021: 3.375%.
  • The discount stops after that.
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    Unlike Bitcoin, you don’t mine BNBs. Prior to their ICO, Binance had already pre-mined 200 million BNB tokens. The token allocation was done as follows:

     

  • 50% of the BNB tokens (100 million) are reserved for the ICO.
  • 40% of the BNB tokens (80 million) are allocated to the founding team.
  • 10% of the BNB tokens (20 million) are reserved for the Angel investors.
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    How to store BNB

     

    In July 2018, Binance acquired Trust Wallet which has since been marketed as the official BNB wallet. Apart from the official wallet, you can use both hot and cold wallets to store your BNB.

     

    Hot Wallet

     

    A wallet that is directly connected to the internet is called a “hot wallet.” While these wallets are not the safest of options since they are susceptible to hackers, they are relatively easy-to-use. If you are someone who regularly uses cryptocurrencies, then you should keep a portion of it in hot wallets. Examples of hot wallets compatible with BNB are:

     

  • Exchange wallets: These are the wallets automatically allocated to you when you create an account in an exchange like Binance.
  • Mist: Mist is a browser for decentralized applications. The browser itself has a wallet that you can use to store BNB tokens.
  • Metamask: Metamask is one of the most well-known browser wallets out there.
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    Cold Wallets

     

    Cold wallets, on the other hand, are wallets that are completely offline. These are the wallets that you should use to store a majority of your cryptocurrency reserve. While these wallets are a lot safer, they are not as convenient and straightforward as hot wallets. Cold wallets compatible with BNB are:

     

  • Paper wallet: Paper wallets allow you to print out your public and private keys in a piece of paper. You can keep this paper in a safe and secure place and keep your cryptos completely safe. The keys can also be printed in the form of QR codes, which you can scan in the future for all your transactions. MyEtherWallet is a paper wallet that stores BNB tokens.
  • Hardware wallet: A hardware wallet is a type of cryptocurrency wallet where you can store your private keys in a secure physical device. Which wallet is the best one? The cryptocurrencies stored in the wallet are kept offline, meaning that they can’t be hacked. However, when needed, the coins stored are readily available. All that you’ll need to do, is to simply plug them into your laptop/PC. Both Ledger Nano S and Trezor both support BNB.
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    Supply and Demand – A Brief Primer

     

    Before understanding the burning mechanism, let’s give you a lesson in Economics 101. One of the most basic principles in microeconomics happens to be “supply and demand.” Let’s do a quick tutorial on that before moving ahead.

     

    Equilibrium of price and quantity

     

    The supply/demand equation states that given all else is equal, in a competitive market, the price of a particular product will vary until it reaches economic equilibrium, wherein the quantity demanded is equal to the quantity supplied. There are two sides to this equation:

     

  • Supply schedule.
  • Demand schedule.
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    Supply Schedule

     

    The supply schedule shows the relationship between the price of a good and the quantity of it supplied by the producers. If the general market condition is perfect, then the cost of producing an extra unit for a company should be less than the market price it receives.

     

    The factors determining the supply are as follows:

     

  • The production cost i.e. how much money does it take to create the product. This includes – labor, capital, energy and materials. Higher, the cost of production, lower the chance of increasing the supply.
  • The production company’s expectation out of the product. If the product won’t be profitable, then they have no incentive to increase the supply.
  • The number of suppliers.
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    Demand schedule

     

    The demand schedule represents the amount of a particular good that buyers are willing and able to purchase.

     

    The factors determining this are as follows:

     

  • The target group has the income required to afford the goods.
  • The commodity being sold is still “hot” and highly-preferred.
  • There is a large number of potential customers.
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    Binance Tokens and Burning

     

    Token burning is not unique to Binance Coin. In fact, it’s a pretty common practice within the industry. During the token burning, a predetermined amount of tokens are “burnt” or removed from circulation permanently. While there are n number of reasons why you would want to burn tokens, it is mainly done for deflation. If you are familiar with the stock market, then think of token burning as share buybacks, wherein publicly-owned companies reduce the amount of stocks available to investors by buying back the stocks themselves.

     

    Binance has a repurchase program where they use 20% of the profit to buy back BNB tokens. Binance will continue the token-burning process until they have bought back 50% or 100 million BNB tokens. The results of the first six quarterly burnings are as follows:

     

  • 1st quarter: 986,000
  • 2nd quarter: 1,821,586
  • 3rd quarter: 2,222,314
  • 4th quarter: 2,528,767
  • 5th quarter: 1,643,986
  • 6th quarter: 1,623,818
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    So, how exactly do you burn tokens?

     

    Token burning can be accomplished in several different ways. The core idea is to render them completely unusable for the future. To do this, the coins are sent to an inaccessible public wallet. Once the coins enter this wallet, it’ll be impossible for anyone to retrieve them. There are many ways that one can do this. Let’s take a look:

     

  • If there are any unsold tokens left after a crowdsale, then many companies choose to conduct a one-time burn to remove them from circulation.
  • Many, like Binance, have a periodic burning event to remove coins from the circulation.
  • Ripple burns tokens gradually with each and every transaction. The transaction fees collected during an XRP (What is XRP?) transaction are burnt at the time of completion.
  • Tether, the most popular stablecoin in the market, burns an equivalent amount of tokens whenever it extracts funds from its account. This is done to make sure that its price remains around $1.
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    Anyway, we are here to study BNB. So, let’s look at how the process works.

     

    BNB Burning – Behind the scenes

     

    The following burning process is what BNB used to do.

     

  • A holder will call the burn function in the smart contract to burn a specific amount of their BNB tokens.
  • The contract will then check whether this person actually has that amount of tokens in their wallet or not.
  • If they don’t have the required number of tokens, then the burn function will not be executed.
  • If they have the required number of tokens, then it will be subtracted from the user’s wallet and burnt promptly.
  • The record of the burnt BNB will be stored within the blockchain, making the transaction transparent and immutable.
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    The current Binance Burn function however, is a little different, because of one major reason – The Binance chain. The Binance chain is Binance’s native blockchain, which had its mainnet launch back in April 2019. Because of this, a couple of things happened which you need to keep in mind:

     

  • The BNB ERC-20 tokens were gradually swapped by the native BNBs (BNB BEP-2).
  • The burning event now take place on the Binance chain and not on Ethereum. All the BNB ERC-20 token burnings that have ever happened were replicated on the Binance chain to make sure that the total supply remained the same.
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    The new coin burn mechanism is not dependent on a smart contract anymore. It can be executed in a specific function on the Binance chain.

     

    Main use-cases of BNB tokens

     

    So, what are the main use-cases of BNB? Let’s take a look.

     

    #1 Trading fees

     

    As already mentioned, the main utility of BNB is to provide trading fee discounts for its holders on Binance. Currently, holders can gain a whopping 12.5% discount on their Binance trading fees. However, keep in mind that these rates will drop by half each year and in 2021, it will no longer apply.

     

    #2 Less dust wastage

     

    First, let’s understand what “dust” means. If you have used exchanges before then, you must be pretty familiar with this. “Dust” is the amount of cryptocurrency that is too small to trade or withdraw since they are smaller than the applicable fees. While this may seem like a small amount at first, let’s look at the reality of the situation. Every single trader accumulates some amount of “dust.” When you consider that Binance has around 15 million users, that’s a lot of accumulated dust that’s just wasting away in their wallets. Now, you can convert this dust to BNB and receive a sum of cryptocurrency that is actually usable.

     

    #3 Purchasing services

     

    BNB is one of the most most popular cryptocurrencies in the world. As such, you will be able to purchase a lot of goods and services with BNB. Australian tourism agency, TravelByBit, accepts BNB among several other cryptocurrencies as payment for their services.

     

    #4 Loans

     

    Nexo allows its users to secure loans by using BNB as collateral. It can also be exchanged for fiat currency through Dether.

     

    #5 IEO dominance

     

    IEOs or Initial Exchange Offerings work like ICOs, but they have a crypto exchange platform acting as a middleman. Instead of handing the funds directly to the developers, you hand it to the crypto exchange, which has partnered up with the project. In return, the exchange will give you a proportionate amount of tokens.

     

    This is the simple reason why IEOs are so much more credible than ICOs. When an exchange hosts an IEO, they are associating their name with the project. Which is why you better believe that they are going to do everything in their power to only host projects which deserve their seal of approval.

     

    So, speaking from the point-of-view of an investor, don’t you want to buy the tokens of a project that an exchange of Binance’s caliber has deemed worthy? Of course, you do. This is why you should have a healthy amount of BNB in your kitty, to take part in Binance’s IEOs.

     

    Conclusion

     

    While the idea of Binance having its own tokens seemed pretty promising, the launch of the Binance chain has taken expectations to a whole new level. The reason why BNB tokens are such a good investment is because the company behind it is highly ambitious and continues to grow and expand. It doesn’t matter if you are a regular trader, an investor, or just a casual dabbler. BNB should be at the top of the list of coins you must possess.

    Rajarshi Mitra
    Blockchain Researcher