Exploring BNB (Binance Coin) for Beginners: A Comprehensive Overview
Binance Coin, more commonly referred to as BNB, is the cryptocurrency of the Binance exchange.
BNB fundamentally acts as the utility token for the Binance exchange and is mostly used to pay for transaction and withdrawal fees on the exchange but can also be traded or staked like any other cryptocurrency.
Additionally, BNB can be used to pay for smart contracts and acts as the replacement for Binance’s previous crypto project, known as the Binance token.
The benefit of using BNB on the Binance exchange, rather than another crypto asset or your local currency, is that Binance will offer you a discount on any fees you incur when using BNB.
As you can imagine, offering even a slight discount on trading fees has made it a popular choice for those trading on Binance.
Further, Binance uses a portion of its profits to buy back and “burn” some of these BNB tokens, which helps to increase BNB’s value over time.
But, I’ll return to what burning is and why this is important for BNB a little later because first, I need to break down how exactly BNB works.
How does BNB work?
The BNB Chain consists of two parallel-running blockchains – the Binance Beacon Chain and the Binance Smart Chain, with BNB being the fuel that fires both.
The Binance Beacon Chain, previously known as the Binance Chain, is the original Binance blockchain.
The Binance Smart Chain, or BSC, is a blockchain that runs alongside the original Binance blockchain to provide smart contract functionality for the Binance network.
Although sounding complex, you can consider the Binance Smart Chain to be an update to the limitations of the original Binance Chain. Together, they are known as the BNB Chain.
The BNB chain runs a modified version of Proof-of-Stake and Proof-of-Authority called Proof-of-Stake-Authority, or PoSA.
PoSA, is a consensus mechanism unique to the Binance network. In short, PoSA aims to combine the benefits of both Proof-of-Stake and Proof-of-Authority.
To explain, under a Proof-of-Stake system, instead of miners solving complex mathematical problems to validate transactions like under Bitcoin’s Proof-of-Work.
Under PoS, validators are chosen to update the blockchain based on the number of coins they are willing to “stake”, meaning deposit, as collateral.
These validators are chosen by the network using a pseudorandom selection process, with the probability of being chosen directly related to the number of coins you have staked to the network.
The validators then validate transactions and add them to the blockchain, and in return, they receive a small percentage of the transaction fees as a reward.
The logic is the person who has staked the most also stands to lose the most by processing false transactions to the blockchain. For example, being caught trying to falsify the transaction record comes with a penalty of where some of your deposited crypto can be taken or burned, meaning destroyed, by the blockchain.
On the other hand, under Proof-of-Authority, those who can become validators are chosen by the company running the blockchain.
So, when you combine these in the way Binance has, you end up with a blockchain where those who stake their tokens to the network given voting power proportional to their stake to select a validator from a list of validators allowed by the network.
Ultimately, Binance believes this specific combination of algorithms reduces further the likelihood of rogue actors being able to submit fraudulent transactions or destabilize the network.
What makes BNB unique?
As I’ve already alluded to, the Binance Coin is unique in a few ways.
First, it acts as a “Binance Discount Coin.” BNB can be used to pay transaction fees on the Binance exchange, such as trading fees and withdrawal fees. When you use BNB to pay these fees, you receive a discount on the total cost.
Next, there is the Binance Smart Chain, which allows the Binance Beacon Chain to be a fast, high-throughput blockchain ideal for a decentralized exchange, with a consensus mechanism tailored to cater to the specific needs of a decentralized exchange.
Lastly, BNB also has other use cases beyond just paying transaction fees. BNB can be used to participate in token sales on the Binance Launchpad, and other services like paying for travel bookings, gift cards, and more.
BNB Tokenomics
The total supply of BNB is capped at 200 million tokens, of which 100 million were distributed during the initial coin offering, or ICO, back in 2017.
A further 80 million BNB was divided among the founding team and accrued over a 4-year window. A final 20 million BNB was given to angel investors with no vesting period – meaning it could be spent immediately.
As I previously mentioned, the Binance exchange uses a portion of its profits to buy back and burn BNB tokens.
Burning BNB, means permanently removing a number of BNB tokens from the circulation and thus reducing the total supply.
This process naturally increases the value of the remaining tokens. Binance intends to burn over 100 million BNB, or half of its total supply.
Technically speaking, BNB consists of both a BEP2 and BEP20 token.
The BEP2 token is a technical standard for the issuance and implementation of new tokens on the Binance Beacon Chain. BEP2 tokens can only be used to pay for transactions and staking.
Alternatively, BNB is also a BEP20 token, a variant of the ERC20 token standard used on the Ethereum network. The reason for this is the Binance Smart Chain essentially runs a modified vanilla version of Ethereum to host the Binance Smart Chain.
For BNB to work with its smart contracts, it needed to be compatible with the Ethereum Virtual Machine, or EVM, that the BNB Chain runs for its smart contracts.
To keep it simple, BEP2 tokens are generally used for paying transaction fees on the Binance DEX, staking, and paying for goods and services online.
However, the BEP20 tokens are generally used for smart contracts or to build decentralized applications, known as dApps, on the network.
However, both are BNB, and there is no price difference between them. The way to tell the difference between the two is the address prefix on the blockchain you’re sending or receiving them.
The BNB Chain uses the native BEP2 version of the token, and its addresses start with Bnb.
Alternatively, the EVM-compatible BEP20 token has an address prefix of 0x, as is standard for the Ethereum network.
In conclusion, the BNB token is a utility token for the Binance network. It can be used for a discount when paying for transaction fees on the network, and can be staked for rewards or be used to pay for smart contracts on the Binance Smart Chain.
Ultimately, the success of BNB is dictated by the success of the Binance exchange itself.
However, as long as the Binance exchange is relevant and functioning, BNB will always have a use case.