Binance Coin

A case for BNB

Overview

  1. Binance is by volume the largest centralized exchange for cryptocurrencies.
  2. Binance created Binance Coin (BNB) which runs on the Binance Chain (BC) and offered its users lower fees for using it as a trading pair on their exchange. As the exchange grew in usage, the price of BNB has increased.
  3. In 2020 Binance also launched Binance Smart Chain (BSC), which is a smart contract platform capable of running decentralized applications (dApps) meant for Ethereum mostly without modification. However, various tradeoffs must be accepted for projects that choose this route as there are some critical differences between the protocols.
  4. Ethereum’s speed has plummeted and transaction fees have skyrocketed with the meteoric rise of DeFi and Non-Fungible Tokens (NFTs) bringing real usage to the blockchain.
  5. As ETH continues to work on improvements for better scalability, some projects have moved to BSC to grow with lower fees today. In particular, some Decentralized Exchanges (DEXs) have launched their protocols on BSC and thus BNB.
  6. BSC uses BNB for transaction fees and therefore as the main monetary token of the protocol.

Major Bullish Arguments

  1. Binance is the largest centralized exchange making it a trusted party for many.
  2. Binance through BSC is positioned to capitalize on growth in both the centralized and decentralized exchange markets.
  3. Binance is proving itself to be one of the fastest-moving and most innovative companies involved in the cryptocurrency space.
  4. Binance may continue to announce and deliver on new projects indefinitely, further pumping the price of BNB.

Major Counterarguments

  1. BSC is much more centralized than ETH. It is controlled by only the top 21 largest validators. This raises concerns that Binance has retained too much power to be considered a decentralized platform. Other projects have suffered hostile take-overs by their parent companies when such a backdoor was left open, to the detriment of their token (e.g. STEEM). Other projects have shown that such vulnerabilities have usually been exploited once the financial incentives become sufficiently large.
    • Binance may prove wiser than its predecessors and not undermine their token by forcing their blockchain down a direction that the community does not support. However, it is also true that many dApps may never give them the chance to prove otherwise. It is also possible that both do well if applications that don’t need as much decentralization can move to BSC and ETH retains those that do need more decentralization.
  2. DEXs are eating the business of centralized exchanges. Eventually, Binance may not be profitable except as a Fiat (currency) onramp.
    • This is perhaps why Binance launched the BSC to profit from the rise of DEXs. The company should be able to attract business or at least speculation if it merely continues to attract or copy popular dApps onto its system.
  3. The value created by dApps such as DEXs may remain more within the app than leaking down to the host protocol.
    • This may prove to be the case. No one yet knows the portion of value that will remain secured within the token layer vs the applications that are built on them. However, it seems reasonable to suppose that the overall value in a token should remain somewhat proportional to the total value created and used on it.

Price Potential

  1. BSC on BNB is a platform for smart contracts. It tries to address the same market as ETH by allowing ETH projects to run mostly without modification.
  2. Binance can continue to add additional functionality to their token BNB not related to BSC. This could give the token some diversification of use case beyond what ETH might be able to replicate. However, it is hard to imagine BNB coming up with a use case more compelling to the market than what ETH has with smart contracts.

Major Risks

  1. BSC and BNB is much more centralized than most other protocols in the space. If Binance is ever in a conflict of interest between BSC/BNB and another of its revenue streams, BNB may eventually be the loser.
  2. Once ETH addresses scalability concerns the need for centralized solutions may dry up, causing BNB usage and therefore price to fall.

Additional Resources

  1. BSC’s white paper
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