Key Insights
- As of February 2022, the Binance Chain and Binance Smart Chain evolved into a unified, modular system referred to as BNB Chain.
- The BNB Chain has come a long way since 2017, with its architectural evolution toward modularity leading to a potentially significant value proposition.
- The BNB community plans to expand the BNB Chain with the launch of zk-rollups for high-performance scaling and sidechains for more custom blockchain solutions.
- Unlike its lagging DeFi sector, BNB Chain’s NFT sector has seen a breakout year in 2022.
- As the network expands its user base with applications in new sectors such as GameFi and the metaverse, technical and regulatory challenges may present themselves.
The Layer-1 smart contract sector has been competing for market share since the launch of Ethereum. The goal of capturing market share has brought competitive forces to the marketplace and has triggered new alternatives. The competition has led to different approaches to network architecture, strategies for going to market, and new use cases. However, throughout their brief history, Layer-1s have been through volatile market cycles. Users have come and gone and network failures have led to hard forks, such as with Ethereum and Terra.
BNB Chain is an alternative to Ethereum that has witnessed high growth since inception. It has successfully maintained its position as one of the most valuable crypto assets in the world for a few reasons. Congestion on the Ethereum network, the slow rollout of Layer-2 scaling solutions, and the ability to bridge assets cross-chain have allowed the BNB Chain and alternatives like it to gain a competitive edge. Beyond that, BNB Chain adoption might also be due to financial backing from Binance, lessons learned from other networks, or executing some other go-to-market strategy. In this report, we evaluate the history of BNB Chain, its evolution, and its current market position. To defend its position as the most valuable smart contract platform behind Ethereum, BNB Chain plans to continue evolving its architecture, growing its user base, and implementing proactive strategies.
Background
The creation of BNB Chain and the BNB token began with the launch of the Binance centralized exchange. The Binance exchange was founded in 2017 by Changpeng Zhao (commonly known as CZ). Before founding Binance, CZ earned a degree in computer science and developed advanced trading software for traditional financial companies such as the Tokyo Stock Exchange and Bloomberg.
In mid-2017, CZ pursued his passion for crypto and established the Binance cryptocurrency exchange we know today. Binance held an initial coin offering (ICO) of BNB to develop the exchange and fund further operations, raising ~$15 million. By early 2018, it became the largest cryptocurrency exchange by trading volume, generating $200 million in profit by its second full quarter of operation. Binance is still the largest cryptocurrency exchange by trading volume. For perspective, at the time of writing, Binance did $10.5 billion in trading volume over the last 24 hours while FTX (ranked second) did $1.6 billion. Part of BNB Chain’s path to capturing market share may have primarily come from successfully transitioning such a large retail “CEX only” user base into DeFi users through their brand value.
Initially, the BNB token was an Ethereum-based ERC-20 utility token used to reward loyalty through discounted trading costs. In early 2019, following the launch of Binance Chain, the ERC-20 token contracts were replaced with native Binance token standard (BEP) token contracts. Binance and its community developed the Binance Chain to implement a vision for a decentralized exchange (DEX).
By 2020, the community utilized source code from the Ethereum network and launched a modified Proof-of-Staked Authority EVM-compatible blockchain called Binance Smart Chain to host smart contracts. Ultimately, BNB became the native cryptocurrency of both the Binance Chain and Binance Smart Chain.
As of February 2022, both the Binance Chain (rebranded as BNB Beacon Chain) and the Binance Smart Chain (rebranded as BNB Smart Chain) evolved into a unified, modular system referred to as BNB Chain.
Network Architecture
Overview
Source: BNB Chain Documentation
The background of BNB Chain lends itself to understanding its evolution and current architecture. The BNB Smart Chain was developed to run alongside the BNB Beacon Chain because the Beacon Chain is purpose-built and has limitations. The Beacon Chain was developed to serve the DEX and was built for high transaction throughput and a more advanced user experience than centralized exchanges. However, the Beacon Chain was not optimized for smart contract functionality or anything beyond a highly performant trade matching engine. Upgrading the Beacon Chain to introduce additional functionality would have introduced the need for additional transaction throughput, making the network less efficient. Therefore, the Binance community decided to develop the BNB Smart Chain separately.
When the two blockchains merged, the Beacon Chain became the dedicated layer used for Governance (staking & voting), and the BNB Smart Chain became the dedicated layer for EVM consensus and execution. Although a governance relayer connects the two chains, the BNB Smart Chain is not a Layer-2. The connection is more like the upcoming Ethereum 2.0 merge, where the execution layer of the currently running Ethereum Mainnet will be plugged on top of the concurrently running consensus engine of the Ethereum Beacon Chain.
BNB Beacon Chain
The BNB Beacon Chain is primarily a trade matching engine for the DEX built on a peer-to-peer distributed system. It connects multiple clients that utilize the Tendermint Byzantine Fault Tolerance (BFT) consensus.
Further, it has a built-in governance module that lets BNB holders submit proposals for adding trading pairs and changing network parameters. One such parameter is the Beacon Chain transaction burn of BNB according to a fee schedule. There are also plans to implement listing assets from other chains. Ultimately, the combined approach allows the Binance DEX to function in a decentralized fashion and enables the community to democratically alter the Beacon Chain. It can be governed in such a way as to drive value to the network and the BNB token while also relaying such functions to the BNB Smart Chain and BNB Sidechains.
BNB Smart Chain
Based on a Proof of Staked Authority (PoSA) consensus mechanism, BNB Smart Chain is powered by a network of 21 active validators. The largest validators by staking amount (including delegated stake) are responsible for validating transactions and generating blocks, ensuring the network’s security, and maintaining the ledger. Besides the 21 active validators, the BNB Smart Chain has introduced more inactive validators (referred to as “Candidates”) into the validator set for redundancy sake. Redundancy, in this case, means two candidate validators and 19 active validators will be selected every one hour to join the consensus.
For their participation, validators receive rewards exclusively from the gas consumption of transactions, not from new issuance. Double-sign detection and slashing mechanisms have been implemented to ensure security, stability, and finality.
BNB Sidechains & Zk-Rollup
Source: BNB Chain Documentation
The BNB Sidechain framework is modular and designed to create BNB Smart Chain compatible sidechains. It defines requirements for integration with the BNB Smart Chain ecosystem and brings development-ready EVM-compatible features like staking, RPC-API, and smart contracts.
The main purpose of the BNB Sidechain is to allow any project developer to deploy their blockchain with customized specifications and validator sets. It will also enable them to be connected to the BNB Smart Chain infrastructure. The validator set can run with fewer validators than BNB Chain, depending on the BNB Sidechain deployer and their desired level of security. The application owners or community stakeholders can run these validators. Developers and teams can create blockchains with their own business rules and economies. Ultimately, BNB Chain can expand the ecosystem with this modular design and flexibility.
Plans also include the launch of zk-rollups for high-performance scaling, allowing sidechains even more custom solutions. Zk-rollups have yet to launch, but there are three sidechain pilot projects under development: Cube, a metaverse-focused application; Project Galaxy, which is focused on bringing credentials to the blockchain; and Meta Apes, a gaming application.
Value Proposition
The BNB Chain has come a long way since 2017. Its architectural evolution has led to a potentially significant value proposition. The overall design enables the network to process transactions of different complexity in parallel with governance and consensus. With this flexibility, workloads and upgrades processed on one sidechain will work symphonically with consensus to independently ensure network security and finality without impacting other sidechains. Developers will be able to strike the desired balance between security and performance depending on their specific business requirements. With that in mind, separating the Beacon Chain and Smart Chain networks and introducing modularity, sidechains, and zk-rollups is neither a new idea nor a proven product-market fit. Ultimately, if the design ideas succeed, BNB Chain could be the first network with complex modularity to go to market with a large, nearly captive user base.
BNB Token
In July 2017, 200 million BNB tokens were distributed across the founding team (40% or 80 million BNB), angel investors (10% or 20 million BNB), and through a public sale (50% or 100 million BNB).
The public sale of 100 million BNB was set at 15 cents per token, resulting in a $15 million raise. The allocation from the public sale was earmarked for use as follows:
- 35 million BNB (35%) for upgrading the Binance platform and exchange system.
- 50 million BNB (50%) for Binance branding and marketing.
- 15 million BNB (15%) for reserves in case of emergency or unprecedented circumstances.
All genesis tokens are fully vested, so the liquid supply curve is now flat. Full vesting means no more illiquid supply exists, and tokens held by the team or angel investors can be bought and sold.
Two types of BNB BEP tokens are interoperable on both the Beacon Chain and BNB Smart Chain. BNB BEP-2 is the native token on the Beacon Chain and BNB BEP-20 on the BNB Smart Chain.
The usage of the BNB token has evolved since its inception. Initially, the BNB token was primarily used for running a validator node or receiving discounted trading fees on the Binance Exchange. As of today, BNB tokens can be used to stake, vote through on-chain governance, participate in token sales on Binance Launchpad, provide liquidity on Binance Liquid Swap, and pay transaction fees on its flagship exchange. BNB tokens can also be used to make credit card payments and to process payments for select travel arrangements. They can also be used as collateral for loans and as currency on select platforms.
Staking involves token bonding and delegate actions being recorded on both chains simultaneously. Through vote delegation, users can vote for validators, earn staking rewards, run validator nodes, and compete to receive user transaction fees.
The BNB token also has a deflationary burning mechanism. Initially, Binance used 20% of its quarterly profits to buy back and burn BNB, removing them from circulation. The quarterly burn was replaced with BNB Auto-Burn to provide greater transparency and predictability. By the end of the burn function, Binance will have eliminated 100 million BNB or 50% of the total supply.
State of BNB Chain Ecosystem
Current State
Like many Layer-1 smart contract platforms, BNB Chain experienced exponential growth throughout 2021. However, similar to its peers, the network has declined in valuation by ~60% year-to-date (YTD). Daily revenue has also declined from ~$4 million in protocol revenue per day at the end of 2021 to ~$1 million over the prior 30 days. Despite the decline in average daily revenue, cumulative revenue has become a more significant fraction of the network value. This relationship signals that fundamentals like cumulative network revenue are closing the gap on network value.
Trading volume of the BNB token across exchanges has declined along with declines in valuation and revenue. The top three trading pairs by volume are trading on Binance (USDT, BUSD) and FTX (USD), currently making up ~25% of all BNB trading volume. While trading volume has declined, liquidity of the BNB token is still healthy, with daily trading volume ranging from $100 million to over $1 billion.
Network usage measured by daily transactions has also experienced a downward trend. The decline makes sense since there is a direct relationship between network transactions and revenue. At the beginning of 2022, the network was averaging ~6 million transactions per day. The current average of daily transactions is ~5 million and lags behind the longer-term average witnessed during the bull market at the end of 2021.
Beyond financial metrics and network usage, the network infrastructure has remained steady with 21 active validators. Although BNB Chain’s level of decentralization, the network has been able to process transactions quickly and cheaply.
Further, contrary to the prevailing belief, none of the network’s validators are run by Binance. Seven validators, including those run by independent third parties such as HashQuark and Certik, contribute to just under ~33% of the network’s total stake. There are many fair critiques about the small validator set for the BNB Chain, but they require context. BNB Chain is not better or worse with respect to decentralization than many other blockchains. According to nakaflow.io, BNB Chain has a Nakamoto Coefficient of 7, which is in the median. With that in mind, BNB Chain can ensure greater security and network reliability by expanding the validator set with inactive validators.
The Ecosystem
Source: bnbchain.org
The BNB Chain ecosystem has evolved right alongside its architecture. While the ecosystem is sprawling and consists of a wide range of applications, infrastructure, wallets, and tooling, the initial traction of network activity stemmed from the launch of DeFi applications. Since the BNB Smart Chain launch, activity on the network has mainly come from DeFi activity, as the network now hosts over 400 DeFi protocols (according to DeFi Llama) and activity from another ~1,000 projects across other sectors. Today, it is the second largest to Ethereum in terms of Total Value Locked (TVL) and the number of applications running on-chain.
Shortly after the launch of the BNB Smart Chain, PancakeSwap (CAKE) came into existence, and it is now the network’s most used application to date. PancakeSwap is a DEX that utilizes an automated market-making (AMM) system. Since its launch, PancakeSwap has exceeded $6 billion in trading volume and captured over $6 billion in TVL at its peak. It’s clear the BNB Chain DeFi ecosystem is highly dependent on the continued success of the DEX, making up ~50% of the TVL across the DeFi ecosystem.
Venus (XVS) has also contributed to initial growth. Venus is a lending platform and synthetic stablecoin protocol. Users can lend or borrow from a pool of assets in a permissionless manner. Further, interest rates are set by the protocol and automated based on demand. Venus has captured as much as $6 billion in TVL and currently makes up ~10% of the BNB Chain’s ecosystem TVL.
The third-largest DeFi application on BNB Chain is Alpaca Finance, the network’s first leveraged yield farming protocol. Lenders can earn yields, and the protocol provides borrowers capital-efficient undercollateralized loans for leveraged yield farming positions. Alpaca Finance has captured as much as $1.8 billion in TVL and currently makes up ~6% of the network’s TVL.
Despite the initial growth of the applications mentioned above and the BNB Chain DeFi ecosystem, TVL has declined 61% YTD, much like the network’s peers, but not as drastic.
Unlike the lagging DeFi sector, 2022 has been a breakout year for the BNB Chain NFT sector. Both NFT secondary sales volume and unique NFT buyers have grown exponentially. NFT activity on the BNB Chain has shown strength despite a relatively down market across the board.
Competitive Landscape
Technical advancements, developer activity, and ecosystem growth strategies separate L1s from each other. Here, we evaluate BNB Chain key metrics versus the top five EVM compatible chains (including BNB Chain) by TVL and the number of DeFi protocols. This peer group was derived by simply grouping the EVM chains with the largest TVL and number of protocols, seeing as today DeFi is the sector driving the majority of each network’s economic activity.
Compared to the peer group, BNB Chain has outperformed across several financial, network, ecosystem, and development metrics YTD. Notably, BNB Chain experienced less decline in network value and TVL. For example, as of June 20, 2022, Ethereum experienced a ~69% decline in network value and TVL, while BNB Chain experienced a ~60% decrease. Other notable metrics include how much greater BNB Chain’s average daily new unique addresses, daily transactions, and verified contracts are versus the peer group. With that in mind, BNB Chain’s decentralization metrics are currently behind in terms of validator count and distribution of stake.
Ultimately, the key to BNB Chain’s position versus its counterparts may rely on the continued value proposition of expanding its modular design, offering developers the flexibility to build customized sidechains and plans to expand validator sets. Executing growth strategies to do so will be paramount in the months ahead as well.
The Road Ahead
Source: bnbchain.org
The road ahead for BNB Chain is focused on advancements to help users, projects, and developers connect to the BNB Chain community. The approach to success includes executing growth strategies to spur large-scale applications within the GameFi, SocialFi, and Metaverse sectors. It also includes implementing technical developments such as scaling solutions, boosting the throughput of BNB Chain, and expanding the validator set of the Beacon Chain and Smart Chain.
Most notably, and as mentioned earlier, the BNB community plans to expand the BNB Chain with solutions similar to L2s. Plans include the launch of zk-rollups for high-performance scaling and sidechains for more custom blockchain solutions. Further, intentional steps are being taken toward greater decentralization. The team plans to open-source the validator set of the Beacon Chain and introduce a different approach to both the election period and the elected validators of the BNB Smart Chain.
Positioning in this highly competitive market may come with some challenges for many networks. For BNB Chain, roadblocks may not even be technology- or strategy-based and may rather be from regulatory issues. Bloomberg reported in early June 2022 that the SEC is investigating whether the BNB token is an unregistered security. At CoinDesk’s Consensus 2022, CZ responded by saying that the SEC regularly questions Binance and its products and that the exchange is in regular contact with authorities. CZ did not confirm the existence of an investigation or that Binance has been subpoenaed. It is important to note that the BNB Chain is a public blockchain that is separate from Binance. However, it appears there may be regulatory risks and challenges ahead as it relates to the BNB token. Time will tell whether any volitility or negative impact materializes.
The biggest challenge may otherwise be executing growth strategies to achieve the goals set out for the near term. As such, BNB Chain and Binance Labs have introduced the MVB V Accelerator Program, a BNB-focused accelerator program to help projects develop and grow more organically through coaching, investment, and network support. MVB V incubation will begin in July with a 6–8 week program designed to help top project teams deliver a working product.
In Q4 2021, Binance announced the launch of a $1 billion ecosystem fund. This fund is dedicated to four main categories in the BNB Chain ecosystem:
- Talent development (allocated $100 million)
- Liquidity incentive program ($100 million)
- Builder program ($300 million)
- Investment and incubation program ($500 million)
Collectively, BNB Chain plans to continue to evolve its network and grow its ecosystem. To do so, it will implement technical solutions and sidechains and utilize an ecosystem fund and accelerator program.
Closing Summary
While Ethereum continues its architectural redesign, the race for adoption and market share is likely far from over for Layer-1 smart contract platforms. New use cases continue to demand alternative solutions, and BNB Chain may continue to be one of those solutions. With its evolving architecture and deployment of zk-rollups and sidechains, BNB Chain is in a position to provide additional value propositions to its large user base. If BNB Chain can successfully roll out its plans, the network stands well-positioned to maintain its place in the Layer-1 race as one of the most valuable networks in the marketplace.
As it expands its user base with applications in new sectors such as GameFi and the Metaverse, technical and regulatory challenges may present themselves along the way. BNB Chain has a strategy that includes a technical outlook, an ecosystem growth fund, and an accelerator program to mitigate such challenges.
Although many Layer-1s like BNB Chain experienced exponential growth in 2021, market volatility and the bear market of 2022 have put downward pressure on their network usage and performance. To sustain itself through such volatile times, BNB Chain needs to ensure network security and reliability. While the network has introduced candidate validators to ensure network reliability, utilizing such a small set of active validators could also present risks. To that end, BNB Chain will dedicate this year to building its validator set and connecting users and developers with its ever-evolving architecture and value proposition.
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