I spent some time catching up on Binance this week and wanted to share some of my learnings with you.

You may not know anything about it yet, and if so, that’s fine. Let’s start from the basics.

What is Binance?

Binance is the world’s largest crypto exchange. No matter how we slice the data, we get the same picture.

Spot markets - Trading volume

Derivatives - Trading volume‍

The company was founded in June 2017 by Changpeng Zhao (“CZ”), a developer who had previously created high-frequency trading software. Binance was initially based in China, but later left the country due to regulatory reasons.

A month after being founded, Binance went on to launch an ICO. A total of 200 million BNB were created, and 100 million of those were offered for sale during the ICO. The tokens were sold within 20 days, raising approximately $15 million.

What came next was some of the best business execution ever seen in the crypto space. Most projects in crypto spend way too much time obsessing over the technology and way too little time thinking about how to go to market.

Binance did the exact opposite. The company took most of what already existed in the space, copied it, and went to market faster and bigger than its competitors. Here’s a brief break down of how the company did it.‍

Move fast...‍

Binance started off by building a crypto-to-crypto exchange in all but 15 countries, scaling to three million users in just six months. Within months, Binance took all crypto exchanges by storm. By 2018, it had become the largest cryptocurrency exchange in the world.

The reasons why aren’t surprising. The fees on Binance are unbeatable. Binance has a trading fee of 0.10%, compared to Coinbase, which has a fee of up to 3.99%. 

Plus, CZ was clever and chose not to initially allow trading in fiat currencies, thus sidestepping regulatory hurdles in a lot of cases. This allowed Binance to quickly launch in new markets without having to worry about getting the blessings of government officials. Then later on, they went on to add fiat gateways. This is the opposite of how exchanges like Coinbase go to market, where they first build relationships with local banks and regulators and then launch.

As the crypto market started to take a nose dive in late 2018 and crypto exchanges across the world started to struggle, Binance was ahead of the game once again by shifting to building other products, such as Binance LaunchPad, where projects can quickly and easily launch and list their cryptocurrencies directly through the Binance exchange. Unlike Coinbase which has a strict framework for determining which coins to list on the platform, Binance was much more generous with its listing (i.e. the bar to list a token on Binance is low).

In late 2019 when DEX’s started taking off, Binance spotted yet another opportunity to jump on the DEX bandwagon. The company built its own decentralized exchange and officially launched it in February 2020. The DEX was built on Binance’s new “Binance Chain,” which was a plain-vanilla blockchain. Moreover, the original BNB token (which was launched on Ethereum as an ERC-20 token) was ported over to Binance Chain.

While Binance Chain served as a useful platform for offering quick transactions on their DEX, it was limited in its functionality. There was no way to build smart contracts or do anything sophisticated on the chain. The company tried to innovate with a new product called “IDOs” (initial DEX offerings) that allowed projects to launch new tokens on their DEX in a completely decentralized manner, but it is unclear if that gained any traction.

Overall, the Binance DEX never really took off. If you look at the 24-hour trading volumes for DEXs, Binance DEX ranks #31 (as of this writing).

Undeterred, the team went back to the drawing board and came out with something more useful: Binance Smart Chain. Binance Smart Chain is essentially a fork of Ethereum and offers all the same functionality as Ethereum (e.g., building Dapps) except with much lower gas fees and faster block times. The company was able to do this by creating a new consensus mechanism called Proof of Stake Authority. The consensus mechanism relies on 21 authorized validators, making it much more centralized than Ethereum’s Proof-of-Stake consensus protocol (which allows any number of validators to participate in the network).‍

Why did Binance use Proof of Staked Authority?‍

As the DeFi market blew up, the Ethereum blockchain became congested, which led to skyrocketing gas fees.

Binance Smart Chain came along and decided to make a trade-off by sacrificing decentralization for speed, offering much faster and cheaper transactions. This quickly attracted new projects to Binance Smart Chain. One example is PancakeSwap, which is a fork of Ethereum’s darling, Uniswap. Within no time, PancakeSwap had a larger 24 trading volume than Uniswap, even though it was launched nearly two years later.

Until yesterday, PancakeSwap had more trading volume than Uniswap (Uniswap launched its v3 platform and trading volume skyrocketed).

I won’t go into the whole story of Pancakeswap vs. Uniswap, but if you are interested, you can read more here.

Overall, Binance Smart Chain seems to be gaining meaningful traction and poses real competition to Ethereum. Below are some of the Daaps being built on the Binance Smart Chain.

At the very least, perhaps Binance Smart Chain’s success could encourage Ethereum developers to move faster and break a few things rather than trying to build the world’s perfect consensus mechanism?‍

Move fast and break laws...‍

Because of the incredible growth and early success of Binance smart chain, the BNB token has also seen an astronomical rise. Just in the past couple months, the token price shot up 8x.

But there’s a catch (of course!). While the Binance growth story is impressive, it’s not as rosy as it looks on the surface.

For example, Binance has been forced out of many jurisdictions it has been in since the company started, including Malta, Japan, South Korea, Uganda, Russia, Lichtenstein, Shanghai, Beijing, Nigeria, Jersey (island), Malaysia, Brazil, and likely more. Binance has always operated within the boundaries of the law, and regulators don’t exactly love that.

Moreover, Binance operates in a very secretive manner. The company doesn’t have an HQ, and employees typically do not identify themselves publicly. Given that Binance is toeing the line with regulators, it makes sense why it’s secretive. There is a huge risk to this type of execution that we cannot overlook.

To some, Binance’s aggressive approach can be off-putting because it seems like Binance is just really good at copying existing ideas (e.g., crypto exchange, ICOs, DEX, a programmable blockchain, etc.) and bringing them to market by moving fast and breaking laws. Other exchanges that are trying to follow the rules simply can’t keep up.

But we have to give credit where credit is due. CZ is a brute-force entrepreneur, and sometimes we need those in the world. ‍

And now, that brings us to BNB‍

We mentioned earlier that Binance did a $20 million ICO. The total supply of BNB was 200 million, with 100 million sold to the ICO market. The remaining 80 million and 20 million coins were allocated to the founding team and Angel Investors respectively. The funds from the ICO were used as such:

35% of the funds were used to build the Binance platform and perform upgrades to the system.

50% was used for Binance branding and marketing, promotion and education of Binance.

15% was kept in reserve to cope with any emergency or unexpected situations that might come up (e.g., this fund was used on May 7, 2019 when there was a cyberattack that cost Binance $40.7 million losses in cryptocurrency).

What is BNB useful for?

Some of the major use cases of BNB include:

• Users get a discount on trading fees if they use BNB to pay. The discount percentage reduces by half each year. The company offered a 50% discount on trades during the first year of launch, and currently, the discount is 25%. In the third year, it will be 12.5%, and the fourth-year discount will be 6.25%, with the discount ending from the fifth year onward.
• Binance DEX is built on top of Binance Chain. BNB is the native asset on Binance DEX to be used as payment for every transfer that goes on the network.
• Binance Smart Chain. Same as above. BNB is used by validators for staking and by users for transacting.
• Purchase goods and services. One interesting real-world example is TravelbyBit, an Australian start-up that has equipped more than 150 establishments, including Brisbane Airport, with the ability to pay for goods and services using BNB and other cryptocurrencies.
• Loan, lending, and cash. BNB can be used for withdrawing cash on crypto ATMs via Zelaacoin, as well as securing loans through Nexo and selling crypto for cash through Dether.
• Social media. BNB can be bought on the crypto-centric social media network Investfeed through API exchange integration. BNB can also be used as gift tokens on live-streaming service Uplive and chat service ADAMANT.
• Salary. About 9 in 10 Binance employees receive a portion of their salaries in BNB.

So effectively, BNB is a payment token to access the Binance platform, with a few minor extrinsic utility use cases being layered on.

And finally, the most interesting part of BNB is...burning tokens.

How and why Binance burns BNB

Binance has an interesting token-burn mechanism, where a certain number of tokens are “burned” every quarter. In crypto land, to “burn” tokens means to send them to an irrecoverable address, effectively eliminating them from the total available supply.

When a crypto project burns tokens, it is analogous to a public company buying back stock and reducing the supply of stock in the market. There are several reasons why a project might choose to burn tokens. One reason is reducing the circulating supply, which helps reinforce the value of the token and hence benefits early investors. When there is less supply of BNB, the value of the token goes up for existing investors because there are less tokens available in the market. 

Every quarter, Binance uses 20% of its profits to “burn” BNB. Therefore, the amount Binance burns is directly tied to the trade volume on the platform during the previous quarter. The company will keep doing this until 50% of all BNB (100 million) are burned, leaving 100 million BNB remaining.

The chart below shows all the Binance token burns that have happened to date.

However, given that the BNB token price has gone up 43,000% since the ICO, the token burn is not happening exactly as quickly as originally intended (do the math). So the company decided to accelerate the token burn:‍

“Initially, the speed of the burn was associated with trading volumes on Binance. This turns out to be somewhat “slow,” or at least slower than we originally anticipated. This is largely influenced by the rapid rise of BNB’s price, which has risen 43,000% since its ICO in 2017, as of the time of writing this article. Over the last three and a half years, we have burned about 13% of the promised amount, with a total USD equivalent value (nominal) of $426,304,000. Even though this is an impressive amount for a three-year-old startup, at that rate, it would take roughly 27 years to finish the burn. So, we thought it’s time we speed it up a bit. Exactly how much faster? We are not 100% sure. The current accelerated burn would put the trajectory to be around 5-8 years to finish the 100 million BNB. But a number of factors could change the accelerated part in the future, including BNB price fluctuations, overall market conditions, and more.”

However, it is unclear how much faster the burn will be.

"How much faster? This is the first accelerated burn, and we will see about the future ones when the time comes."

Overall, betting on BNB is more of a bet on CZ and his cut-throat execution to keep building (or copying) thing that end up working. On top of that, you just have to hope that when the "future" comes, they do the right thing for their investors.

Some concluding thoughts

This post was supposed to be a super-quick recap of Binance basics, but turned out to be an essay 😀

Let’s close off with some parting questions for you to ponder:

1. Given that the primary use case for BNB is to pay for trading fees, and given that the discount for using BNB to pay for trading fees eventually will go to zero, what happens after that? What is the incentive to use BNB to pay to use the platform? How does this affect the long-term utility of the token?

2. What happens in a world where crypto becomes super regulated? Will Binance still be the elephant in the room?

3. Where is all of Binance's Derivates trading volume coming from if they are supposedly banned some of the biggest markets: China and USA?

4. Given that derivatives represent a large portion of Binance’s volume, what happens when Coinbase enters the game?

5. It is well known in the crypto industry that reported trading volumes can be fake (i.e. because some exchanges engage in wash trading). How can we know that Binance is not doing this? Is there any analysis out there around this?

What other questions do you have? Let me know in the comments!