Binance 101: The Crypto Giant That Covers All The Bases

Jonathan Hobbs, CFA

8 mins

Binance 101: The Crypto Giant That Covers All The Bases
  • Binance is the world’s largest digital asset exchange. And it's only been around since July 2017, when Binance had the ICO for its popular BNB token.

  • The latest iteration of Binance’s blockchain, BNB Chain, has smart contracts and is aiming to become a lot more decentralized.

  • There might be some regulatory risk associated with Binance and the BNB ICO. Mind you, Binance is investing heavily in compliance to try to iron this out.

Binance is the world’s largest digital asset exchange. And it's only been around since July 2017, when Binance had the ICO for its popular BNB token.

The latest iteration of Binance’s blockchain, BNB Chain, has smart contracts and is aiming to become a lot more decentralized.

There might be some regulatory risk associated with Binance and the BNB ICO. Mind you, Binance is investing heavily in compliance to try to iron this out.

If you’re even remotely interested in crypto, you’ve probably heard of Binance – the world’s largest crypto exchange by trading volume. But Binance is a lot more than just a platform for trading digital assets: it also has its own token called BNB (which stands for “build and build”), and its own blockchain. In this Binance 101 guide, you’ll learn about all three components, and find out why you might want BNB in your long-term crypto stack...

What’s the appeal of Binance, the crypto exchange?

When Changpeng Zhao (known in the crypto world simply as “CZ”) founded Binance in 2017, he wanted to create a “crypto only” exchange. By staying away from traditional currencies altogether, Binance could avoid most of the regulatory headaches that come with setting up a financial services company. This helped CZ and his crew grow the exchange really fast. And it was the world’s largest crypto exchange just six months after launch day.

Before entering the world of crypto, CZ had developed high-speed trading software for traditional investments. He worked at the Tokyo Stock Exchange and Bloomberg, before starting Fusion Systems in 2005 – a business that builds some of the fastest high-frequency trading systems out there.

Binance is still the world’s largest crypto exchange. And now you can use it to trade crypto with traditional fiat currencies. In an average month, Binance processes about the same amount of trading volume as its eight major competitors combined. The chart below shows Binance’s monthly crypto trading volume in green. Notice how those green spaces take up about half of each bar.

Monthly trading volume (spot) per crypto exchange. Source: CryptoCompare.
Monthly trading volume (spot) per crypto exchange. Source: CryptoCompare.

And it's pretty much the same story with crypto derivatives…

Monthly trading volume (derivatives products) per crypto exchange. Source: CryptoCompare.
Monthly trading volume (derivatives products) per crypto exchange. Source: CryptoCompare.

Today Binance also has another exchange for US citizens, Binance US, which currently has much lower trading volumes than its core exchange.

And what’s the appeal of Binance’s BNB token?

To get the exchange off the ground, CZ and his team raised $15 million through an initial coin offering (ICO) – a crowdsale of 100 million BNB tokens in July 2017. Here, investors sent ether to a smart contract address (built on the Ethereum blockchain) to buy BNB in the ICO. The ICO market was booming at the time, and you could have scooped up one BNB for just 15 cents. Today, BNB trades north of $200. Not a bad investment, if you ask me.

The funds raised from the ICO were split up like so:

  • 35% toward upgrading the Binance platform and exchange system
  • 50% toward building the Binance brand (marketing and education)
  • 15% kept as a reserve for a rainy day

Before the ICO, the team also sold 20 million BNB to angel investors, and created another 80 million tokens for the founding team. All in all, that put BNB’s initial coin supply at 200 million when the exchange launched.

But today, there are only about 165 million BNB in existence. Binance has a “token burn” mechanism, which spends some profits each quarter to buy back BNB tokens – and then destroys them for good by sending them to a wallet address that won’t ever be used again. Think of this like a share buyback, in which a company buys back its own shares, boosting the stock price and rewarding shareholders. Binance plans to continue burning BNB until the supply falls to 100 million.

BNB can be used as an “exchange token.” If you’re trading in and out of BNB on Binance or Binance US (for US citizens), you’ll pay lower trading fees than you would with other assets. Those fee savings add up over time, which is why there’s consistent demand for BNB among traders. It is the world’s largest crypto exchange, after all.

How does the Binance blockchain fit into all this?

Remember that BNB launched on Ethereum in 2017. In technical crypto lingo, it was an ERC-20 token, meaning you could send it back and forth across the Ethereum blockchain (you can learn more about ERC-20 tokens here).

But as time went on, Binance realized it needed a faster blockchain than Ethereum that could handle more data for its exchange too. It would need to build its own, but with some iterations…

Version #1: Binance Chain.

In April 2019, Binance launched its own blockchain called Binance Chain. This made it faster and cheaper to ping BNB from one Binance wallet to another, but left a lot to be desired when it came to processing more complex transactions.

The DeFi craze took off like a rocket in the summer of 2020. Thanks to Ethereum’s smart contracts, Ethereum-based DeFi protocols like Compound (COMP), Yearn Finance (YFI), Maker (MKR), Aave (AAVE), and Uniswap (UNI) were revolutionizing the industry, and attracting record numbers of users along the way.

People who understood DeFi – and could afford to pay Ethereum’s high transaction fees – made a lot of money that summer. Ethereum was way ahead in the race to become the dominant DeFI blockchain. Meanwhile, Binance Chain didn't have smart contracts, so it wasn’t even out of the starting blocks. There’d be some iterations…

Version #2: Binance Smart Chain

To enter the DeFi race, Binance needed a blockchain that could run its own smart contracts. So in September 2020, it launched Binance Smart Chain (BSC). This was a “fork” of Ethereum’s code, and ran pretty much the same way as Ethereum – with a few changes to make it faster and cheaper, but also more centralized.

It used a proof-of-stake algorithm to process transactions. In other words, validators would stake BNB as collateral to process transactions on the blockchain in exchange for fees. This made BSC a lot faster and cheaper than Ethereum, which currently operates on proof-of-work (with miners).

But here’s the thing: there are hundreds of thousands of Ethereum miners. And there’ll be hundreds of thousands of validators when Ethereum eventually becomes a proof-of-stake blockchain. But the BSC chain required only its 21 largest validators to process transactions. This made BSC a lot more efficient (as fewer validators were needed to reach an agreement), but also far more centralized than Ethereum. For this reason, BSC has been met with some skepticism by the crypto community.

Nonetheless, BSC’s lower fees and fast transaction speeds quickly turned it into the second-largest DeFi blockchain. This was mostly thanks to a decentralized exchange (DEX) project called Pancakeswap (CAKE) that attracted billions of dollars of user capital to its platform. Pancakeswap works much like Ethereum’s Uniswap (UNI), except you pay transaction fees in BNB instead of ether. Those fees are fractions of a dollar, rather than $15 on average with Ethereum applications.

As with the ERC-20 standard on Ethereum, BSC has BEP-20 standard – a blueprint that allows new tokens and projects to launch on the blockchain.

Version #3: BNB Chain

In February 2022, Binance rebranded its blockchain as BNB Chain – taking the word “Binance” out of its name to emphasize decentralization. BNB Chain has all the functionality of BSC, but currently uses the top 41 validators to confirm transactions (more than the 21 required in the previous BSC chain). BNB Chain also deploys an “auto-burn” mechanism to automatically determine how much BNB to burn through a formula based on the token’s price. That makes BNB token burns more transparent and verifiable.

BNB Chain’s developers also have a few other development tweaks in the works to make it more decentralized and scalable. According to Binance’s website, they’re gearing up for BNB Chain to become “the infrastructure of the MetaFi universe.”

MetaFi is a concept that combines DeFi with the metaverse – and it could be a big deal in the years to come. So watch this space.

What are the opportunities here – and what are the risks?

CZ, his team, and the Binance community have built up a powerful crypto ecosystem. You’ve got:

  • Binance: the largest crypto exchange.
  • BNB: the third largest digital asset by market size (excluding stablecoins Tether and USD Coin).
  • BNB Chain: the second largest smart contract blockchain behind Ethereum (when considering the total value of assets processed by the blockchain, and the number of applications built on top of it).

Given the above, investing in the Binance ecosystem (by buying BNB) could bear fruit in the long run. BNB is used on the Binance exchange, Binance US, and the BNB Chain, which all boost demand for BNB.

With that said, there are three potential risks to consider before jumping in.

First, there is some degree of regulatory risk with the Binance exchange. Like most crypto exchanges, Binance isn’t fully regulated everywhere it operates. As regulators bring the hammer down on crypto, this could slow Binance’s roll a bit, as it’ll be forced to invest even more time and money in compliance.

The second risk is also a regulatory one, but relates to the BNB ICO – and whether BNB tokens were technically “unregistered securities” when they were offered to the public in 2017. The Securities and Exchange Commission (SEC) and other regulators are currently looking into what went down. Basically, they want to know whether the ICO involved a direct investment in the Binance exchange (which would make it a security, and that would be a potential violation) or whether it was a utility token to use on the exchange (which would make it not a security, and therefore OK).

The investigation could cause some volatility in the token’s price, but I suspect that Binance has more than enough capital to pay off any fines that come its way.

The third risk is that BNB Chain still is more centralized than its competitor smart contract blockchains. This is a double-edged sword: on the one hand, being more centralized can make the blockchain faster and cheaper. On the other hand, centralization is frowned upon by the crypto community.

And, remember, it’s temporary, with the BNB Chain set on becoming more decentralized in the years to come.

Now test your knowledge with our Binance 101 quiz.

test your knowledge Binance 101 quiz


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