Michaël van de Poppe - 23 March 2022
Binance Smart Chain Upgrade
Binance Smart Chain (BSC) has successfully been upgraded with the v1.1.5 Bruno hard fork on the 30th of November. What does this upgrade mean for the network and how does it have an impact on the BNB token, which is used to pay for gas fees on the network?
Binance Smart Chain is a fully EVM-compatible blockchain launched in September 2020. Binance created BSC to offer a solution to Ethereum’s increasingly high gas fees and decided to sacrifice some decentralization and security in return for higher scalability. Transactions are paid in Binance’s BNB token.
The chain has seen impressive growth since the start, with popular DeFi applications such as PancakeSwap launching right at a time when DeFi users became frustrated by Ethereum’s increasing gas fees.
The recent announcement of a $1 liquidity incentive program will likely see new innovative DeFi protocols being built on the chain. Binance Smart Chain does receive a fair share of criticism due to its centralized nature, with only 21 active validators being chosen daily by Binance Chain, a network that is governed by just 11 validators.
Despite its shortcomings, BSC is ranked #2 in terms of total value locked (TVL) in DeFi projects behind Ethereum, with decentralized exchange PancakeSwap accounting for 33.7% of the TVL according to DeFiLlama.
The number of daily transactions has been rising steadily, currently doing around 14.8 million transactions per day compared to Ethereum’s 1.28 million.
Bruno hard fork
Binance Smart Chain has successfully been upgraded with the Bruno hard fork, introducing a real-time fee burning mechanism set to increase the rate at which BNB is burned. Binance’s BNB token is already deflationary by design, as Binance uses the revenue from its exchange’s trading volume to burn a percentage of the BNB supply quarterly to maintain the token’s value. Binance will stop its BNB burning when 50% of the initial supply is burned and only 100 million BNB is left. The initial BNB supply was 200 million. The current supply is currently around 166.8 million BNB, meaning 40% of BNB’s supply will be still burned by Binance to reach the million token limit.
This extra fee burning as per BEP-95 (Binance Evolution Proposal) will see 10% of all future BSC transaction fees being burned, even after Binance stops burning tokens after the 100 million BNB supply is reached.
This added deflationary pressure on the token supply will be beneficial for holders. The token becoming more scarce while demand stays either equal or increases should have a bullish effect on the BNB token. This fee burning will result in validators earning less BNB rewards from staking rewards, but a higher fiat value of BNB will offset this drop in rewards.
The initially proposed burn ratio of the upgrade is set to 10%, meaning 10% of all gas fees will be sent to the burn address. However, community members can propose a change to this burn ratio parameter. The proposal requires a minimum deposit of 2000 BNB and will take place on Binance Chain, allowing validators to vote “for” or “against” the proposal. The BNB deposit is returned after the vote. This means if a majority vote is reached, the burn ratio can increase, putting further deflationary pressure on the BNB token.
The Bruno hard fork also increases the full node sync of the chain by 60%, which will help with the decentralization of the network. BSC Validators have been complaining about problems regarding the network for a while, and this hard fork can be a step in the right direction.
Ethereum’s fee-burning mechanism
Ethereum has implemented a similar fee-burning mechanism, although Ethereum burns most of the ETH spent on transaction fees as opposed to BSC burning only 10% of transaction fees, a parameter that can be altered if the community agrees. The ETH fee-burning change has been positive for Ethereum holders, as the token’s inflation rate has drastically decreased since the implementation of the hard fork.
Ethereum’s supply could potentially even become deflationary after the Ethereum 2.0 merge is successfully completed and Ethereum switches from PoW (Proof of Work) to PoS (Proof of Stake) as the improved scalability could lead to a significant rise in usage of Ethereum. The copy of this fee-burning mechanism by Binance Smart Chain is smart as it will provide more value to BNB holders as the supply is reduced at a faster rate.
Binance Smart Chain has seen impressive growth over the year, as well as the BNB token greatly increasing in price. The Bruno hard fork will be beneficial for BNB token holders as it puts more deflationary pressure on the token. If the number of daily transactions continues to increase, the amount of BNB burned with every transaction will also increase. This burning mechanism will make BNB more scarce, which could lead to the price increasing long term as long as demand for BNB stays equal.
Binance Smart Chain is facing some competition from other new smart contract platforms such as Solana, Avalanche, and Terra, which also offer faster transaction times and lower gas fees than Ethereum. Ethereum layer 2 scaling solutions and side chains are also a threat to Binance Smart Chain’s DeFi dominance, although the Binance Smart Chain’s $1 billion liquidity incentive program may incentivize developers to build innovative DeFi applications on BSC over other networks.
Despite Binance Smart Chain being a relatively centralized blockchain with a fair bit of criticism which it still has to solve, its growth will likely continue as the chain is very accessible for existing Binance exchange users, which can easily withdraw BNB to the chain to start using DeFi applications for the first time.