How Binance Smart Chain Increased BNB’s Value: The BEP-95 Upgrade

How Binance Smart Chain Increased BNB’s Value: The BEP-95 Upgrade

Created 2yr ago, last updated 2yr ago

How Binance Smart Chain Increased BNB’s Value: The BEP-95 Upgrade

How Binance Smart Chain Increased BNB’s Value: The BEP-95 Upgrade

Table of Contents

The BEP-95 proposal — also known as the Burno Upgrade— is a proposal that will burn a portion of BNB tokens as part of gas fees for transacting on Binance Smart Chain.

In this article, we will look at what the proposal is, how it impacts the gas fees on the network and the motivations behind its implementation.

Let's dive in.

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What Is BEP-95?

The BEP-95 is a proposal to add a real-time burning mechanism to Binance Smart Chain, with the aim of making Binance Coin (BNB)’s tokenomincs more dynamic.

With this proposal, a "portion" of the gas fees will be burned — this means that as more people use BNB, the more it will be burned, thereby increasing its intrinsic value. Since the gas fees are being burned, BNB holders will have the power to decide how much gas fees they actually need to dispense.

Opposition to this proposal came from a faction that did not want the total rewards for validators to be reduced. However, through BEP-95, the trade-off is that the whole community would be compensated for an increase in the value of the underlying BNB tokens. Thus, the overall value of the rewards that validators receive will likely remain at their required threshold.

Binance wrote in a blog post that the introduction of BEP-95 aims to make the Binance network (and thus the BNB token) more decentralized.

In fact, by burning a portion of the gas fees, users will have the added predictability factor for the amount of gas fees that they do want to use for their transactions.

Binance’s introduction of a burning mechanism comes right on the heels of the similar EIP-1559 change, which was implemented in fall 2021 on the Ethereum network.

Before we get into the details of why both of these proposals were implemented or how they could impact the overall ecosystem, let's understand how BEP-95, or Bruno, works.

How Does BEP-95 Work?

BNB has been designed to be a deflationary token: because there is an absence of a mining algorithm that issues more BNB tokens, the supply has been capped at 200 million tokens. Out of this, about 100 million tokens were issued as part of Binance's ICO in 2017. Since then, Binance scheduled regular burnings of its token, with the latest burning event happening in April 2021 and burning over 1M BNB. The primary purpose of BNB is that it is a utility token used within the now-growing DeFi ecosystem on Binance Smart Chain (BSC, Binance's native blockchain).

As part of BEP-95, the gas fees are collected and then directed to two different smart contracts.

  • System Reward Contract: This contract is responsible for holding a maximum of 100 BNB. If the holding goes below this stipulated number, then 1/16 of the gas fee being used for transactions is transferred to the contract. The funds held within this contract are used for "cross-chain package subsidies."
  • ValidatorSet Contract: The remainder of the gas fees are held within the ValidatorSet contract. This contract is responsible for issuing gas fees for validators and/or delegators within the BSC network. These funds are further directed to the Binance Chain and further split amongst the validators.

How Does the BEP-95 Burning Mechanism Work?

The parameter, burnRatio, will be introduced to the ValidatorSet contract.

Here's how the burning process will be carried out.

  1. The validator calls the deposit function to withdraw the gas fee. This is where the burn logic of the transaction will be included.
  2. Initially, Binance has decided to keep the burnRatio = 10%.
  3. This means that 10% of the gas fees will be burnt as per the given equation: burnRatio * gasFee
This ratio will be subject to change as per the governance and voting mechanism already set in place by Binance. Validators will be able to vote in proportion to the amount of BNB that they have staked. The process to alter the burnRatio will be carried out on Binance Chain, where the participating community members will be able to have a say on the amendment of the parameters that are being considered.

However, to suggest a proposal, they will have to submit at least 2,000 BNB tokens on the mainnet. Once the entire voting process is complete, all the members who had staked their BNB will get their tokens back. Naturally, the higher the vote, the more influence that the member will have over the decision.

Binance has also highlighted that in case of a quorum, the proposal will automatically be passed and the changes will be implemented immediately.

In the end, BEP-95 was passed and went into effect on Nov. 30, 2021.

How Does BEP-95 Affect Me?

This change will have a direct impact on the gas fees, as well as make the BNB token (along with the underlying BSC network) more decentralized.

But doesn't the BSC network already have extremely low fees?

Yes, it does. We must understand the crucial point that token burning is done to ensure the fixed circulating supply of tokens. It also helps in creating an intrinsic value for the token. This will mean that as more tokens are burned, their value automatically increases.

As a user, you might not feel any change, but if you are a validator on BSC, then the amount of gas fees that you are rewarded for validating transactions might get reduced. But, as highlighted earlier, because of the burning mechanism, the value of those tokens will go higher — only minutely impacting the net profit that you generate from validating within the network.

How Does BEP-95 Aid in Decentralization?

To understand how BEP-95 will truly impact the decentralization of the network, it is crucial for us to understand how the underlying network actually works.

Without going into too much detail, here's a quick overview.

  • BSC is a hard fork of the Go Ethereum (Geth) protocol, with some changes to the underlying infrastructure.
  • These changes come in the form of the limited 21 validators on the BSC network. Out of this pool of validators, the active validators are determined every 24 hours, and this decision is subject to the amount of tokens that each has staked within the network.
  • If you wish to stake your tokens within the network, then you can decide to delegate them to one of the active validators.
  • Each of these 21 validators take turns to validate each block. Since the number of validators is so low, the transaction speeds are quite fast and the fee is very low.

To get close to an answer to our initial question, let's ask a critical question.

Do Validators on the BSC Receive Rewards?

Validators on the BSC do not receive any block rewards. This is different to Ethereum, where a miner is rewarded with some ETH for every block that they help add to the chain. On the contrary, BSC validators do have the power to decide how much of the gas fees that they collect from processing transactions gets redistributed to the delegators.

The pre-existing burning mechanism of the tokens ensures that BNB gains intrinsic value over time. This process will be carried out until the total number of tokens in circulation drops to 100M.

Now, as you can imagine, the BSC network in itself is not truly decentralized. And because BNB is not an inflationary asset by design, validators have been given the power over the amount of tokens that are redistributed to the delegators. This means that they have a disproportionate power over the network.

Combating Centralization via Gas Fee Burning

To combat the problem of centralization, this burning mechanism has been introduced. However, we mustn't forget that the network is largely centralized at its heart right now. Even when it comes to voting, it is the validators who get to make the decision on most proposals. Naturally, the more tokens that the validator has staked, the greater their influence over the network will be.

Delegating tokens within the network is a crucial feature of protocols that have a proof-of-stake (PoS) consensus mechanism. By "staking" the tokens within the network, the users are participating in ensuring that it is decentralized. In return, they can expect to get rewards from all the transactions that the entire network processes. This is the objective of Ethereum, which aims to transition to a PoS network soon.

The idea of burning a portion of the gas fees and making BNB a deflationary asset comes from the famous EIP-1559, which was brought into effect a couple months ago. While it is hard to tell what the long-term impact of BEP-95 would be on BNB, we can review the kind of impact that EIP-1559 had on ETH to draw some comparisons.

Note, however, that this comparison will only be done at the cost of comparing a truly decentralized network with a centralized one.

EIP-1559: Where It All Started

The primary argument behind the decision to burn a portion of the gas fees in EIP-1559 was the need to create a fairer transaction process for users. The high gas fees on Ethereum was already a cause for concern for millions of users, many of whom had started moving towards alternative L1s like Solana and BSC or adopting a scaling solution like Polygon — Ethereum's dominance within the market was being compromised.

EIP-1559 — one step on the way to the PoS transition — proposed a novel method of rewarding miners for all the transactions that they were validating. Moving away from the basis of a first-price auction, the objective was to split the gas fee into two parts.

  • Base fee: This was the minimum required amount that the users needed to pay for their transaction to be included in the block.
  • Inclusion fee: This was the optional fee that the users could pay to the miners if they wanted the process of transaction inclusion to be expedited.
The base fee was to be burned in its entirety, as a consequence of which ETH would become a deflationary asset — provided that the fee burned was more than the ETH generated as part of block rewards. This burning of gas fees also helps take some congestion off the network and removes any delays happening on the validators' end.
Since the release of EIP-1559 in August, Ethereum has become one of the top assets being burned. In fact, ETH occupies the second position on the Burn Leaderboard, and it is estimated that 3.3M ETH is being burned per year. This number is only expected to go up.


Why Is EIP-1559 Beneficial?

There are several reasons why the EIP-1559 is considered a major step forward in making the transactions on the Ethereum network fairer.

  • EIP-1550 introduces a fixed price sale and eliminates first-price auction inefficiencies. The fee estimation process has also been simplified, giving the user the option to go ahead with the transaction or not depending on the fee.
  • The inherent fee volatility prior to EIP-1559 introduces several economic inefficiencies. By creating a "fixed-fee" mechanism, users get the exact amount that they must pay for the gas fees without having to worry about its fluctuations subject to network congestion.

While these benefits were more aimed at introducing a sense of measurability to the gas fees, they also helped in creating a much more transparent gas pricing mechanism for the users.

Closing Thoughts

While there is a crucial difference between EIP-1559 and BEP-95, we must understand that both of them are aimed at creating a more trustless and decentralized network. The former helps in making the gas fee markets more efficient and the process more transparent. The latter helps in creating a deflationary asset and provides more transparency overall to the market.

As the L1 ecosystem has emerged in crypto, several protocols have emerged that are aiming to offer faster transaction speeds at lower costs — some of them (like BSC) have only done that at the cost of decentralization. BEP-95 is one attempt by BSC to move away from that and create a more transparent network.

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