How Binance Smart Chain Increased BNB’s Value: The BEP-95 Upgrade
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.
Join us in showcasing the cryptocurrency revolution, one newsletter at a time. Subscribe now to get daily news and market updates right to your inbox, along with our millions of other subscribers (that’s right, millions love us!) — what are you waiting for?
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.
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?
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?
Here's how the burning process will be carried out.
- The validator calls the deposit function to withdraw the gas fee. This is where the burn logic of the transaction will be included.
- Initially, Binance has decided to keep the burnRatio = 10%.
- This means that 10% of the gas fees will be burnt as per the given equation: burnRatio * gasFee
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.
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
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.
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.
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.