What is the Binance Smart Chain? And, is it a Viable Alternative to Ethereum?
With escalating gas fees on Ethereum, the Binance Smart Chain (BSC) is attracting liquidity from Ethereum by providing a solution to this problem. Additionally, the projects built on BSC have seen extraordinary growth this past month. That implies BSC is fulfilling the needs of the market but is it?
What is the Binance Chain?
Before describing the Binance Smart Chain (BSC), I must first explain the Binance Chain (BC). When the Binance Coin (BNB) launched in 2017 with an initial coin offering (ICO), it did so as an Ethereum ERC-20 token. However, as the BNB whitepaper outlined, that would be temporary as BNB would move to its blockchain with BNB being the native currency.
In Q1 2019, this vision became realised with the creation of the BC. That provided Binance customers with a centralised and decentralised option to exchange cryptocurrencies.
The first use case for the BC was the Binance Decentralised Exchange (DEX) that; “aim[ed] to carry over the best features of the current Binance exchange in a decentralised setting, while also offering the benefits and security of a DEX.” Additionally, Binance CEO CZ stated that the “Binance DEX can handle trading volumes as huge as the ones we process on the centralised exchange, at a rate of about “a couple of thousand” transactions per second.” In comparison to the Bitcoin and Ethereum network that have an estimated block time of 10 minutes and 20 seconds respectively, the BC processes blocks at a rate of a block per second. The block time refers to the time taken to verify the transactions on the blockchain. Therefore, the quicker to process the blocks on the blockchain, the faster the network is in theory.
While BC claims to be decentralised, their current node structure demonstrates that they are centralised, with many on Twitter describing the BC as CeDeFi (Centralised Decentralised Finance). Nodes in cryptocurrency are computers connected to the network to validate the transactions on the blockchain. The limited amount of nodes on the BC (21) are all operated by Binance and therefore gives Binance total control of the blockchain. That enables Binance to subsidise the transactions fees on the network to keep them artificially low. By keeping the transaction fees low, users of alternative blockchains are tempted to move some or all of their liquidity to the BC. The BC nodes can take this loss as Binance is a leading Centralised Exchange (CEX) with deep pockets, and the losses incurred for Binance are small relative to the wider business. The upside for Binance is enormous! That is why the risk is worth taking.
In comparison to the BC, Bitcoin is fully-decentralised operating with a distributed ledger model. This model allows anyone the ability to run their node and is actively encouraged to do so. As a result, the Bitcoin blockchain has no majority actor that controls how the network operates. By having a distributed model, the nodes on the blockchain can validate the activity on the network to maintain its strength. No one has control, and that is incredibly powerful.
What is the Binance Smart Chain?
The difference between the BC and the Binance Smart Chain (BSC) is that the BSC is the smart-contract blockchain that runs parallel with the BC. Essentially, it is a ‘fork’ of Ethereum compatible with the BC. That has resulted in the BSC replicating tools of Ethereum while allowing users to keep their current Ethereum Wallet(s). For Example, the BSC has an identical block explorer to ‘Etherscan’ with the BSC alternative being ‘BSCscan’, which is similar but has a different colour scheme. Projects that have done well on the BSC like Pancakeswap are forks of existing Ethereum protocols like Uniswap with some extra development. Additionally, developers are incentivised to move their projects onto the BSC or dedicate resources to the BSC by applying for the Binance accelerator fund. This fund has $100m available to provide developers with the necessary funds to innovate on the network.
Furthermore, as the BSC and the BC were designed to work in unison, Binance created a bridge that allows for assets to move between the blockchains. This feature allows for two things. The first enables users on the CEX to move their liquidity directly onto the BSC to enjoy DeFi. The second is that as the BSC is an Ethereum clone, ERC-20 tokens can be converted into their BSC alternative BEP-20. That allows Ethereum users to move their assets across the two blockchains for the cost of gas. The interoperability this provides with its simplicity has resulted in the BSC growing exponentially.
Unlike other so-called ‘ETH Killers’ which have been attempting to take market share from Ethereum or to replace it, such as Cardano, the BSC has offered a viable alternative for users. As Binance controls the limited node structure, they have managed to keep fees incredibly low, with the average transaction costing cents and not half your paycheque as we have seen with Ethereum recently. With the smart-contract functionality of the BSC, users are also able to experiment with dapps (Decentralised Applications) without worrying about the extortionate fees on Ethereum.
How do you interact with the BSC?
With the Binance Bridge, it is easy to use the BSC and is well explained by Binance. If you are using your Ethereum Wallet, for example, Metamask, the wallet will need to be adjusted to enable BSC compatibility. Rather than explaining it myself, I will link the explainer I used by Linear Finance.
Also Read: Set up MetaMask for Binance Smart Chain
Before interacting with the BSC, make sure that you have BNB available either from Binance or another wallet. Without BNB, you won’t be able to use the blockchain.
What is the Utility of BNB?
With BNB serving as the ‘gas’ on the BSC, its utility is well defined. However, the BNB has other uses, and collectively this provides the BNB with its ‘value’. Aside from being the native token on the BC, the other important use for BNB, as the whitepaper states, is to reduce trading fees on the CEX. Holders of BNB who actively trade on the platform can benefit from appreciation of the token and a fee reduction to increase their profits while trading on Binance.
Additional uses of BNB allow for non-tradable amounts of crypto, ‘dust’, to convert into BNB. These non-tradable amounts are untradable as their balance in terms of USD is very low. Holders of BNB can also claim lottery tickets based on their respective BNB held to participate in Binance’s Initial Exchange Offerings (IEO). An IEO provides investors with an opportunity to buy a token at a discounted before going public. When the token gets listed on Binance, the thought process is that the token will perform well and result in financial gains. Although, that will not always be the case. Finally, BNB can be used like other cryptocurrencies as a currency to pay for products.
Holders of BNB can also see the price of BNB rise with the Binance burning of BNB. As stated in the Binance whitepaper, 20% of the profits made from Binance are used to buy-back BNB, then subsequently destroyed. That changed when Binance updated its whitepaper, stating that the buy-back will become based on the exchanges trading volume rather than the profits from Binance.
Why has BSC Disrupted Ethereum?
While Ethereum is innovating and the DeFi space is expanding rapidly, the network has failed to provide an adequate scaling solution to meet this demand. That has resulted in gas costs escalating to >300 gwei, which means a transaction on Uniswap can cost over $100. For most users, this fee is debilitating and prevents the possibility of trading. I also believe that with rising gas costs, ‘alt-coins’ become inflated in the market to reflect the price of gas which artificially inflates users wallets.
With gas this high, the innovation across the Ethereum network cannot be utilised and therefore, retail users seek an alternative. Other alternative chains have failed to appeal to these users. However, the BSC with its low fees and Ethereum compatibility appeals to those users excluded. Additionally, Pancakeswap, for example, has incredibly high yield generating opportunities with the typical APY offered to be in the triple digits. Low fees and high yield; it’s convincing!
What are the main projects on BSC?
In this spreadsheet, I have included all the BSC protocols listed on CoinGecko for more than two weeks, and I have also excluded stablecoins. The list of BSC projects has now expanded. But, for this analysis, I didn’t want to change the original selection.
I created this spreadsheet to compare how BSC protocols have performed against the 10 DeFi tokens and the top 10 coins on CoinGecko. I held some CAKE at the time to see what the BSC was all about and saw it rise very quickly and wondered if other projects had similar gains.
Reflecting on this spreadsheet, it is clear that there has been some impressive growth on the BSC. It confirms that money has moved from Ethereum to BSC to enjoy the benefits of the BSC. However, what I have noticed when looking at these protocols, is that the likes of Pancakeswap have seen the price of their token (CAKE) surge, and that makes up a significant portion of the total value locked on the protocols.
Therefore, I have concerns that the growth of these protocols is inflated by the new money rushing to chase these gains as users are depositing their ETH and ERC-20 tokens to earn yield or swap for BEP-20 tokens. In the event of these BSC tokens collapsing in price, users will lose huge sums of money. Furthermore, these BSC tokens have no use on Ethereum, resulting in money being moved from Ethereum to the BSC, with a high probability to be lost when scaling solutions are implemented on Ethereum or when gas inevitable declines.
How has the BSC Performed Against the top 10 in Market Cap and top 10 DeFi Protocols?
To understand the growth and development of the BSC, I wanted to compare and contrast it to other sectors. I decided on using the top 10 for market cap and the top 10 DeFi Protocols as a result. By using the top 10 for market cap, it would create an average for how the overall cryptocurrency market performed. I could then use that to contrast to the BSC. If the BSC outperformed this metric, then the BSC is performing better than the market. I also chose DeFi as a sector as this sector has had rapid growth, and if the BSC outperformed DeFi, I assumed that the BSC is growing exponentially.
The selection made was decided on 10/02/2021. These coins did change in ranking after the subsequent two weeks, but I decided to keep this selection to visualise the changes between these two weeks as if I bought into them.
With the to 10 in Market Cap, there was good growth across the section with an average increase of 7%. However, when contrasted with the BSC, this growth looked poor as the average performance on the BSC was just under 14x higher. But the top 10 did see less of a decline in contrast to those tokens that dropped on the BSC. Nevertheless, with the potential growth available on the BSC, this risk is most-likely considered for speculators.
Additionally, the coins that did decline in the top 10 where Ethereum, XRP and DOGE. That makes sense. Ethereum has had ridiculous transaction fees over this period and has resulted in retail moving over to the BSC. That most-likely impacted the price of ETH. XRP is currently being investigated by the SEC and should be at 0. Finally, DOGE has been turbulent based on the inevitable buying and selling of Elon Musks DOGE tweets.
I was surprised when looking at the change in the market cap of the top 10 DeFi protocols. I was excepting to see continuous growth as DeFi is both exciting and innovative. The table on the left had seen triple-digit growth in all but three tokens, with an average increase of 211.27%. That was very good, although this was less than the tokens on the BSC. Therefore, when I saw a significant decline in these tokens two weeks later, it was unexpected. With the benchmark set at 7% by the top 10 for market cap, I assumed that DeFi would grow at a higher rate than the top 10, and that wasn’t the case.
When comparing the BSC to the other two benchmarks, it became clear that the BSC significantly outperformed. As a sector, the BSC almost doubled in market cap and saw exponential growth when contrasted against the top 10 in market cap DeFi protocols. Therefore, as an investor over this two-week time frame, speculating on the BSC would have been very lucrative.
What are the Views of the Crypto Community on the BSC?
Over the past two weeks, Twitter has been actively debating the pros and cons of the BSC. I have chosen a selection from the community that, in my opinion, cover the broad views of the wider community.
One of the underlying concerns about the BSC is how centralised it is. Already, the BSC has prevented withdrawals for users, which is unacceptable. It raises the concern that Binance can prevent users from accessing and moving their funds in the future. No blockchain should allow for that. As the mantra goes, not your keys, not your coins.
I found this summary by Larry to be the best summary of the BSC vs ETH debate. The BSC has low fees that are ideal for opportunistic investors. I have already demonstrated how the BSC has performed against the market and how it has been significantly more lucrative. Additionally, tokens that do well on the BSC will inevitably list on Binance’s CEX, and that will result in a nice pump for investors. However, Larry also points out that the BSC is incredibly centralised and is not DeFi, despite its claims.
This thread by Anthony demonstrates both the benefits and negatives of having a centralised node structure. Unlike other ‘ETH killer’s, the BSC has the backing on Binance that has deep pockets. Therefore, that enables the gas to be continually subsidised, despite the natural rise which will be expected with an increase of activity on the blockchain. However, that demonstrates that the centralisation of the BSC and the dependence on Binance. If something happens to Binance, fees could rise and lock users out of their funds. Additionally, if Binance controls the network they can and will influence the blockchain in their interest, as opposed to operating in a decentralised fashion.
One of the underlying criticisms of the BSC is with how Ethereum has been the architect for DeFi, and many ETH maximalists are disgruntled that the BSC is marketing itself as DeFi. However, as Qiao argues, the cryptocurrency sector will be multi-chain as there is now innovation in new blockchains with interesting solutions. The extent that a blockchain is decentralised isn’t the selling point but, its usability is, and the BSC is an example of this.
However, in contrast to Qiao, the decentralisation point is fundamental. Ethereum is building a new financial system, one that is open, transparent and decentralised. It aims to challenge and destroy the current centralised system that has embedded many inequalities within it. If the BSC is successful, it further entrenches the centralised financial system, and that is why many in the ETH community are against the BSC.
As the BSC is centralised, many in the community have been watching the trading activity on the blockchain to see if it’s real. As this tweet indicates, the BSC has been fabricating transaction volume and raises legitimate concerns about whether you should hand custody of your funds to a bad actor. If Binance is willing to inflate the trading volume on the BSC, what else is it willing to do to get ahead?
I really liked this flossing anecdote as it covers the debate so succinctly. Decentralisation in the long-term is important, but with high gas fees, people will look elsewhere.
Finally, I included this tweet by CZ, as he summarises why many users have left Ethereum for the BSC. Spending over $100 on one transaction is too much. One of the aims of Ethereum is to create a new financial system. But, if that system is going to charge ridiculous amounts per transaction, then it will be unsuccessful in its attempt.
What do I Think About BSC?
I have already written that I have used the BSC and found it to be interesting. I was intrigued about the low fees and the ability to make ridiculous amounts in profit over a short period. You could describe my position as an opportunistic retail investor jumping on the BSC bandwagon. I doubled my money and then moved it back to ETH.
I noticed that with the low-fees, my behaviour changed as I was looking to day trade on the BSC. It went well, then seeking more gains, I continued to chase and lost those subsequent gains. I wouldn’t be surprised if other investors who are accustomed to the fees on Ethereum did the same. With Ethereum, I realised that my decision-making is more ‘rational’ as I have researched my positions and what I want to achieve. In contrast to the BSC, I acted more irrationally, chasing the gains available on the blockchain.
It was nice to experience low-fees when trading, but I care more about decentralisation, and that is why I won’t continue to use the BSC. Current transaction fees on Ethereum are too high, but users are still willing to pay them. Ethereum will remain number one. But I believe the BSC has told the market to accelerate with layer-2 implementation as users want low fees.
The BSC will remain part of the ecosystem, but I think that retail investors will lose money in the long-term. My major concerns about the inflation of BEP-20 tokens has alredy been outlined.
Final Remarks
I have attempted to discuss and explain the BSC and why it has had rapid growth. When protocols on the BSC are compared with the top 10 in market cap and DeFi, the growth is nothing but impressive.
However, I have also highlighted concerns of centralisation associated with the BSC. The real test for the BSC and its long-term viability is if or when the nodes get extended, and what the subsequent impact on transactions fees is. If the BSC can keep transaction fees low, then the blockchain could be a success.
Unlike other ‘ETH killers’, the BSC is well designed and is easy to use. The addition of the Binance Bridge and the Developer Fund will accelerate its growth. But, I do think that this is a fad caused by Ethereum and its high fees. Already, when I started researching the BSC, transaction fees were over $100 per transaction on Uniswap. But they are already declined significantly and if that continues, then it will be interesting to see how that will impact the growth of the BSC.
If you have any questions, please comment below this post or connect with me on LinkedIn at https://www.linkedin.com/in/wilsonedwardc/
Legal Disclaimer: I am not a financial advisor. The advice here given is not financial advice even though my excitement might make it look like such.
For The Curious Mind
Here is a great podcast discussing the BSC and contrasting that with Ethereum.
I have also attached another podcast by Bankless discussing Layer-2 solutions on Ethereum
Finally, I have attached a fantastic Twitter thread on the BSC.
