Kryptolesson #26

The Binance Smartchain - an alternative to Ethereum?

In one of our first KryptoLessons, we examined Ethereum ↗. Ethereum became very significant within the blockchain space because it popularized the term smart contracts, started housing a wide variety of different tokens, and provided a framework for allowing developers to build decentralized applications. The Ethereum blockchain houses noteworthy decentralized projects such as the DeFi applications Chainlink ↗, Uniswap ↗, and Aave ↗. However, Ethereum´s market position is now contested: If we consider Ethereum king, the mission of the Binance smartchain is dethroning Ethereum.

Binance smartchain, or BSC ↗, is backed by Binance, which is known for today´s largest decentralized exchange (DEX) platform, Binance DEX ↗. Binance DEX is running on a parallel blockchain, namely the binance chain (BC), thus creating a ledger for transactions within the exchange. The Binance smartchain was additionally implemented in April 2020 to simultaneously support a smart contract function to users without deteriorating performance of the decentralized transactions on the BC. The two blockchains - BSC and BC - run in parallel. While the BC offers fast and high capacity for cryptocurrency decentralized exchanges, the BSC offers the possibility for smart contract deployment.

Just like on Ethereum, developers can build decentralized applications on top of BSC. BSC offers superior scalability and significant lower transaction fees compared to Ethereum through a particular consensus mechanism, so-called Proof-of-Staked-Authority (PoSA): here, only the 21 most reputable nodes secure all network transactions. This mechanism is faster and therefore more efficient in building consensus than Proof-of-Work (PoW) ↗.

The advantages of scalability and low fees that BSC offers, come with one large detriment, a higher degree of centralization: A central entity, Binance, coordinates and performs the steering and development processes of BSC. At the same time, most of the 21 validators that fulfill the consensus mechanism PoSA are somehow directly or indirectly owned by Binance. Nonetheless, they are elected newly every day, and are selected by BC validators.

To keep barriers as low as possible for a project to switch from Ethereum to BSC, BSC enables projects currently operating on the Ethereum network to swap onto the BSC platform with little to no changes in the code. The current objective of BSC is to gain more users, and allocate total value locked (i.e. liquidity) and investments inside the market on itself.

Whereas Ethereum is a fully decentralized project with thousands of developers and validators, the strong centralization of BSC bears reasonable concerns. On the other hand, BSC outperforms Ethereum in terms of scalability and fees. Ethereum is currently implementing a large transfer from PoW to PoW, by which these disadvantages are expected to become abolished (see here ↗ for our in-depth KryptoLesson on how and why this transfer is performed). If this transformation is conducted quickly enough, Ethereum might remain the the go-to network for developing decentralized applications. If not, rivals such as Binance smartchain might be able to supersede Ethereum.

Photo by Ben Neale