What is Binance Smart Chain?

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robertstevens

Robert has reported for a variety of international publications including the Associated Press, The Guardian, Vice, and Decrypt. Current areas of interest include the political economy of technology, cryptocurrencies, and privacy. Robert has a Bachelor of Science from UCL, and a Master's degree from the University of Oxford's Internet Institute.

Binance Smart Chain is a blockchain created by Binance, the world’s largest cryptocurrency exchange. While critics argue that it sacrifices some of the elements of decentralization that made its main rival, Ethereum, so popular, it manages to offer smart contracts and a thriving ecosystem of financial applications at a fraction of the cost and at a far greater speed.

Binance Smart Chain offers versions similar to the top apps on Ethereum. However, Binance Smart Chain is just one more horse in the race: Plenty of other blockchains are also competing with Ethereum to become the preferred smart contract platform.

As its native currency, Binance uses BNB, or Binance Coin. Once an Ethereum-based coin, BNB now runs on the Binance Smart Chain. Binance incentivizes customers to buy and hold it by offering them discounts on trading fees and cheap withdrawal fees. Withdrawal fees for Ethereum are comparatively high.

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Binance Smart Chain: A History

In April 2019, Binance launched the predecessor to Binance Smart Chain, Binance Chain, on “mainnet”—the official version of a blockchain that operates with “live” cryptocurrency (as opposed to worthless test cryptocurrency).

Binance Chain lets you send and receive BNB, issue new tokens according to Binance’s BEP-2 token standard, burn tokens, and freeze and lock them. It isn’t compatible with the Ethereum Virtual Machine.

The primary focus of Binance Chain at the time was Binance DEX, a decentralized exchange. A decentralized exchange is a non-custodial exchange where the operators have no control over your cryptocurrency (unlike Binance’s main exchange, which is a centralized exchange). Binance DEX never really took off. It is the 41st most popular decentralized exchange as of September 2021, and has since been usurped by other DEXes.

Still, Binance DEX motivated Binance to build a smart contract platform that runs on the Ethereum Virtual Machine, allowing other people to create applications and tokens on Binance. It called this blockchain the Binance Smart Chain. One of these applications, PancakeSwap, is now the third most popular DEX.

The ability to launch decentralized applications on Binance Smart Chain put the blockchain in direct competition with Ethereum. Since Binance Smart Chain is compatible with the Ethereum Virtual Machine, developers can build applications with the same tools they use for Ethereum smart contracts, such as MetaMask and Truffle.

Binance Smart Chain runs parallel to Binance Chain. Binance says that it is an “independent but complementary system” to Binance Chain, and that it could run if Binance Chain went offline. Binance calls the architecture “dual-chain,” meaning that users can transfer assets from one blockchain to another seamlessly and cheaply.

Tokens on Binance Smart Chain operate on the BEP-20 token standard, which is distinct from Binance Chain’s BEP-2 token standard. Addresses for Binance Chain and Binance Smart Chain wallets are also distinct.

The bottom line: Binance Chain is the muscle of Binance’s blockchain operation. It offers high transaction capacity and lets you mint and issue tokens. Binance Smart Chain is the blockchain that lets you create decentralized applications using the Ethereum Virtual Machine.

Binance Smart Chain launches

Binance Smart Chain launched in September 2020, and decentralized applications sprung up thick and fast. Almost immediately, lots of people complained that these applications were simple mimics of Ethereum applications. Other people didn’t mind since Binance Smart Chain applications offered far cheaper transaction fees.

PancakeSwap, the largest decentralized exchange on Binance Smart Chain, was forked from Uniswap and Sushiswap, Ethereum-based decentralized exchanges that do pretty much the same thing. Etherscan, an Ethereum blockchain explorer (a site that lets you search for transactions on the vast Ethereum ledger) became BscScan. Countless “yield farms” sprung up to mimic Ethereum-based projects like yEarn Finance.

Just like early decentralized finance smart contract projects on Ethereum, lots of early projects on Binance Smart Chain turned out to be scams. Indeed, given that Binance Smart Chain’s transactions are lower than Ethereum’s, it’s far cheaper to mount a scam on Binance Smart Chain.

A decentralized storage project on Binance Smart Chain called TurtleDex cost users $2.4 million when its team pulled an “exit scam” and disappeared with customer funds. And in March 2021, $31 million of customer funds were siphoned from Meerkat Finance. The developers later returned the funds, calling the drain a “test.”

“We actually help with a few rug pulls recently too,” tweeted Binance’s CEO, Changpeng Zhao, in March. “I mean, helped chasing the funds back,” he clarified.

There are different ways of measuring the popularity of a blockchain. One is to look at the “total value locked,” or TVL, which refers to the amount of money that is locked up in decentralized finance protocols, such as lending protocols, automated money markets, or non-custodial investment funds. According to The Block, Binance Smart Chain’s TVL peaked in May 2021, when around $35 billion was locked in the blockchain’s top decentralized finance smart contracts.

This figure dipped around May 19, when figures sunk to about half of that. One reason for the dip was that the wider crypto market had crashed, and traders were likely taking money out of Binance Smart Chain’s smart contracts, which generally promise high yields at great risk, and putting that money into more stable opportunities.

It could also be due to hacks. In May 2021, $122.8 million was stolen from Binance Smart Chain, more than double any other month (apart from August, when a hacker stole $600 million from Ethereum and Binance Smart Chain, but returned most of the money shortly thereafter).

Slowly but surely, things started to pick up on Binance Smart Chain, and by August 28, Binance Smart Chain had $22.68 billion in TVL.

This is far smaller than Ethereum, BSC’s main rival. Ethereum’s TVL also peaked in May 2021, when it hit about $87.2 billion, according to data from The Block. Like Binance Smart Chain, Ethereum’s TVL dipped shortly after but then started to rise, increasing to $84.1 billion on August 31.

Binance Smart Chain: Is it really decentralized?

Critics argue that Binance Smart Chain achieves low costs and speeds by sacrificing decentralization. This violates the core principle of many blockchain projects; the whole point is to have a ledger that is verified by anonymous people from all over the world.

There are just 21 validators on Binance Smart Chain. These validators are determined every day by Binance Chain, which has just 11 validators. In comparison, there are 223,624 Ethereum validators.

What’s more, several public Binance Smart Chain validators have close ties to Binance itself. Of the remaining anonymous validators on Binance Chain, Messari analyst Wilson Withiam wrote on April 12, “It’s hard not to presume that each Binance Chain validator is in some way connected or tied to Binance.”

Wilson presumes that all Binance Chain validators are managed or influenced by Binance. He continued: “They each take turns producing blocks in a seemingly predefined order. There doesn’t appear to be any stake-weighted mechanism to determine which one produces the next block.”

So, while Binance Smart Chain is cheap and fast, it likely accomplishes this by giving up one of the foundational principles of blockchain technology: decentralization. However, lots of blockchain companies sacrifice decentralization to speed things up. Binance’s cryptocurrency exchange, as well as companies such as Wealthsimple and Coinbase, are entirely centralized. They control your funds and manage them on your behalf.

This is because popular blockchains like Ethereum and Bitcoin are slow and expensive to use, and all blockchains are unwieldy for people unfamiliar with the technology. Some purists consider such centralized companies a scourge on the technology, while others are thankful that they make crypto trading convenient and introduce it to non-technical customers.

How to get started on Binance Smart Chain

Binance Smart Chain works much like Ethereum. To show you how to get started, we’ll walk you through a trade on PancakeSwap, the most popular application on Binance Smart Chain.

To start, you first need to get a BEP-20 compatible token. You can do this by signing up to a cryptocurrency exchange, like Binance, and buying one. An example of a BEP-20 token is BNB, Binance’s own cryptocurrency. You can buy this with another cryptocurrency or directly for a fiat currency.

Once you have your BNB, you’ll need to move it to an external wallet that is compatible with Binance Smart Chain and its applications. A popular example of this is MetaMask, a wallet that can be downloaded as a mobile app or as an in-browser web extension. When you withdraw your BNB from Binance, make sure to send it to your MetaMask’s BEP-20 address.

Then head to PancakeSwap, You can then connect your MetaMask wallet by clicking on the wallet in your browser and switching it from the default blockchain, Ethereum, to the Binance Smart Chain mainnet. Once you see your funds in MetaMask, you can connect your MetaMask wallet to PancakeSwap.

Then, enter in the amount of BNB you’d like to swap (sell, to put it another way) for another token. You’ll have to pay a fee to PancakeSwap’s liquidity providers (the people who are providing the tokens for you to swap, plus the transaction fee that goes to BSC validators). Then, confirm it in your MetaMask wallet and, you’re all set. You’ve successfully used an application on the Binance Smart Chain.

Last Updated September 20, 2021

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