Despite its origins in China, which has been historically skeptical of cryptocurrencies, Binance has emerged as the global leader in cryptocurrency exchanges, catering to more than 13.5 million active users. With its current base in the Cayman Islands, Binance aims to provide a comprehensive range of cryptocurrency trading services. An integral component of its offerings is the Binance Smart Chain (BSC), a publicly accessible smart contract platform that enables individuals to engage in the next generation of financial activities, known as Finance 2.0.

Preliminary information

In April 2019, Binance introduced the Binance Chain blockchain as part of its decentralized trading vision. Alongside the blockchain, it launched the Binance Decentralized Exchange (DEX), which aimed to offer high transaction throughput.

Many existing DEX platforms suffer from cumbersome user experiences and clunky interfaces, prompting Binance to revolutionize the space with its new solution. The goal was to incorporate the intuitive user interface (UI) and optimized user experience (UX) that made the Binance Exchange successful into the DEX. Additionally, Binance aimed for trade confirmation times of less than one second on the platform.

Functionally, the BC blockchain is primarily designed for decentralized trading. Binance highlights the following capabilities of the BC blockchain:

Facilitating the sending and receiving of digital assets, including Binance's native currency, BNB.

Exercising control over token issuance and supply through actions such as minting, burning, locking/unlocking, or freezing/unfreezing.

Enabling the issuance of new tokens based on the BEP-2 standard. For instance, BNB exists as a BEP-2 token on the BC blockchain.

Binance Smart Chain (BSC) was launched in September 2020, approximately 18 months after the introduction of its predecessor, Binance Chain (BC). Serving as a smart contract platform, BSC replicates the functionalities of Ethereum and other dApp platforms like Tron and EOS.

Interestingly, Binance made the decision to launch a separate blockchain instead of upgrading Binance Chain, despite it being technically feasible. The rationale behind this choice, as explained by the exchange, was to prevent network congestion and maintain optimal efficiency. The historical incidents of smart contracts burdening their host networks, such as the CryptoKitties crisis on Ethereum in December 2017 and the recent issues on the Solana network, influenced Binance's approach.

Creating a parallel blockchain with smart contract capabilities and compatibility with Ethereum, the dominant dApp network, was deemed the most favorable option for Binance. Rather than constructing an entirely new blockchain from scratch, leveraging the open-source nature of Ethereum's code allowed Binance to fork it, thereby expediting the process. Binance utilized the Go Ethereum (Geth) client as the basis for Binance Smart Chain, introducing certain modifications to differentiate it from Ethereum. Notably, they implemented a Proof of Staked Authority (PoSA) consensus mechanism instead of Ethereum's existing Proof of Work (PoW), enabling shorter block times and reduced transaction costs.

Binance Chain utilizes the Tendermint Byzantine fault tolerance (BFT) consensus mechanism, which is also employed by the Cosmos blockchain. Since BC and Cosmos share a consensus mechanism, they also adopt the Proof of Stake (PoS) model for governance and transaction validation, as used in Cosmos. Further elaboration on the PoS system will be provided in the upcoming section on BSC.

Binance Chain VS Binance Smart Chain:

When comparing Binance Chain and Binance Smart Chain, it becomes evident that there are both similarities and differences between the two blockchain platforms. Here's a brief overview of how they compare to each other.

Shared Features

Both Binance Chain (BC) and Binance Smart Chain (BSC) share several commonalities as outlined below:

1. Origin and Maintenance: Binance exchange initiated and continues to oversee the development and operation of both blockchains. Although BSC grants a relatively higher level of autonomy compared to BC, Binance's involvement remains substantial and noteworthy.

2. Rapid Block Times: Both BC and BSC exhibit fast block generation intervals. BC boasts block times of less than one second, while BSC follows closely with a new block created approximately every three seconds.

3. Cost-Effective Transactions: Both blockchains offer significantly lower transaction fees when compared to prominent industry players like Bitcoin and Ethereum. This enables users to process transactions more affordably, facilitating cost savings and improved accessibility.

Distinguishing Factors

Binance Chain (BC) and Binance Smart Chain (BSC) exhibit notable differences, which are summarized below:

1. Functionality: BC has a limited scope as it primarily serves as the host blockchain for Binance Decentralized Exchange (DEX). In contrast, BSC is a versatile platform capable of hosting any decentralized application (dApp), including those initially designed for Ethereum, which can be easily migrated to BSC.

2. Consensus Mechanisms: BC employs the Tendermint Byzantine Fault Tolerance (BFT) consensus mechanism, allowing Binance exchange to maintain complete control over the blockchain without extensive community involvement. On the other hand, BSC utilizes the Delegated Proof of Staked Authority (PoSA) consensus mechanism, enabling participation from other validators in network governance and block validation. Nevertheless, Binance retains control over the BSC blockchain by vetting the block validators.

3. Token Issuance Standards: BC mints network tokens following the BEP-2 issuance standard, while BSC adheres to the BEP-20 standard. The BEP represents Binance Evolution Proposal, and if necessary, the BSC network can introduce additional token issuance standards. For example, the BEP-721 standard, similar to Ethereum's ERC-721, supports the issuance of non-fungible tokens (NFTs) and other unique digital collectibles.

Getting to Know Binance Smart Chain (BSC)

For a deeper comprehension of Binance Smart Chain (BSC), it is crucial to examine its characteristics to uncover its distinctiveness and exceptional qualities in comparison to other blockchain networks. This section provides an insight into its fundamental elements, encompassing its guiding principles, consensus mechanism, and ecosystem.

Following a year of existence, the blockchain has witnessed exponential expansion. It might be valuable to retrospectively assess its journey, gauging the extent of its progress and identifying any significant transformations it has undergone.

Fundamental Design Tenets

During the design and development of Binance Smart Chain (BSC), Binance adhered to four key principles that guided the architecture of the blockchain. These principles are as follows:

1. Native Cross-Chain Communication: While Binance developed BSC as a parallel chain to Binance Chain, they ensured the integration of native cross-chain compatibility between the two blockchains. This allows for seamless token swapping between the BSC network and other tokens, utilizing the fast Binance DEX on Binance Chain.

2. Staking: BSC implements a staking model, enabling active participation in governance and block creation by the BSC community. Binance's decision to adopt staking over traditional mining was primarily driven by the goal of achieving faster network speed, even if it came at the expense of some decentralization and security. Staking models are also more environmentally friendly and support faster block generation.

3. Standalone Blockchain: Binance prioritized the independence of BSC from Binance Chain. This separation ensured that the failure of one blockchain would not cause disruptions in the services provided by the other. It also allowed Binance to incorporate new technologies that were either underutilized or had undesirable side effects in the past.

4. Ethereum Compatibility: Binance leveraged the existing work done by Ethereum, the leading smart contract platform. Ethereum boasted a large user base, a robust network of miners, and a thriving development community. Despite challenges such as high gas prices and security vulnerabilities, Ethereum had emerged as the market leader. Binance chose not to reinvent the wheel and instead utilized what worked for Ethereum, with certain modifications such as the consensus mechanism. By replicating Ethereum's source code, BSC facilitates cross-chain interoperability, making it easier to transfer native Ethereum dApps to BSC.

Proof of Staked Authority (PoSA) Consensus Mechanism

BSC employs the PoSA consensus mechanism to establish network consensus. This mechanism combines elements of Delegated Proof of Stake (DPoS) and Proof of Authority (PoA). DPoS has proven successful in blockchains like EOS.

In the DPoS model, validators stake the network's native tokens to earn the opportunity to validate transactions and create blocks. While technically anyone with the minimum required token stake can become a validator, allowing unlimited validators would hinder network performance. DPoS networks enable token holders to vote for a specified number of delegates to become validators. In the case of BSC and EOS, this number is limited to 21 validators.

In Binance Smart Chain, PoA involves the selection of validators by a central party, namely Binance. Before being eligible for voting by token holders (delegators), all validators undergo Binance's vetting process. This can be likened to a KYC (Know Your Customer) process for validators, where Binance approves their participation in block creation.

Although the merging of PoA and DPoS consensus models increases network centralization, Binance appears to have accepted this trade-off to achieve high network throughput. BSC achieves a block generation time of 3 seconds, surpassing Ethereum's 13 seconds and Bitcoin's 10 minutes.

Native Token (Binance Coin - BNB)

Binance Coin (BNB) was introduced as a utility token on the Binance exchange in July 2017. Initially, it served as an incentive for the crypto community to participate in the Binance ICO, offering trading discounts to holders who used BNB as a payment method.

During the ICO, 200 million BNB tokens were created, with half sold to the public and the remaining half allocated to the founding team and angel investors. The funds raised, approximately $15 million, were utilized to develop the exchange platform.

Initially, BNB was an Ethereum token following the ERC-20 standard. However, when Binance launched the BC blockchain in April 2019, all BNB tokens were migrated to the BEP-2 standard, becoming the native token of the Binance DEX on the BC network. BNB continued to function as a utility token for transaction fee payments.

In 2020, with the introduction of the BSC, BNB was once again adapted to serve as the native token issued under the BEP-20 standard. As Binance has two blockchains, there are now two versions of BNB, as the exchange chose not to eliminate the previous BEP-2 tokens. Instead, native cross-chain compatibility was established between BC and BSC, allowing seamless conversion of BNB tokens.

On the BSC, BNB serves three main purposes:

1. Paying gas fees for deploying smart contracts on BSC.

2. Staking on selected BSC validators and earning corresponding rewards.

3. Facilitating cross-chain operations, such as transferring token assets between BC and BSC.

Binance Smart Chain Ecosystem

The Binance Smart Chain (BSC) ecosystem is a dynamic and expanding environment that continually integrates new applications and innovations derived from the Ethereum community. In this section, we will highlight four key components of the ecosystem. However, we highly recommend conducting further research to explore the full breadth of offerings within the BSC ecosystem.

Binance Smart Chain (BSC) Wallets

Blockchain wallets play a crucial role in securely storing assets and enabling users to interact with native dApps on smart contract networks like BSC and Ethereum. Despite being relatively new, BSC already offers a diverse range of decentralized applications. Here are three excellent wallets that support the BSC network:

1. Binance Chain Wallet:

The Binance Chain wallet is an official browser extension developed and maintained by Binance exchange. It serves as the designated wallet for accessing BSC and Binance Chain. Compatible with Firefox and Chromium browsers (e.g., Brave Browser), this wallet, although limited in functionality, fulfills the essential tasks, and Binance consistently works on enhancing its capabilities.

2. Trust Wallet:

Trust Wallet is a standalone mobile wallet available for both iOS and Android devices. Owned and maintained by Binance, it offers comprehensive support for BSC-related features. Users can seamlessly interact with BSC dApps, swap between BEP-2 and BEP-20 tokens, trade numerous digital assets, and stake tokens to earn rewards.

Trust Wallet was the first wallet to support BSC and also provides support for other network protocols such as Ethereum, Tron, EOS, and Solana. It offers seamless integration with hardware wallets like Coolwallet, further enhancing the security of users' assets.

3. MetaMask Wallet:

MetaMask is a popular and widely used wallet that supports various blockchains, including BSC. It started as a browser extension wallet but has now expanded to mobile platforms as well. With MetaMask, users can easily access and interact with BSC dApps, manage their BNB and other BSC tokens, and enjoy a user-friendly interface for their blockchain transactions.

These wallets provide users with convenient and secure options for managing their assets and accessing the vibrant ecosystem of decentralized applications on the Binance Smart Chain.

The economic aspects of Binance Smart Chain (BSC)

Similar to how Ethereum has its native token ETH, Binance Smart Chain (BSC) has its own cryptocurrency called Binance Coin (BNB). BNB serves various purposes within the BSC ecosystem, including payment for transaction and trading fees on the Binance exchange, including the decentralized exchange (DEX).

During the initial coin offering (ICO) in July 2017, BNB was launched as an ERC-20 token, just two weeks before the launch of Binance. At that time, 2,700 BNB could be obtained for one ETH or 20,000 BNB for one BTC. Since then, BNB has shown impressive performance, surpassing both bitcoin and ethereum. Year-to-date, BNB has outperformed bitcoin by 825% and Ethereum by 572%. Currently, 1 BNB is valued at $366 USD, and the maximum token supply is 200 million BNB coins. Approximately 168.1 million BNB are currently in circulation.

BNB follows a deflationary model similar to bitcoin, with regular token burning events conducted by Binance every quarter. These burning events remove tokens from circulation, with the goal of eventually reducing the total supply to 100 million BNB.

However, it's important to note that BNB's management is highly centralized, as Binance controls or owns at least 50% of the BNB supply. The distribution of BNB tokens allocated to founding members and angel investors further emphasizes the influence of Binance on the fate of BNB. This dependency on a centralized and for-profit company raises concerns, especially considering Binance's regulatory challenges and recent allegations of insider trading.

Binance Bridge as Interoperability Tool for Blockchain Networks

The Binance Bridge, managed by Binance, serves as an interoperability solution for connecting BC, BSC, and other blockchains. It enables the seamless integration of tokens issued on incompatible networks into the Binance DEX and Smart Chain ecosystems.

Through the Binance Bridge, users can create new tokens that are pegged to the value of the original tokens on non-compatible networks. For example, if you have Eth coins on Ethereum that don't comply with ERC-20 standards, you can convert them to BEP-20 compliant tokens using the Bridge to use them on the BSC network. This process results in wrapped tokens that maintain a value pegged to Eth.

The conversion process, known as pegging in, allows users to convert their native tokens to wrapped tokens. The reverse process, converting BEP-20 wrapped tokens back to their native versions, is referred to as pegging out. Hence, these BEP-20 minted tokens can be referred to as either "wrapped" or "pegged."

Binance does not charge any fees for token conversion, but users are required to pay network fees on the respective blockchains for the transaction. For instance, if you transfer ETH coins to the Bridge, you would need to pay Ethereum transaction fees to the miners.

There are several benefits to wrapping tokens:

Ø Cross-chain compatibility: Wrapping non-native tokens enables their utilization on different blockchains, increasing their value and utility.

Ø Increased liquidity: Wrapped tokens are more versatile and easier to trade. They can be transferred to platforms with higher liquidity, allowing for seamless entry and exit from positions.

Ø Expansion of blockchain availability: Wrapping and unwrapping tokens provides access to various blockchain features. For example, if you need a fast network, you can wrap your ETH or BTC coins and use them on BSC. Conversely, when security is a priority, you can opt for Bitcoin or Ether on their respective networks.

Ø By leveraging the Binance Bridge, users can enjoy the benefits of interoperability, enhanced liquidity, and broader blockchain accessibility for their tokens.

Binance Smart Chain: Strengths and Weaknesses

Similar to any blockchain network, BSC has its strengths and weaknesses. While it excels in certain areas as a platform for hosting blockchain applications, these characteristics may not appeal to all cryptocurrency users. Let's explore what makes BSC a compelling or less appealing smart contract platform compared to other players in the market. Here are some of the factors to consider.

Virtues of Binance Smart Chain

Interoperability across chains: BSC not only exhibits compatibility with the Ethereum Virtual Machine (EVM), but it also supports pegged coins from multiple other blockchains, enabling users to create various tokens for utilization within the network. This cross-chain compatibility fosters enhanced token liquidity, utility, and value.

Cost-effective gas fees: On BSC, the average cost for processing a transaction stands at 5 Gwei, significantly more affordable than Ethereum's 40 Gwei. This translates to an 8x reduction in expenses for running dApps on BSC compared to Ethereum.

Swift transaction speed: BSC distinguishes itself as one of the swiftest smart contract platforms, propelling its rapid expansion. With block generation occurring every three seconds, it outpaces Ethereum's 13-second interval, resulting in a minimum of four times faster transaction processing.

EVM-compatibility: By opting to fork the Geth Ethereum client, BSC appeals to Solidity developers, granting the Binance network effortless access to an already thriving community of developers and users. Furthermore, the cost-efficiency of running dApps on BSC simplifies the process of porting applications from Ethereum, which offers faster and more cost-effective execution.

Reputable platform: Binance stands as one of the premier cryptocurrency exchanges, and its reputation extends across all its platforms, including BSC. The exchange assumes a crucial role in the PoSA consensus by meticulously evaluating all network validators, ensuring the blockchain's security and reliability.

Limitations of Binance Smart Chain:

Centralization: One of the main concerns associated with BSC is its high level of centralization. The PoSA consensus mechanism heavily involves the Binance exchange in the functioning and upkeep of the blockchain, creating a significant single point of failure. Both BSC and BC rely heavily on Binance, raising concerns about decentralization.

Deflationary tokens: BNB tokens undergo regular coin burns, reducing the total supply. While this may initially drive up token prices, it can also lead to potential issues. A growing demand coupled with a shrinking supply may result in supply shortages and inflated prices, ultimately impacting transaction costs.

Reliance on Ethereum: Binance made significant efforts to replicate the Ethereum network, allowing for easy migration of Ethereum-based dApps to BSC. However, this has resulted in limited innovation on BSC, as it largely relies on existing Ethereum capabilities. To truly establish its own identity, BSC needs to foster local innovation and differentiate itself from Ethereum.

These are some of the notable challenges faced by BSC. However, despite these concerns, BSC continues to experience growth, indicating positive momentum for the platform.

Is BSC deserving of investment?

Investing in Binance Smart Chain (BSC) involves considering several factors. BSC has gained popularity due to its fast transaction speed and low fees, making it an attractive smart contract platform. However, it is important to note that BSC is criticized for its high level of centralization. The future of BSC could be influenced by regulatory actions towards Binance and the company's approach to conducting its operations.

Considering the potential benefits of BSC's speed and low fees, along with its popularity, some investors may find it worth considering. However, it is crucial to conduct thorough research, analyze market conditions, and assess the risks associated with investing in BSC or any other cryptocurrency or blockchain project. As with any investment, it is advisable to seek professional financial advice before making any decisions.

Final thoughts

BSC has demonstrated remarkable growth and adoption, quickly becoming a prominent blockchain network. While it may be considered less innovative compared to Ethereum, its transaction volume and scalability achievements are commendable. However, Ethereum's upcoming upgrade to a PoS consensus mechanism indicates potential improvements in speed and scalability.

It's important to acknowledge that BSC offers more than what has been discussed, with its involvement in the realms of DeFi and NFT launches. This presents an exciting opportunity for exploration and further research within the blockchain and cryptocurrency space. We encourage you to delve deeper into the Binance Smart Chain and uncover the potential it holds.