The following year, Binance launched its own blockchain called Binance Chain. Recognising its limitation, however, the developers launched Binance Smart Chain in 2020 to support smart contracts.
Missing Feature In Binance Chain
Binance Chain was developed as a high-speed blockchain that’s able to support large transaction throughput.
It was all well and good until decentralized finance (DeFi) started flourishing on Ethereum (ETH). This meant that Binance Chain wasn’t getting as much traction because it was missing a crucial feature—the ability to run smart contracts for decentralized applications.
Instead of adding smart contract capabilities onto the existing blockchain and sacrificing its performance, Binance decided to launch another blockchain network parallel to Binance Chain.
The Birth Of Binance Smart Chain
Towards the end of 2020, Ethereum was experiencing scalability issues. The high gas fees and congestion on Ethereum forced investors to look for other options.
Binance launched a fully programmable blockchain that can support smart contracts in September 2020. At that time, Ethereum was experiencing scalability and gas fees issues and so investors had to look for other options.
Being cost-effective, Binance Smart Chain (BSC) proved to be a better alternative for investors. The low gas fees also created a lower entry barrier for retail investors who wanted to experience DeFi. Unlike Ethereum’s Proof-of-Work consensus model, BSC uses the Proof-of-Staked-Authority model which has allowed for low transaction fees and higher throughput.
Features Of Binance Smart Chain
The 3 main features that attracted investors and developers to BSC were:
Binance Smart Chain runs parallel to Binance Chain network which means users may enjoy the flexibility of transferring assets from one blockchain to another. This also makes it easier to access different types of protocols.
Low transaction fees
BSC is much more cost-effective than Ethereum due to the different consensus mechanisms. Ethereum has recorded fees over $100 for a single transaction while BSC charges between $0.10-$0.05. The gas fees on BSC has also been gradually lowered from 20 gwei to 5 gwei.
High transaction speed
As BSC is built with a similar structure to Binance Chain, a transaction experiences higher processing speed and shorter confirmation times. This feature is a significant factor when developers consider a blockchain to build their services.
Binance Smart Chain PoSA Consensus Mechanism
The Proof-of-Staked-Authority (PoSA) consensus mechanism has made BSC a solution to Ethereum’s scalability issue.
This mechanism relies on a system of 21 nodes or validators to approve transactions. These validators are chosen based on the amount of BNB staked. The top 21 highest-staked nodes are elected every 24 hours. A share of the transaction fee paid in BNB is awarded once a transaction is validated.
While the PoSA consensus model achieves a short block time and low fees, it does so at the cost of decentralization.
Binance Smart Chain is not a decentralized network even though it supports smart contracts. The CEO of Binance describes it as a mixed solution between centralized and decentralized finance (DeFi). Hence, the term CeDeFi.
Although network security may be compromised, users may take advantage of the low fees to experience more than 60 DeFi protocols such as decentralized exchanges, lending protocols, liquidity aggregators, and yield farming tools.
Supported Tokens On Binance Smart Chain
While Ethereum has its popular ERC-20 token, BSC uses essentially the same format with its BEP-20 token. BEP-20 tokens are supported on BSC while BEP-2 and BEP-8 tokens are supported on Binance Chain.
Binance’s native utility token, BNB is mainly used for paying transaction fees, staking, asset transfers, and running smart contracts on BSC. Users can stake their BNB on a smart contract and delegate to a BSC validator to earn proportional rewards.
Will Binance Smart Chain Remain In Favour?
Recently, there has been a growing number of DeFi rug pulls or exploits on BSC. This brings back the question of network security. Furthermore, the amount of crypto assets that are locked in DeFi protocols on BSC, also known as the total value locked (TVL), is currently far off its all-time TVL high in May.
Such concerns may affect the performance of BSC while Ethereum continues to solve its scalability issue via Layer 2 solutions.
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Diyana helps you to make sense of the complicated stuff. Follow the author on Twitter @diyana_eco