The hype around the Binance Smart Chain (BSC) alternative DeFi ecosystem is gaining momentum amid record-high fees on the Ethereum network.
The total value of funds blocked in BSC platforms (TVL) exceeded $ 12 billion as of March 15, 2021. Binance’s top DeFi ecosystem projects are already comparable in scale to Compound, Maker, Aave and other well-known dApps based on the second largest cryptocurrency by capitalization.
If this rate of growth continues, the value locked in BSC apps will surpass that of Ethereum in a matter of months.
We figured out why there was a stir around the new DeFi ecosystem, what are its pros and cons, and most importantly – whether BSC has any prospects after scaling Ethereum.
- Amid problems with the scalability of Ethereum, the BSC ecosystem quickly gained popularity thanks to low-cost transactions.
- The main disadvantage of Binance Smart Chain is its high degree of centralization.
- Some experts are confident that BSC will not be able to surpass Ethereum in the long run.
Brief Introduction: Binance Smart Chain Key Features
In April 2018, the popular crypto exchange Binance launched the Binance Chain mainnet. The main idea behind this initiative is to create a high-speed blockchain with significant bandwidth.
To implement their plans, the developers chose the Tendermint BFT consensus model. The result is a system that is tailored mainly for the main application of the network – the Binance DEX trading platform.
In early 2020, the Ethereum-based DeFi sector began to grow and develop at an accelerated rate. On the eve of a new boom, Binance realized what exactly Binance Chain is missing – support for smart contracts and the ability to launch its own applications by various projects.
The developers did not try to add smart contract capabilities to Binance Chain at the expense of its performance. They cut the Gordian knot by launching the parallel Binance Smart Chain.
Launched in September 2020, the BSC platform has become fully programmable and ready to work with smart contracts thanks to compatibility with the Ethereum Virtual Machine [Ethereum Virtual Machine, EVM]. This approach made it possible for developers to easily transfer projects originally launched on Ethereum to the new system.
Interacting with BSC applications will not be difficult for users familiar with the «classic» DeFi and MetaMask wallet. The latter is easy to configure to work with the Binance Smart Chain.
The BSC system employs a hybrid Proof of Staked Authority (PoSA) model, obtained by crossing the Delegated Proof of Stake and Proof of Authority algorithms.
The small interval between blocks makes the processing of transactions fast – about 3 seconds. The higher gas limit compared to Ethereum also has a positive effect on throughput, allowing more transactions to be included in blocks.
At the time of writing, the gas limit per block in Ethereum is 12.5 million, Binance Smart Chain has 30 million.With an average block size of 40,000 bytes, the size of the new blockchain grows about 10 times faster in comparison with Ethereum – about 1.15 GB per day or 420 GB per year. This means that after a few years, anyone wishing to become a Binance Smart Chain validator will need a whole data center.
Moreover, a candidate for Binance validators needs to have at least 10,000 BNB ($ 2.55 million at the exchange rate as of 03/15/2021). From candidates meeting this criterion, those who have more coins (own and delegated) are selected. Ultimately, a kind of oligopoly of 21 validators is formed. The list of participants is reviewed once a day.
The new network uses Binance Coin (BNB) to pay for transaction fees. Thanks to BSC, the latter has gone far beyond the exchange token for discounts on trading commissions and access to initial coin offerings. BNB has become the centerpiece of profitable farming.
The excitement around the new ecosystem
In the second half of February, the TVL of the Binance Smart Chain ecosystem surpassed the $ 10 billion milestone.
Leading projects based on BSC:
- Venus landing protocol – an analogue of Compound based on Ethereum;
- PancakeSwap – DEX is akin to Uniswap;
- Autofarm is a project similar in essence to Yearn Finance.
TVL of the above protocols are $ 5.34 billion, $ 3.88 billion and $ 1.15 billion, respectively. For comparison, the three leading Ethereum-based DeFi projects – Maker, Compound and Aave – have these figures of $ 6.95 billion, $ 6.41 billion and $ 5.01 billion (as of 03/15/2021).
In the context of the value of blocked funds, the ecosystem based on Binance Smart Chain is gradually becoming comparable in scale to Ethereum.
If we consider on-chain activity, then the daily volume of BSC transactions is more than double that of Ethereum.
On March 11, the BSC network processed 2,930,895 transactions. For Ethereum, this figure was 1,284,767.
Significant activity on the new network is also evidenced by the rapid growth in the number of unique addresses.
BSC is popular despite its low degree of decentralization. Retail investors are clearly attracted by the high transaction speed and low network fees.
Below is a graph of the average gas price that Binance Smart Chain users pay for transactions.
With a BNB price of around $ 250 and a gas price of 13 gwei, a simple transfer of tokens will cost the user about $ 0.10. Interaction with a smart contract, usually involving several transactions at once, can exceed $ 1.
Ethereum’s fees are much higher – a simple ETH transfer sometimes costs users $ 30 or more.
Interacting with Ethereum smart contracts involves even more significant costs. During periods of significant on-chain activity and high ETH prices, the cost of exchanging tokens on Uniswap or depositing funds on Compound can reach $ 100 or more.
Fees attractive to most retail users and high transaction speeds have been the main reasons for the growing popularity of BSC-based applications.
Demand creates supply: the new DeFi ecosystem grows with projects, infrastructure develops. This is not happening without support from Binance.
As of mid-March 2021, the range of BSC applications is not as rich as that of Ethereum. However, new projects are constantly appearing. Also, on the other hand, hacker attacks and exit scams have become more frequent.
CeDeFi and associated risks
Late last year, Binance CEO Changpeng Zhao coined the term CeDeFi, meaning something between centralized and decentralized finance.
BSC is a typical example of CeDeFi. According to Zhao, Binance Smart Chain is more of an add-on than a competitor to «classic» DeFi, designed to drive the massive adoption of cryptoassets and dapps.
The advantages of CeDeFi include low fees. Along with their high speed, they motivate users to try different protocols – decentralized exchanges, landing apps, profitable farming tools, and liquidity aggregators.
With CeDeFi, some newbies are introduced to MetaMask and block explorers for the first time, plunging into the diversity of the crypto industry.
Low gas costs allow projects to reduce costs while deploying smart contracts and testing the ecosystem in real-life conditions. The architecture features make it easier for developers to interact with the new ecosystem. Several well-known projects have already opened «bridges» between Ethereum and BSC, allowing you to switch between these networks.
Similar to Ethereum with its popular ERC-20 standard, Binance Smart Chain users can create BEP-20 tokens. Binance Chain has its own standard – BEP2.
One of the main disadvantages of CeDeFi is its high centralization. The system controlled by Binance and supported by 21 validators is hardly decentralized. This is the flip side of low fees and fast transactions.
The high entry threshold for validators is also significant. The latter, as already mentioned, need approval from Binance, an impressive amount of BNB and a considerable disk space.
Binance is investing heavily in the development of the ecosystem, the success and popularity of which determines the price outlook for BNB. The latter is a native BSC token and pays transaction fees.
On the other hand, there is no emphasis on serious innovation like in Ethereum. The Binance ecosystem’s value proposition is essentially limited to a low-cost alternative for profitable farming.
The BSC infrastructure is also inferior to the development of the Ethereum-based DeFi ecosystem. However, given the frequency of emergence of new analytical services and wallets, the situation has improved over time.
Expert opinions on BSC
Sam Bankman-Fried, head of Alameda Research and FTX crypto derivatives exchange, shared his thoughts on the Binance Smart Chain ecosystem and its future in a series of tweets.
1) A while ago I wrote a post on Sushiswap
– SBF (@SBF_Alameda) March 8, 2021
“They haven’t created a completely new network; they essentially forked Ethereum , ”the expert emphasized.
Bankman-Fried added that not even a wallet for the new ecosystem was originally created. The developers «made BSC work with MetaMask.»
“I would be very sad if BSC becomes the future of blockchain technology. But again, I don’t think there’s any desire for this. A completely new product has not been created, which implies scaling in the context of decentralization. A cheap product has been created that is easy to switch to. «
According to Bankman-Fried, most users are interested in profitable farming, not a decentralized autonomous organization.
He is confident that Binance has succeeded in creating the «perfect» platform for pharming income.
The expert is convinced that BSC has brought competition to decentralized finance, without at all depriving this area of the future.
Bankman-Freed concluded by identifying the inherent characteristics of a «winning» DeFi ecosystem.
“It cannot be decentralized, or fast, or cheap, or mature, or innovative, or well-made, or have a significant user base. She must have all of the above. «
The Block analyst Larry Cermak is convinced that BSC does not pose a threat to Ethereum in the long term.
We all know BSC is not going to threaten Ethereum long term but it absolutely amuses me when Ethereum people start sounding just like Bitcoiners bitching about Ethereum. Just chill, take a breather and let the incentives play out
– Larry Cermak (@lawmaster) February 19, 2021
«It really amuses me when Ethereum apologists are like Bitcoin maximalists complaining about the second largest cryptocurrency by capitalization.»
Among the main shortcomings of the BSC, the analyst noted that centralization was «fucking awesome» and that «everything is funded by Binance.» Cermak attributed the significant resources of Changpeng Zhao’s company to the benefits of the new ecosystem. The main reason for the hype around BSC is the wide opportunities for maximizing profits.
Why is this happening? In retrospect, it was inevitable. Retail wants to gamble in DeFi and the vast majority of newcomers are priced out of Ethereum. Do they care about decentralization? Nope
– Larry Cermak (@lawmaster) February 19, 2021
According to Chermak, the emergence of a platform for «DeFi-gambling» was inevitable, as many newcomers to the industry were put off by the high transaction costs of Ethereum.
“Are they concerned about decentralization? Nope , «the researcher emphasized.
Binance Smart Chain has managed to achieve impressive success in a short time, considering the number of users, trading volumes and TVL. The decision to build a system in the image and likeness of Ethereum, with similar tools and protocols, seems quite reasonable.
BSC came about in a timely manner – the growing popularity of Ethereum, with the still pressing issue of scaling, resulted in extremely high transaction fees. High costs have pushed many retail users away from the ecosystem, prompting them to seek alternative options for interacting with DeFi.
As one of the largest cryptocurrency exchanges, Binance has opened up the possibility for multiple users to withdraw BNB and other cryptoassets directly into the BSC ecosystem. The BEP-20 standard, cross-chain communication and network effect have done their job.
PoSA-model provides a quick transactions and low commissions and. The price for this is the low level of decentralization and network security. However, few people are worried about this – for most, profitable farming with low transaction costs is important.
The high growth rate of the BSC ecosystem is likely to continue to positively influence the price of Binance Coin. The ecosystem’s native asset is needed to pay transaction fees and is widely used in applications that promise a high percentage of the investment.
It is unlikely that this trend will reverse in the short and medium term. However, the question remains: will BSC manage to become the leading DeFi ecosystem in the long term?
Tier 2 scaling solutions, as well as a full-scale transition to the second version, can significantly reduce the costs of interacting with Ethereum, without compromising decentralization and security.
The intrigue grows as technologies like Optimism, Plasma, and Rollups evolve and become ubiquitous. Who will win in the DeFi vs CeDeFi confrontation, time will tell.