Binance Smart Chain: the answer to DeFi’s prayers?

Binance Smart Chain (BSC) is grabbing headlines this week as the contender to Ethereum’s crown as the king of DeFi. The new chain is gobbling up fresh and defecting applications and outpacing transaction volumes while its native token — BNB — has soared to become the third-largest cryptocurrency by market capitalization.

Launched in September 2020, BSC is a blockchain protocol from Binance that runs in parallel with Binance Chain. Unlike Binance Chain, BSC allows for the hosting of decentralized applications (dApps) and the execution of smart contracts. BSC’s Ethereum Virtual Machine (EVM) allows developers to code in the same manner as Ethereum, while BSC’s BEP-20 token mirrors Ethereum’s ERC-20 tokens, which are both essential components of DeFi.

This interoperability has made BSC a highly attractive alternative for dApps originally built on, or for Ethereum. Currently, there are more than 100 dApps operating on BSC. PancakeSwap (a Uniswap clone that now has more active wallets than Uniswap), Autofarm and Goose Finance are three of BSC’s most popular DeFi protocols. They also rank in the top 10 of dApps across all chains by number of users. Meanwhile, other projects such as Harvest Finance and Value DeFi have migrated to BSC because of high transaction fees on the Ethereum network.

Binance Coin (BNB) / PancakeSwap (CAKE) / Venus (XVS) / Autofarm (AUTO)

Unlike Ethereum’s current proof-of-work (PoW) consensus mechanism, BSC validates transactions via proof-of-authority (PoA). There are currently 21 validators that stake their BNB to secure the network. Also unlike Ethereum, BSC does not offer block subsidies or minting of tokens as a reward for validators. Rather, validators earn transaction fees in return for securing the network.

This makes BSC faster and more efficient than Ethereum, with BSC boasting a three-second block completion time compared to Ethereum’s 13-second average over the past year. This puts transactions per second around 57.8 for BSC and 15 for Ethereum. Perhaps most importantly for DeFi, PoA makes transactions on BSC significantly cheaper than Ethereum right now.

Recently, Ethereum has seen transaction or ‘gas’ fees spike over $100 for a single transaction, while BSC charges $0.15 per transaction. This is potentially a game-changer for DeFi which, as we covered in previous blogs, is suffering hugely from congestion and sky-high transaction fees on the Ethereum network.

The popularity of BSC is evident not only in the soaring value of BNB — which rocketed from a little over $41 per coin on 24 January to over $300 per coin by 20 February — but by volume of transactions. On February 20th, BSC registered 2.88 million daily transactions in comparison to 1.33 million on Ethereum. A substantial number of these transactions are from new DeFi protocols on BSC, many of which have been driven out of Ethereum due to the aforementioned congestion.

This was much to the satisfaction of Binance CEO Changpeng Zhao (frequently referred to as “CZ”) who last week boasted on Twitter about BSC reaching twice the number of daily transactions as Ethereum. On Monday, he also added a jibe at Ethereum, pointing out that BNB started as a token on Ethereum and that perhaps “#ETH will end up as a token on #BSC”.

The above highlights the brinkmanship between Ethereum and BSC advocates, who have been frequently vocal about their preferred project. In response to complaints about high gas fees, Vitalik Buterin (co-founder of Ethereum) Tweeted that the issue could be easily solved by layer-two solutions like Polygon (formerly Matic) and Loopring, if people would only begin to use them.

BSC’s daily transactions have soared in recent weeks

Indeed, one of the challenges that BSC may face in the future is skepticism about Binance’s influence in the wider cryptocurrency space — its dominance may dissuade more rebellious DeFi users from giving more power to the crypto behemoth. The nature of PoA also means Binance itself must select BSC’s validators, arguably making it a centralized blockchain.

Further complicating the issue is the recent claim that Binance has intentionally congested the Ethereum network with increased transactions in an effort to attract more users to its own blockchain. Binance accounts for six of the ten most active wallets on Ethereum, and approximately 20% of the entire network’s fees, an indication of how powerful the company is. However, as Binance is the single largest payer of gas fees, this claim is difficult to substantiate.

Binance also came under fire for unexpectedly disabling ETH and ERC-20 token withdrawals on 22 February as gas prices surged to all-time highs of more than 1200 gwei due to heavy congestion. This again prompted claims of possible market manipulation and abuse of power, however with this measure actually working to reduce congestion and gas fees, it would discount the first accusation. Binance also withdrew the measure 37 minutes later.

For some critics, rather than a grand conspiracy, the incident underlines the inability of centralized exchanges to handle the flow of transactions now pouring through them — even one the size of Binance. This is underlined by issues with AWS servers last week that put a strain on a number of exchanges with, CZ noted, Binance “barely holding up”.

It could also be argued that, overall, BSC is beneficial to Ethereum, as it captures many of the low-value transactions clogging the network. BSC has also proven itself as an effective testing ground for new Ethereum protocols, and easily hosts forks and clones of popular DeFi platforms. In other words, it would not be particularly challenging or expensive to build-out an Ethereum-esque DeFi ecosystem on BSC.

This could, in the future, help to take some of the strain off Ethereum. Moreover, in a recent tweet, Ryan Watkins of Messari indicated that BSC’s EVM compatibility could even allow existing Ethereum protocols to “capture incremental value” from development on BSC while the “heavier financial activity” gets carried back to Ethereum.

Many will be watching to see how much total value locked (TVL) and volume occurs on BSC if Ethereum passes its upcoming EIP-1559 proposal, which should be a significant step in reducing gas fees. Despite its immeasurable importance to DeFi, Ethereum can often be its own worst enemy, and it will be interesting to see how much of the market moves to direct competitors like BSC and Polkadot in the coming months.

YIELD App offers the easiest way to invest in DeFi using crypto or traditional currencies, regardless of your financial or technological level of expertise.

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