Binance SmartChain.
Binance is probably the biggest cryptocurrency exchange in the world and has its own blockchain on which it runs the exchange. This is called the Binance Main Chain. In September of 2020 it deployed a separate blockchain called Binance Smart Chain. While the original Binance Chain is devoted to the exchange, this second blockchain was carefully designed to support smart contracts and to host decentralized finance applications. Binance Smart Chain, which is a separate blockchain running in parallel with Binance Chain, is a newer, modern blockchain with high transaction speeds, and several traits including its’ ability to host smart contracts and have cross blockchain swaps via a common currency—BNB.
Ethereum Compatible Design
Binance carefully replicated the world famous Ethereum Virtual Machine. Which is the software construct the allows Ethereum to host another type of software construct called Smart Contracts. Smart Contracts allow Decentralized Finance Applications like Uniswap to work. The Ethereum Virtual Machine and the Smart Contracts allow for decentralized exchanges to exist where code controls everything without human intervention and interference. These exchanges also allow trading without giving up control over your cryptocurrency by transferring it to a centralized exchange. You simply connect your wallet to the application and give permission for it to trade your cryptocurrency. The combination of this replicated Ethereum Virtual Machine, along with the Smart Contracts replicated on Binance Smart Chain also, made it possible for clones of famous Ethereum Applications like Uniswap to be launched on Binance Smart Chain. This is how PanCakeSwap, a Uniswap clone was able to be launched on Binance Smart Chain. These features also allow applications currently running on Ethereum to be moved over to Binance Smart Chain.
The importance of consensus mechanism Proof of work versus Proof of Stake.
It’s no secret that Ethereum has problems keeping up with the greatly increased volume of business that decentralized finance applications have brought to the Ethereum Blockchain. While a human being can barely process one transaction in 10 to 15 minutes, Ethereum can process forty transactions per second. This means in the 600 seconds it takes a person to process a single transaction Ethereum has processed 2400 transactions. However this is not fast enough. The total value of decentralized finance transactions on Ethereum has grown from 20 million to over 20 billion in one year. Think of it this way if it makes it easier to understand: that means Ethereum has 1000 times as many transactions each day as before.
Bitcoin and Ethereum both use a consensus mechanism called Proof of work. Consensus means agreement and in cryptocurrency that means the method by which the software decides that the record of transactions is correct. This is a vital process. Proof of Work uses thousands of computers all over the world working at lightning-fast speeds together to reach consensus, or agreement, on the record of transactions being correct. Although computers are fast and 40 transactions per second is 2400 transactions per minute or 24,000 transactions in ten minutes—it is not fast enough to keep up with the one thousand-fold increase in transactions Ethereum experienced.
An alternative to Proof of Work, which uses thousands of computers, is Proof of Stake, which uses less than 100 computers—and in some cases even less than 30. This smaller number of computers, which has to agree on the correctness or accuracy of the record of transactions, allows transactions to be processed much faster. Binance Smart Chain uses a variant of Proof of Stake, so it is much faster than Ethereum. Additionally, consensus requires people all over the world to buy and maintain computers hooked up to the internet, which are much more powerful than the normal household or business computer. Unfortunately the Proof of Work consensus-model requires more expensive computers than the Proof of Stake Consensus model. And there are no alternative ways to pay the people running the computers for Proof of Work, other than a charge per transaction that gets higher every year, and higher when business volume is the greatest. But Proof of Stake allows cheaper computers and alternative payment models. If you put these three factors together you understand why Binance Smart Chain uses a Proof of Stake variant to make Binance Smart Chain run faster and cheaper than Ethereum.
Binance Development Fund, the final genius move by Binance
The last “Smart” business move by Finance was to reduce the cost of developers creating duplicates or clones of popular applications running on Ethereum by paying the labor costs through competitive grants. Binance launched a multimillion dollar developers fund to assist developers in developing applications for Binance Smart Chain, and the fund specifically targeted decentralized finance applications. This incentivized developers to develop new applications similar to the ones already running on Ethereum.
A mis-understood principle in software development: Open Source
Open Source, means that when developers write software code to perform tasks, they store this code in public places in the internet called repositories. In the beginning this code was just for performing single tasks. Gradually they grew to contain hundreds of tasks performed by entire applications. This allows developers to benefit from the hard work of other developers, when building something new. It allows new and innovative programs to be developed much faster, and everyone benefits.
But it also allows your competitor to make an exact copy of your business, and use it to compete against you. Open-source is a beautiful idea, but it can result in situations of imitation instead of innovation. Since most applications running on the Ethereum Blockchain are open source, the Binance Development fund provided developers the funds to copy the applications on Ethereum and run them on Binance Smart Chain. Because of the differences in consensus mechanism I discussed above, these applications run faster and cheaper on Binance Smart Chain. This has led to some of the cloned applications on Binance Smart Chain growing to the same size as the similar applications on Ethereum.
Fans of Ethereum are understandably concerned and have strong feelings about this development. But the volume of decentralized finance transactions on Ethereum continues to grow, and in 2021 from 20 billion to almost 60 billion dollars. So there appears to be enough business for several lockchains like Ethereum, Binance Smart Chain, Tron and most recently Polygon.
Summary
I hope this has helped you understand the origins and significance of Binance Smart Chain , and helped you understand the concept and importance of a Consensus Mechanism and how it effects decentralized finance.
What do you think about the proof of Work versus Proof of Stake issue?
What do you think about open-source software?
Leave your comments below.
Shortsegments is a writer focused on cryptocurrency, the blockchain, non-fungible digital tokens or NFTs, and decentralized finance.
Read more of shortsegments articles here: @shortsegments
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