History

The binance Chain launched in 2018 with the intention to create a high-speed blockchain capable of supporting high transaction throughput. To achieve this goal, Binance chose the Tendermint consensus model for their blockchain and decided not to support applications except for the Binance Decentralised Exchange or “DEX.” 

While decentralised finance, or “Defi,” exploded on Ethereum, the Binance DEX struggled to get traction. Binance quickly realized there was very little demand for their DEX because users could not deploy applications or smart contracts on the Binance Chain. 

To satisfy this demand, Binance built a second blockchain called the “Binance Smart Chain,” which operates parallel to the Binance Chain. The Binance Smart Chain is fully programmable and supports third-party smart contracts, meeting demand while keeping the high throughput of the Binance Chain. The Binance Smart Chain launched in September 2020.

The Binance Smart Chain was forked from Ethereum because creating an independent, smart contract platform like Ethereum requires years of work and research. This decision also gave Binance an advantage by leveraging user and developer familiarity with the Ethereum platform and tools. Copying Ethereum in its current form would inherent its issues with low throughput and high transaction fees. To prevent these issues, Binance optimized the Smart Chain for low fees and higher transaction throughput by sacrificing the network’s decentralization and censorship properties in favour of a centralized model.

Why did Binance Sacrifice Decentralisation on the Binance Smart Chain?

Forgoing decentralisation was a logical decision for Binance to make. To understand the decision, we will look at the “scalability trilemma.” This model looks at trade-offs made between different blockchain architectures. Each blockchain has three core properties: security, scalability, and decentralization. To improve one of the properties, you must compromise one or both of the other core properties. You cannot achieve all three at the same time. 

Although there are now projects which have solved this problem, such as Cardano or layer 2 scaling on Ethereum, these solutions are beyond the scope of this article. When Binance Chain was built they were faced with the scalability trilemma.

Instead of using either proof of work or proof of stake, Binance decided to use a Proof-of-Stake-Authority (POSA) model for their Smart Chain. In this model, all the transactions are validated by a set of nodes called “Validators.” A Validator can be active or inactive. The number of active validators is limited to 21. Only active validators can validate transactions. Active validators are determined by ranking all validators by the amount of BNB tokens they hold. The top 21 validators with the highest amount of BNB become active and take turns validating blocks. Once per day, the validators are determined, and the sets of validators are stored on Binance Chain. 

Besides staking BNB tokens, validators can encourage BNB holders to delegate their tokens to them and receive a share of the validator’s transaction fees. All transaction fees on Binance Smart Chain are paid in BNB token, which is the native token of the chain. There is no other fixed reward per block. 

Although the POSA consensus model allows for achieving a short block time and lower fees, it does this at the cost of both decentralization and network security. Users cannot participate in validating the blockchain state as they do it on Bitcoin or Ethereum. Additionally, even If users could join the network and validate transactions, they would not be able to participate on consumer-grade hardware for a very long time because the state grows at a much faster rate than the Ethereum state. 

How POSA reduces Block TIme and the Block Gas Limit on the Binance Smart Chain

Binance has reduced the block time from 13 seconds on Ethereum to just 3 seconds on Binance Smart Chain. This allows for higher transaction throughput and faster confirmation time at the cost of storing more data. If implemented on Ethereum, this approach would also increase the number of orphaned blocks as there would not be enough time to propagate valid blocks across the network from multiple geographic locations. 

This is not a problem on the Binance Smart Chain because validators simply take turns validating blocks without requiring consensus from distributed nodes. 

The “block gas limit” determines how many transactions can fit into a single block. On Ethereum, miners must come to a consensus and agree on a block gas limit. Increasing the block gas limit, like reducing the block time, increases the amount of data produced by the blockchain. More data makes it more difficult for individual users to run their own nodes. 

This is not a problem for the Binance Smart Chain because the 21 validators can run nodes on institutional-grade hardware once the blockchain’s state grows beyond what can be processed by consumer-grade hardware. When writing this article, the gas limit on Ethereum is 12.5 million Gas, while the gas limit on the Binance Smart Chain is 30 million. By knowing both the block time and the gas limit per block, we can calculate that the amount of data on the Binance Smart Chain increases approximately ten times faster than the Ethereum Blockchain state. 

The Binance Smart Chain currently has an average size of 40,000 bytes and grows at a rate of 1.15 GB/day, approximately 420 GB/Year. Within only a few years, this will exceed the capabilities of consumer-grade hardware.

What is "CEDEFI?"

CEDEFI is a mixed solution between centralized finance and decentralized finance. CEDEFI offers users the benefit of using applications similar to Defi applications without paying high transaction fees. 

CEDEFI enables teams to deploy smart contracts at a fraction of the cost of decentralized blockchains like Ethereum. This provides a low-cost opportunity to test and get feedback on projects. Testing in an ecosystem like CEDEFI with real economic incentives typically works better than testing on a testnet. 

Rising transaction costs on Ethereum have priced out many users. Where the Binance Smart Chain is the only viable alternative for many users, it has grown in popularity quickly.

Being a fork of Ethereum allows smart contracts built on Ethereum to run on the Binance Smart Chain. Binance can fork any project they want and implement it on the Smart Chain. Users can connect to Binance Smart Chain Based Dapps by switching their network in Metamask. Some examples of Dapps forked on to Binance include Pancake Swap, a fork of Uniswap, and Venus a fork of Compound. 

Binance Smart Chain, similar to Ethereum, allows the creation of new tokens using their BEP-20 standard: the Ethereum ERC20 counterpart. Some Ethereum based projects also used the opportunity to expand their reach to the Binance Smart Chain at a minimal cost. 1inch, a liquidity aggregator on Ethereum, recently decided to launch on the Binance Smart Chain.

Conclusion

Binance has been able to attract many users and significant trading volume in a short time period. With no other competitors to Ethereum in Defi at the moment, Binance capitalized on the opportunity to attract users to their platform. Because many users were priced out of Ethereum by high gas fees, the Binance Smart Chain has experienced rapid growth. With Binance succeeding in part by being the only alternative and with Binance forgoing decentralisation, it does raise the question of whether this growth is temporary? Decentralised exchanges are expected to launch on other platforms later this year that will be decentralized and have low gas costs. We will know in the near future whether users acquired to date will stay with them for the long term.

We want to give credit to Finematics. His videos have served as inspiration for some of our Defi Basics series. His YouTube channel dives into the Defi movement and is a great place to learn more.  

References

https://docs.binance.org/smart-chain/guides/bsc-intro.html 

https://docs.binance.org/smart-chain/guides/concepts/consensus.html 

https://docs.binance.org/smart-chain/guides/concepts/bsc-gov.html 

https://finematics.com/binance-smart-chain-and-cedefi-explained/