The Binance Smart Chain: Use Cases, Consensus Model, And Future Prospects

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1 year ago

After running primarily as a crypto exchange in its early days, developers at Binance went a step further and developed a native ‘Binance Chain’ blockchain. The initial intention was to provide an alternative to the increasingly expensive Ethereum blockchain, on whose ecosystem millions of users and developers were already building.

The initial Binance Chain ran on the Tendermint Consensus Mechanism, which despite having a high transaction throughput, still did not support smart contracts. Smart contract capability is the one reason developers and users had stuck on the ETH ecosystem, high gas fees notwithstanding. Naturally, Binance developers went on to roll out a new smart contract blockchain, Binance Smart Chain, forking off the old Binance Chain blockchain.

The Binance Smart Chain is much faster and cheaper to use, with the native currency on the blockchain being the BNB token. There’s an ongoing debate about whether these developments might have come at the cost of decentralization, a key pillar for any digital asset, according to Vitalik's Blockchain Trilemma.

The Proof of Stake Authority Model

Binance Smart Chain’s (POSA) settlement mechanism means that transactions on the Binance Smart Chain are settled by a group of 21 ranked nodes on the blockchain. Typically, the nodes staking the most BNB tokens end up deciding which transactions on the blockchain get settled and which ones do not.

These 21 wallets are also free to incentivize other users to delegate their BNB tokens to them. This way, users get to earn the validating node’s high APYs, while the validating node gets to remain a validator, considering its increase in token holdings.

This quasi-centralized consensus mechanism is what critics of the Binance Smart Chain hold up when trashing this blockchain. This centralized nature of the chain also came into question back in 2019 when a hacker stole 7000 BTC from the Binance exchange hot wallet. During this occasion, Binance paused all transactions on the exchange for a while. The intentions might have been noble but it calls to question just how decentralized the chain is.

Questions have also arisen about the legitimacy of a certain SAFU fund which Binance keeps for emergency occasions like these. It is this emergency fund that was used to pay back users whose accounts had been affected during the hack. Again, pure intentions but just how (de)centralized are we here?

What must not be forgotten however is the fact that this exact setup also allows the chain both faster transaction speeds and lower settlement fees compared to the Ethereum blockchain. Being the alternative cheaper, faster go-to blockchain has earned Binance Smart Chain the reputation for being the next best ecosystem for users and developers to flock into.

Since the validators take turns to propagate incoming transactions, the blockchain has been able to reduce its block time to 3 seconds, compared to ETH’s 10-13 seconds. This explains why Binance Smart Chain is able to confirm way more valid blocks than say the ETH blockchain.

Some BNB Coin Tokenomics

At launch, BNB tokens raised $15 million total, from selling 50% (100,000,000) of the minted tokens to the open markets.  40% of the minted coins were allocated to the project’s founding team, with the last 10% paid out to early angel investors. Smart contracts make it such that every 3 months, Binance uses 20% of its profits to buy back BNB tokens. The play is to then destroy them, keeping the supply low and ensuring that BNB remains an inflationary token with a rising price profile.

The Binance Smart Chain is a fork off the ETH mainnet; DApps and smart contracts developed for the ETH blockchain can be successfully transplanted and used on Binance Smart Chain. This provides extensive opportunities for the growth and development of the blockchain which offers similar capabilities as the ETH blockchain at way lower gas fees and a much higher transaction throughput.

Many developers who are currently feeling priced out by the prohibitively high gas fees on the ETH blockchain are taking the chance to deploy on the cheaper, faster Binance Smart Chain blockchain instead.

What does the Future Hold for the Binance Smart Chain?

The ETH ecosystem is currently working on a series of mechanisms trying to cut down gas fees and raise transaction speeds by several orders of magnitude. Whereas it looks likely that they might succeed, it remains to be seen just how much of this market share moves to Binance Smart Chain in the meantime.

The combination of rapid transaction speeds and really low costs to navigate the Binance Smart Chain has made it a worthy contender for an alternate developer-user ecosystem. Add this to the fact that you can basically copy and paste ETH DApps and Smart Contracts onto Binance Smart Chain and you have yourself a potentially explosive community.

On-chain politics aside, the Binance exchange continues to enjoy the more massive trading volumes compared to counterparts like Gemini and Coinbase, which means that they continue to enjoy profits from the trades too.  All factors seem to point towards a successful Binance future in line with the massive bets that they have taken in the blockchain ecosystem, together with the resources that they currently have to take a shot at that future.

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