Blockchains: Binance (Smart) Chain

An exchange making their own blockchain? What?

Binance Chain, and its newer brother in the “dual chain” system, Binance Smart Chain, are both blockchains developed in-house by the Asian exchange giant Binance.

Binance Chain

Binance Chain was launched in April of 2019, with the stated goal of facilitating fast, decentralized trading. In this regard, it is no surprise that a blockchain developed by an exchange focuses primarily on trading.

The first application to run on Binance Chain was Binance DEX, which is the decentralized equivalent to Binance. Besides the focus on trading functionality, this blockchain is quite similar to Ethereum.

Binance Smart Chain

Binance Smart Chain joined its younger brother in September of 2020. Its goal is to extend Binance Chain by the smart contract functionality that was missing from Binance Chain.

Most notably, it is compatible with the Ethereum Virtual Machine (EVM), which makes it comparatively easy for developers to launch their dApps on BSC that had previously been running on Ethereum, as opposed to porting those dApps to another blockchain such as Tron or Polkadot.

This design choice is especially convenient for everyday users of the chain, because it means you can easily configure web3-based wallets such as MetaMask for use with BSC.

The chain also supports pegged coins, similar to the way RenVM works. If a user wants to send some BUSD tokens from Ethereum to BSC, one just needs to send them to a smart contract on Ethereum which locks the tokens, and the same amount of tokens is minted natively on Binance Smart Chain. When the user wants his tokens returned, they are burned on BSC and released on Ethereum.

The tokens which can be issued on Binance Chain, such as the native exchange token BNB, are based on the BEP-2 specification. With BSC, this was later extended by the BEP-20 specification, which is compatible with ERC-20 tokens. This is similar to how Ethereum transactions are paid for with gas (small amounts of ETH to pay for the computational effort required to execute the transaction), BSC transactions are paid for with BNB.

What happened to decentralization?

There are some glaring issues with an exchange developing their own blockchain. First, even though the source code is public and can be inspected by anyone, Binance ultimately is the sole decision maker when it comes to what features get added to the protocol.

Second, are arguably more importantly, the consensus mechanism used by Binance Smart Chain is PoSA, which stands for Proof of Staked Authority. To enable the three second block times, Binance decided against Proof of Work, as it is too slow and inefficient.

This, however, also entails a sacrifice in security, since instead of miners trying to guess the input to a given hash, a limited set of 21 validators validates the transactions on the chain. In contrast, Bitnovo estimates that there are currently around 1 million contributors mining on the Bitcoin blockchain.

Finally, the barrier to entry for becoming a BSC validators is quite high. At the time of writing, the 10.000 BNB (the minimum amount which has to be provided by the validator node operator) required for submitting a validator candidacy are worth around 3.7 million dollars. Not exactly chump change!