What Is Binance Smart Chain (BSC)?

Defining BSC

Binance Smart Chain (BSC) is an independent blockchain network with smart contract functionality, running parallel to Binance Chain. 

Before we get into what BSC is, let’s introduce Binance. Binance is the leading cryptocurrency exchange by trading volume, founded in 2017 by CEO Changpeng Zhao, also known as CZ. It is now a major crypto ecosystem, offering an abundance of trading pairs and over 500 cryptocurrencies and tokens. Its first blockchain, Binance Chain (BC), supports a native utility token, BNB, used for transaction fees as well as staking. 

While Binance Chain boasts high speed and throughput, it has limited flexibility and programmability. BSC was meant to be an Ethereum Virtual Machine-compatible blockchain made for cross-chain interoperability with BC. It also presented a more cost-efficient and scalable alternative to the Ethereum network (although, notably, far less decentralized). 

We should also point out that, while it runs parallel to Binance Chain, BSC is not a layer two solution! This means that it does not depend on the BC network to run. 

How BSC Works 

As mentioned, Binance Smart Chain was built to be self-sufficient, EVM-compatible, interoperable, and more efficient through a staking-based consensus. Let’s look at how BSC meets these standards! 

PoSA

BSC introduced an innovative staking mechanism called Proof of Staked Authority (PoSA). This consensus algorithm combines DPoS and Proof-of-Authority (PoA) to secure the network. In this hybrid setup, participants stake BNB in order to become validators. Once elected by other BNB holders, these validators confirm transactions and produce new blocks. There are only ever 21 nodes active at one time, and they rotate every 24 hours. 

We should note here that PoA is especially resistant to 51% attacks, as it leverages reputation and requires a formal identification process. Yet as a result, BSC can be considered centralized - with a vast majority of BNB tokens being held by Binance itself. This also means the company has the most control over which nodes are elected to become validators. 

Gas

Like with Ethereum, BSC uses its native token, BNB, to execute transactions on-chain. A major distinction between Ethereum and BSC is the amount of gas a transaction requires. A typical transaction on Ethereum can cost several dollars or, at times of high volume, hundreds; the typical transaction on BSC only costs a few cents on average. The low cost of trading on-chain therefore makes BSC quite attractive to traders.

Cross-Chain Interoperability 

BSC was built with cross-chain compatibility in mind, enabling users to access the best features of both its platform and Binance Chain: dApp functionality and fast trading capacity, respectively. This also allows assets to be moved easily between the two blockchains. BC’s BEP-2 and BEP-8 tokens can also be swapped for BSC’s BEP-20 tokens (think: ERC-20). 

Staking And Governance

BSC relies on staking to decentralize its network and grant governance to the community. As we’ve seen, BSC uses PoSA, which allows token holders to delegate their stake towards a validator candidate. BNB can also be used to vote on community governance protocols. 

Ethereum-Compatibility

BSC is EVM-compatible, meaning its infrastructure can support the development of dApps. These decentralized applications can range from gaming and NFT platforms to trading and financial services. Popularized on Ethereum, they can now also be transferred to and built on Binance Smart Chain. 

While some were quick to point out the irony of a major centralized exchange entering the DeFi space, CZ maintained the company’s long term goal of decentralization. And BSC has definitely been active in the DeFi corner of the industry. Let’s have a closer look at some popular protocols.

DeFi On BSC

PancakeSwap

One of BSC’s most successful dApps and its largest DEX, PancakeSwap is an AMM with a native token: CAKE. Launched in late 2020, it quickly became one of the leading decentralized exchanges in DeFi, coming in third behind Uniswap and Aave for TVL. 

Attracting a volley of users through its lower fees and fun interface, with cute bunny collectibles and a lottery feature, PancakeSwap has become wildly popular. It offers users the ability to trade BEP-20 tokens, as well as add liquidity to pools and receive LP tokens. 

LP tokens can be used to farm the governance token CAKE, which can then be staked in Syrup Pools (earning you even MORE CAKE). Sounds fun, right? We think it sounds like a delicious video game.

BurgerSwap, PancakeBunny & Other Unfortunates  

Other DEXes on BSC have had far less luck than PancakeSwap. With the sweet comes the bitter - BSC has hosted a number of rug pulls and attacks on various protocols. In May 2021, BurgerSwap announced a loss of $7.2M following a flash loan attack. 

Flash Loan Attacks have become increasingly common, as these loans are open to anyone - given that they repay it within a single transaction. Regrettably, this means malicious actors can manipulate the market in that short window of time, and exploit artificially altered token prices. Another victim of this type of attack was PancakeBunny, which recently lost around $40M in WBNB and BUNNY. 

Rug pulls are another major issue in the DeFi space, occurring when a project runs off with user funds (often after a period of significant hype and FOMO). DeFi protocols are particularly vulnerable to this type of scam, due to smart contract risk and a lack of regulation in the space. Notable examples on BSC include PopcornSwap, Zap Finance and Tin Finance. 

AN EXAMPLE OF A RUG PULL

Somewhat unsurprisingly, as Binance itself is a centralized entity, complaints about exploits and protocol flops on BSC have been redirected to CZ - to which he amusingly responded that the same goes for Ethereum, but “nobody complains to Vitalik.” And while the PoSA protocol allocates a substantial amount of control to the company itself, BSC was still built with the permissionless architecture of DeFi in mind. This inevitably entails risks, and investors must carefully do their own research. 

Takeaways

Binance Smart Chain was developed to satisfy a growing demand for dApps and other DeFi products, while being more cost-effective and offering faster transaction times. The convenience provided by BSC’s cross-chain compatibility with BC should not be overlooked either; users are given access to an immense ecosystem of services, with functionalities tailored to their specific needs. 

BSC itself is far more centralized than your average DeFi platform - due to stakeholder demographics - leading CZ to aptly term the platform “CeDeFi.” The benefits of this hybrid build include significant funding from Binance, given that projects pass security audits, which are also meant to ensure the code’s resilience against attacks. 

However, BSC is still unfortunately the site of many, many hacks and rug pulls, as we’ve seen over the last few months. DeFi, being an experimental space, makes this hard to avoid, though Binance has started taking steps towards increased regulation - like its recent introduction of CipherTrace. 

Moreover, until Ethereum’s scalability and fee issues are resolved, alternative options will remain highly attractive to users. These include Polkadot and Cardano, in addition to BSC. According to CZ, CeFi still has a role to play as a gateway to introduce more users to the world of DeFi. And yet, he believes we’ve already passed the turning point with regard to its adoption. It’s time to go all-in, and we agree - after all, DeFi is the future of crypto.