There is a lot of competition in the DeFi world. Bitcoin is the world’s first programmable money, but other projects have sought to simplify the programming of blockchain assets. The first was Ethereum, whose goal was to give developers an easier way to build applications that run on a decentralized blockchain.
This allowed people to bypass banks and institutions in search of loans or higher incomes, which charged high commissions and required identification. People can now use DeFi to obtain unit of account, funds of trade, loans and more without the need or approval of a third party.
One of the biggest competitors to emerge from the DeFi space is Binance Smart Chain (BSC). But what is BSC and how does it work?
What is Binance?
Binance is a cryptocurrency exchange founded by Changpeng Zhao. The company was originally based in China, but moved to the Cayman Islands after increased Chinese regulation jeopardized its business.
Binance has quickly become one of, if not the largest cryptocurrency trading platform in the world with its extensive list of trading pairs and relatively low fees compared to its competitors.
Binance Smart Network
In September 2020, Binance announced its new DeFi platform, BSC, which was later launched in April. Its goal was to offer an alternative to Ethereum and other leading DeFi platforms.
Over time, Ethereum outgrew what its infrastructure could even handle, causing congestion, slow transactions, and fees so high that sending anything under $ 100 was nearly impossible unless the timing was accurate.
This led to the emergence of other smart contract platforms such as BSC, which grew rapidly as Etheruem could not provide a viable platform for those who could not afford to pay.
Today, the total value of BSC is $ 26 billion, invested in various applications running on the platform. But what is BSC and how does it compare to others like Ethereum?
Binance Smart Chain vs Ethereum
Binance has made huge strides in catching up with Ethereum in trading volume. They also have very similar applications built on top of them, such as decentralized exchanges and lending and borrowing platforms. But they operate on two completely different consensus mechanisms.
A consensus mechanism is a system that allows nodes (participants) in a distributed computer system (blockchain) to reach “consensus” on the correct set of data (transactions). This is what keeps blockchain networks secure and allows participants to authenticate transactions without trusting each other.
Different blockchains have different ways of forming this consensus. Ethereum currently uses a mechanism known as Proof-of-Work (PoW), the original consensus mechanism used by Bitcoin. Binance, on the other hand, uses a method called Proof-of-Authority (PoA).
In PoA, block creators are known as validators. These validators are pre-approved and selected by Binance, as explained on Binance’s own website. To get approved, they must prove their true identity, invest money to prove long-term commitment, and be equal to all other candidates, building the PoA reputation of their own accord.
In this model, Binance has absolute control over the blockchain. They decide who becomes the validator and remove validators as they see fit. This requires users to feel confident that Binance will behave in their best interest. If Binance decides to change any aspect of the chain or ecosystem, it has the right to do so.
Binance Founder and CEO, Changpeng Zhao, is known to have said that BSC is similar to “CeDeFI” or Centralized DeFi. IN tweet the place where he made those comments has since been deleted, but according to the founder of BSC, this is not a decentralized ecosystem of financial applications.
In a thread that emerged from Zhao’s tweet, he said that the benefits of such centralized control are that Binance itself can verify projects built on the system, but more than one project has already pulled investors out.
Ethereum currently uses the same PoW mechanism as Bitcoin. In this system, computers compete with each other to confirm transactions. To win, the computer must solve complex math puzzles.
Once they have won, the computer adds a new block of transactions to the blockchain. These computers are also known as miners and are given Ethereum for executing a new block of transactions. This process is energy intensive and helps protect the network from intruders.
This process is very energy intensive and helps protect the network. A sufficient number of geographically dispersed miners creates a decentralized network with no central authority, which is fundamentally different from how BSC works.
Ethereum is in the process of transitioning to a new consensus model known as Proof-of-Stake (PoS) to lower fees. In this model, consensus is achieved using an algorithm that selects a node to win a block of transactions. When a node is selected, it produces the next block of transactions in the chain. These nodes are commonly referred to as rate pools.
These bet pools are selected based on the “stake” or the number of coins stored in it. In other words, the more coins are stored in the stake pool, the more likely it will be selected to create a block and receive a reward. To ensure that the richest pools do not always win to a certain degree of randomization, other criteria, such as the amount of time over which coins have been placed, can influence the selection process.
So, in PoS, miners are replaced by people who stake their coins. People can bet or place their coins in different bet pools, just like miners join a mining pool to get more rewards. Unlike PoA, the stake pools and nodes in the PoS model are not approved or elected by any central authority, making it much more decentralized.
So is Binance Coin a good investment?
Overcoming the quality of cryptoassets as an investment opportunity can be challenging. With something like Bitcoin or even Ethereum, it’s easier to assess value when analyzing their decentralization.
Bitcoin, for example, has a large number of geographically dispersed nodes and miners and has experienced 11 years of ups and downs. By using Bitcoin, you can know with a high degree of certainty that no company, government or individual is in control. Instead, a collective of users determines its future, which means that the free and open market determines only its price.
Although Ethereum has half as many nodes as Bitcoin, it is still several orders of magnitude more distributed than Binance Coin. This is due to its PoA model, which gives the Binance exchange complete control.
But what does it matter? Binance has lower fees than Ethereum and is faster, right? What difference does it make if it’s centralized?
Each person’s answer to this question depends primarily on the reason for which he is investing. Do you want to speculate in cryptocurrency? Or are you interested in a decentralized ecosystem that solves real-world problems?
The problems that cryptocurrency, in particular Bitcoin, seeks to solve are related to control and freedom, and not just to making money from speculation.
Who should control the money and its supply? Should one company or government set the rules for the rest of us? Who decides who is allowed access to the financial system?
These are all serious questions that humanity has been faced with almost throughout its entire existence. So far, giving control of money to one single entity has proven far from ideal. This causes currency depreciation and inflation, disenfranchisement of certain communities that do not meet fictitious assumptions, and much more.
If you are interested in speculation and trying to make money, then perhaps Binance Coin could be a good opportunity as more and more people leave Ethereum in search of cheaper transactions. If you are interested in building systems without centralized management, then investing in Binance Coin would be ridiculous for this reason.
Honestly, there is nothing wrong with speculative investment. The cryptocurrency itself is generally considered speculative due to its reformative nature. This is why it can help to understand why cryptocurrency exists in the first place – to give people economic opportunity and independence, as well as take control out of the hands of a few and give it back to people, and Binance Coin is the exact opposite.