Binance, one of the most famous cryptocurrency exchanges, has announced the launch of Binance Chain, their own blockchain. The key goal of Binance Chain was to build a fast Blockchain that could handle a high volume of transactions. Binance Chain's team used the Tendermint consensus model of immediate finality to do this, and instead of promoting several apps, they opted to rely on their main product, Binance DEX.
Binance found that the only thing lacking from Binance Chain was the potential to run smart contracts and allowing other teams to deploy their own apps, after Decentralized Finance on Ethereum and Binance DEX failed to gain momentum as predicted. Binance made an interesting decision at this moment. Instead of attempting to apply smart contract features to Binance Chain while jeopardizing its success, they wanted to start a separate chain in parallel, which is where Binance Smart Chain comes in.
Binance Smart Chain, unlike Binance Chain, was entirely programmable and embraced smart contracts when it debuted in September 2020. You can read my post here if you want to learn more about smart contracts and why they're so relevant.
Developing a brand-new smart contract platform from the ground up takes years of effort and testing. Instead, Binance wanted to take advantage of Ethereum users' and developers' experience with the platform and fork the Ethereum go, client, Geth. It's obvious that forking Ethereum without making any improvements isn't a good idea. As a result, Binance chose to sacrifice the network's decentralization and censorship resistance properties in order to configure the current chain for lower fees and higher transaction throughput.
This was accomplished by switching from the Proof of Work consensus model to the Proof of Staked Authority consensus model and modifying a few other factors including block time and gas limit per block.
Instead of using a Proof of Work (PoW) or Proof of Stake (PoS) consensus mechanism, Binance Smart Chain employs a Proof of Staked Authority (PoSA) model. All transactions in this model are authenticated by a group of nodes known as validators. Validators may be active or passive. Only active validators are able to validate transactions, and the number of active validators is restricted to 21. The number of BNB tokens held by active validators is calculated by rating all validators. The top 21 validators with the most BNB become involved and switch validating blocks over to each other. This is done once a day, and the list of all validators is kept separate on Binance Chain.
Validators may allow BNB holders to assign their BNB tokens to them in exchange for a share of the validator's transaction fees, in addition to taking BNB tokens themselves. Both transaction costs on the Binance Smart Chain are charged in BNB, which is the chain's native token, close to how ETH is native to the Ethereum Blockchain.
On Binance Smart Chain, unlike Ethereum and Bitcoin, there are no block subsidiary rewards. This means that the validators will collect the BNB transaction fees, with no other defined rewards per block. Despite the fact that the PoSA consensus model provides for a shorter block period and lower fees. It does so at the expense of network decentralization and security.
Initially, a user cannot begin validating the state of the Blockchain in the same way as they would in Bitcoin or in a simpler manner. Furthermore, even though a user could access the network without requiring authorization and begin validating transactions immediately, they would not be able to do so for too long on consumer-grade hardware, as the state of first of all expands at a much faster pace than the state of Ethereum.
On the Binance Smart Chain, the block time was reduced from around 13 seconds on Ethereum to around 3 seconds. Better transaction throughput and quicker validation times are achieved at the expense of needing to store more data. If introduced on Ethereum, it would maximize the number of orphaned blocks because there would be insufficient time to spread legitimate blocks across the network from various geographical locations. This is not an issue for Binance Smart Chain since the validators simply take turns validating chains.
Another key element is the block gas limit. This element determines how many transactions can be stored in a single Ethereum block. Miners must reach an agreement and determine what amount they want to set it to. Increased block gas limits, including reduced block times, increase the volume of data generated by the Blockchain, making it more difficult for individual users to run their own nodes.
As the state of the Blockchain expands above what market grade hardware can accommodate, the 21 validators can simply run their nodes on institutional grade hardware, which is not a challenge on Binance Smart Chain. On Ethereum, the gas limit for a block is currently set at 12.5 million gas, while on Binance Smart Chain, it is set at 30 million gas.
DeFi stands for Decentralized Finance, as we all know. Centralized Finance (CeFi) is the exact opposite of DeFi. CeDeFi is a term created by Binance CEO Changpeng Zhao "CZ" to represent a combination of centralized and decentralized finance, of which Binance Smart Chain is an excellent example.
CeDeFi encourages users to try out DeFi without having to pay high transaction fees. Users will be able to use a variety of DeFi protocols, including Decentralized Exchanges, Lending Protocols, Liquidity Aggregators, Yield Farming tools, and others, because of the low fees. CeDeFi also familiarizes users with basic DeFi tools such as Metamask and block explorers. It also enables new teams to create smart contracts for a fraction of the cost of doing so on the Ethereum Blockchain.
Binance Smart Chain and CeDeFi have recently gained a lot of momentum, owing to the high transaction costs on Ethereum, which have priced out certain consumers. Binance Smart Chain is a fork of Ethereum that allows for the execution of similar smart contracts to those found on Ethereum.
It's obvious that Binance Smart Chain has gained a lot of momentum and attracted a large number of users and trading volume in a short period of time. It was a brilliant move to fork Ethereum to enable users and developers to interact with DeFi tools and protocols they already know. The success of Ethereum, along with the fact that most Ethereum scaling solutions are still in the works and a bull market, resulted in high transaction fees, pricing out smaller users and forcing them to look for another way to invest in DeFi. Furthermore, Binance was able to take advantage of its position as one of the most popular cryptocurrency exchanges by allowing its millions of users to withdraw BNB and other tokens directly to Binance Smart Chain.