DeFi 101: What Is Binance Smart Chain (BSC) And How Does It Work?
DeFi has led to the disruption of traditional finance, and there’s no denying in its emergence as it trumpets over the outdated traditional financial systems by introducing an optimized, more inclusive, more efficient decentralized financial system to the world.
While Ethereum laid the foundation for DeFi with smart contracts, other platforms are joining in the space in hopes of delivering better performance and scalability. Binance, the world’s most popular cryptocurrency exchange, is catching up to Ethereum as it steps into DeFi with Binance Smart Chain (BSC), a counterpart to the existing Binance Chain.
The Problem - High Transaction Costs
With DeFi emerging on its own, the transaction costs have surged since the beginning of this year. Simple transactions on popular platforms like Ethereum have gone as high as $20, while interactions between complex smart contracts (like NFTs) are worth north of $200 depending on the network usage at the time.
Ethereum, as a platform, couldn’t handle the surging success of DeFi, which is why there was a need for platforms like the Binance Smart Chain that could offer the same functionality but faster and cheaper.
Source: BSCScan Charts
The scalability issues in Ethereum have led both developers and users to better options with higher throughput and cheaper network fees. Fortunately, Binance Smart Chain addresses a lot of those issues by introducing a faster and much cheaper alternative to the Ethereum blockchain. Smart contract interactions that would cost over $200 on Ethereum costs less than $0.05 on the Binance Smart Chain.
What is the Binance Smart Chain?
Before we can dive into the Binance Smart Chain, let’s talk about the Binance Chain first. Launched back in mid-April 2019, Binance Chain was introduced to support ulta-fast decentralized trading. Undoubtedly, Binance Chain originally laid the foundation for the Binance DEX, one of the biggest decentralized exchanges currently in existence.
However, due to the inherent limitations of the Binance Chain, such as not having enough flexibility for fast trading and smart contracts that can bring network congestion like the Ethereum blockchain, Binance introduced the Binance Smart Chain.
Binance Smart Chain is a blockchain that runs in parallel with the Binance Chain. It’s a network specifically built for running smart contract based applications. This very configuration allows users to enjoy the best of both worlds: high throughput from the Binance Chain and smart contract functionality from the Binance Smart Chain.
Binance Smart Chain has garnered a lot of attention from the developers and users looking for better options due to Ethereum scalability issues. It is a faster, optimized, and much cheaper alternative to the Ethereum blockchain. Developers and users are jumping on the bandwagon in large numbers. Today, almost 40% of the total value locked in DeFi is attributed to the Binance Smart Chain.
Source: The Block
Here are some of the key features that make Binance Smart Chain the ideal choice for Developers and users looking for a faster and robust smart contract platform.
Standalone blockchain: The Binance Smart Chain runs in parallel with the Binance Chain. This means that the Binance Smart Chain will be functional regardless of the Binance Chain.
Compatibility with Ethereum: One amazing feature of the Binance Smart Chain is that it is compatible with Ethereum smart contracts. This means that developers can easily migrate their DApps, tools, and other ecosystem components to the BSC network with minimum efforts.
The BSC Consensus
Binance Smart Chain is a community-driven platform. To stay true to its principles, the platform runs on a Proof of Stake (PoS) consensus mechanism. Users can stake Binance Coin (BNB), the platform’s native token, to participate in the network’s security and community governance.
Moreover, Binance Smart Chain’s Proof-of-Stake (PoS) mechanism allows users to process their transactions faster and more efficiently than Proof-of-Work (PoW) based platforms. Here’s a comparison of the average block times between Binance Smart Chain and Ethereum.
Source: BSCScan Charts
Binance Smart Chain utilizes both the delegated Proof-of-Stake (PoS) and the Proof-of-Authority (PoA) consensus mechanism to maintain the network's security. This consensus mechanism consists of elected validators who take turns verifying transactions on the network and are responsible to produce the blocks according to the PoA rules. This consensus mechanism allows Binance Smart Chain to average around three-second block times.
Both Binance Smart Chain and Binance Chain use BNB, the Binance ecosystem’s native utility token. While BNB is used to pay the transaction fees on the Binance Chain, Binance DEX platform, staking, and asset transfers, it’s also used to pay gas fees for the smart contracts on the Binance Smart Chain. Moreover, users can earn additional rewards by staking their BNB on the BSC platform.
The Binance Smart Chain is undoubtedly one of the most efficient, low-cost, and fastest smart contract platforms in the market right now. It’s no surprise that the platform is home to over one million active addresses.
Source: BSCScan Charts
Until Ethereum 2.0 isn’t a reality, more efficient platforms like Binance Smart Chain are the best option for large-scale and complex applications. With Binance Smart Chain, we have already seen the emergence of high-throughout DeFi applications like PancakeSwap that overcame Uniswap in daily transaction volume.
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