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With millions of active users, Binance.com is the biggest centralized crypto exchange. In addition to extensive crypto trading facilities, Binance offers staking opportunities, loans, vaults and mining pools. One of Binance’s most popular products is its blockchain: The Binance Smart Chain. In this article, we will explain what the Binance Smart Chain is and how it works.
In the spring of 2019, Binance launched its first blockchain: the Binance Chain. The goal of the Binance Chain was simple: To establish fast and decentralized trading. To achieve this, the Binance Chain launched the Binance DEX (Decentralized Exchange). This is a decentralized exchange that supports the trading of assets built on the Binance Chain.
However, there were many shortcomings with the Binance Chain. Unlike the Ethereum blockchain, the Binance Chain does not support Smart Contracts. As a result, complex and extensive DApps (Decentralized Apps) could not be built, while they were flourishing in large numbers on the Ethereum blockchain. The Binance team saw this reflected in the number of users on the Binance Chain: the Binance Chain didn’t find significant traction in comparison to Ethereum.
This is where the Binance Smart Chain comes into play. As its title implies, the Binance Smart Chain supports Smart Contracts.
The Binance Smart Chain was launched in September 2020. It was developed to solve the scalability problems Ethereum faces, such as high transaction fees and slow transaction speeds.
The Binance Smart Chain is a modified fork of Ethereum. An advantage of this fork is that the Binance Smart Chain’s Smart Contract functionality is compatible with the Ethereum Virtual Machine (EVM). This makes it easy for Ethereum DApp developers to migrate their platforms to the Binance Smart Chain.
It is worth mentioning that the Binance Smart Chain is not a layer 2 or off-chain scaling solution for the Binance Chain. They are 2 separate blockchains that run ‘parallel’ to each other. The main difference is that the Binance Chain does not support Smart Contracts while the Binance Smart Chain does.
This can be seen when looking at the DApps that run on both blockchains. The Binance Chain is the home of the Binance DEX, while several DEXes and other DApps operate on the Binance Smart Chain. The most popular DEX that runs on the Binance Smart Chain is PancakeSwap.
The main goal of the Binance Smart Chain is to bridge the gap between centralized and decentralized finance. By implementing smart contracts and optimizing its blockchain for high scalability, the Binance Smart Chain is an excellent alternative to the overloaded Ethereum blockchain.
Since the Binance Smart Chain is compatible with the EVM, a large amount of DApps could be migrated from Ethereum during the launch in September 2020. This was good news for many DApp developers as well as DeFi users, which were suffering from high transaction fees on the Ethereum network.
Because of Binance Smart Chain’s cross-chain compatibility, users can easily transfer their assets to the Binance Chain and vice-versa. In this way, users can be exposed to a large and complete ecosystem: Assets can be traded quickly on the Binance DEX, and can then be used in a wide range of DApps.
In order to improve the scalability of the network, Binance needed to sacrifice some of its security and decentralized aspects. After all, to improve the scalability and transactions speed, a more centralized system is needed.
To achieve this, Binance has replaced Ethereum’s Proof of Work (PoW) consensus with a Proof of Staked Authority (PoSA) consensus algorithm. Simply put, this means that 21 validators are needed for the Binance Smart Chain. To give a better perspective: Ethereum has more than 77,000 validators on the network. While this makes the network of the Binance Smart Chain less decentralized and secure, transactions can be validated faster, and more cheaply.
Another difference compared to the Ethereum network is that the Binance Smart Chain uses BEP-20 tokens. The Binance token (BNB) is the main token of the network and is used to pay for transaction fees. BEP-20 tokens are very similar to Ethereum’s ERC-20 tokens. This allows tokens from the Ethereum network to be bridged to the Binance Smart Chain. The tokens can then be bridged to the Binance Chain in the form of BEP-2 tokens.
The Binance Smart Chain has sacrificed its decentralized nature for greater scalability. Because its interoperability makes it easier to migrate tokens between the Binance Chain, Ethereum, Binance Smart Chain and central Binance exchange, it can be concluded that Binance has achieved its main goal. Thanks to its versatility and flourishing ecosystem, the Binance Smart Chain has filled the gap between central and decentralized exchanges.
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