Ethereum Vs. Binance Smart Chain — Battle of the DeFi

The Binance coin ($BNB) started as a token based on the Ethereum blockchain, but now, it’s looking all set to overtake the second largest cryptocurrency by circulating supply and market cap.

Ethereum has been the poster child of real world use cases for blockchains and cryptocurrencies for the good part of the last decade. The development started in 2014 and was crowdfunded at the time. The network went live on 30th July 2015 and it didn’t take it long to become the most widely used blockchain in the world. Ethereum enables the use of Smart Contracts (which is one of the most anticipated use of blockchain technology even today). It was used for many an ICOs throughout it’s history, including the one from Binance.

Binance, in comparison, was founded in 2017, in China, by CEO Changpenng Zhao. However, as a result of the cryptocurrency ban in China, in September 2017, it had to move its headquarters to Japan, which by comparison has a much more friendly regulatory environment for cryptocurrency startups. By January of 2018, it was the largest cryptocurrency exchange in the world with a market cap of $1.3 billion. Since then, Binance has been moving fast and hard and has evolved into a whole ecosystem, offering a whole range of DeFi and crypto products. Binance also acquired India’s largest cryptocurrency exchange WazirX and integrated it into their ecosystem. It’s launchpad service, which is a way for new and promising crypto projects to leverage the massive user base Binance posses for a fiery launch, has gotten incredibly popular in recent months. It’s not uncommon for launchpad tokens to do 10–20x within days of being listed.

Ethereum uses a Proof-of-Work (POW) blockchain consensus. A Proof-of-Work system requires miners to solve complex mathematical problems using an enormous amount of computing power in order to approve transactions and keep the network running. The miners get paid in the form of block rewards, or “gas fees” to the user. The same consensus that is used by the largest, most popular cryptocurrency Bitcoin. This makes the network very secure since the only way it can be “hacked” is if someone takes control of 51% or more of the network, which is spread across many places all over the world. The very process would be more expensive than what the hacker could potentially steal so it provides a very strong safety incentive.

However, this security comes at a cost. The amount of energy used by these sophisticated mining systems is hard to imagine. to put it into perspective, Iceland, which is a fairly popular destination for setting up massive crypto mining farms to take advantage of the cheap electricity and the natural cooling systems, spends more energy on mining operations than the rest of the total domestic energy consumption of the country. This, expectedly, raises a lot of eyebrows since crypto is still a relatively young industry with a lot of critics.

The price of Etheruem is up over 700% in the last one year. This, coupled with the fact that Etheruem is working on ETH 2.0, which would make the blockchain transit from a Proof-of-Work to a Proof-of-Stake consensus (more on that later), among various other changes to help the scalability of the network, has meant that the mining rewards for verifying transactions has shot up massively in the past one year. This is due to the fact that the current set of miners require much higher rewards since there is a huge influx of demand into the network. These days, the gas fees for a simple Ethereum transaction can run into the hundreds of dollars.

With the rise of decentralised cryptocurrency exchanges built on Ethereum’s blockchain, like Uniswap, and with the rise of new projects choosing to launch on markets with an open listing policy, these gas fees have almost become unavoidable. As of July 2020, Uniswap had more than 2,800 virtual asset markets. That was more than 10 times of all it’s competitors combined. Even now, Ethereum based MDex and Uniswap are two of the most popular decentralised exchanges by market volume and share.

However, a new type of “decentralised” exchanges have been gaining a lot of momentum lately. The Dexs based on Binance Smart Chain. These exchanges use the Proof-of-Stake consensus algorithm in order to approve transactions. In case of PoS algorithm, a set of nodes decide to stake their own cryptocurrencies for the transaction validation. They are called ‘stakers’. The larger the amount of stake and the longer the duration of the stake, the better are the chances of the staker to get transaction validation responsibility. Here, the stakers are providing the function that miners do for the more traditional PoW consensus. The difference is, you don’t need warehouses full of processing units and countries full of energy to do it.

This makes the PoS consensus much more scalable, environment friendly, and adverse to the usual criticism cryptocurrencies get which slows down adoption. This is where Binance comes in.

Binance recently developed their own blockchain protocol called Binance Smart Chain. It uses the PoS consensus and has a bunch of other features designed to make it much more scalable. Other organisations have attempted to develop their own protocols too, but with the level of influence Binance has over the entire industry with its ecosystem, it took no time for new projects to adopt the BSC protocol and make use of their massive user base.

PancakeSwap, BurgerSwap, BakerySwap, the developers that make decentralised exchanges on the Binance Smart Chain seem to be obsessed with breakfast food based names. PancakeSwap has proved to be the most popular among the bunch and has been growing at an unprecedented pace. Launched by anonymous developers and governed by its community, Pancake found its niche among Binance users. Users pay a 0.2% trading fee on every token swap (trade), while 0.17% goes back to the liquidity providers (stakers). The remaining 0.03% is sent to the PancakeSwap Treasury. The price of PancakeSwap’s token, $CAKE, has gone up more than 2750% since the start of 2021.

It’s not all roses, however.

The token at the centre of all this recent development on BSC is, unsurprisingly, $BNB. Binance’s own native token. Binance coin is controlled completely by the company, and accounting for the control it already has with its ecosystem, saying that this has the purists of the crypto community worried would be putting it lightly. The whole movement was based on the need for decentralisation in the financial system, and the current developments in the markets seem to be putting it all on risk. Binance’s CEO, CZ, calls these exchanges based on BSC Ce-De-Exs. Centralised Decentralised Exchanges.

All of these problems could be solved with the launch of ETH 2.0. But even the first stage of the launch is at least two years away. And in the crypto-verse, two years is a long, long time.

The major differentiating factor among Ethereum based Dexs and BSC based Dexs, is the consensus they use to verify transactions. But the way things are right now, this difference translates into very different levels of decentralisation, massive variance in transaction and environmental costs, and most importantly, a big difference in ideology. Which side comes out on top remains to be seen.

Disclaimer — the author holds stake in Ethereum and BNB both, among other assets mentioned in the article. This is not financial advice.

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Parv Prabhakar

Fintech analyst, trader, and investor. Crypto, stocks, options, in that order.