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Understanding the Binance Smart Chain

Posted July 13, 2022 11:49 am
5 min
By Deep In The Sesh

Anyone who’s had access to an internet connection knows what Binance is. You’ve probably seen your fellow crypto bros smiling when the financial graphs on it flicker green or witnessed them suffer from a complete meltdown when they turn red. 

Simply put, Binance is the world’s largest cryptocurrency exchange in terms of volume. It handles almost $6.88 billion, according to numbers from Statista. Changpeng Zhao, aka CZ, launched the company in July 2017. He later became the top crypto exchange in the world after just 180 days. 

According to Binance, the story of its founder, labeled “From Burgers to Bitcoin,” tells the story of a Chinese-born immigrant in Canada, hailing from humble beginnings, taking on various odd jobs to help keep his family afloat. At one point, he was even working at McDonald’s. 

“All this hard work has led to CZ graduating with a computer science degree at McGill University in Montreal, then to building innovative trading software for the Tokyo Stock Exchange and Bloomberg’s Tradebook. He then learned about Bitcoin in 2013 during a game of poker, after which he decided to go all-in on crypto by dedicating his life to it. He even sold his apartment to buy Bitcoin. Even when the price of BTC at the time sank from $600 to $200 after his BTC purchase, he soldiered on,” the story reads. 

But while this slumdog billionaire story is inspiring, to say the least, the objective of this article is not to showcase the history of the exchange. But rather to understand the by-product of the company CZ founded: Binance Chain and Binance Smart Chain. 

Let’s jump in. 

What is Binance Chain?

Soon after launching Binance in 2017, the company developed its own ERC-20 token called Binance Coin. It is used for trading fees, with a percentage of it burnt every quarter. 

Two years later, in 2019, the exchange replaced the ERC-20 token with its own native token, also calling it Binance Coin (BNB) – confusing a little, but bear with us here – while launching its own blockchain, the Binance Chain. 

It provided a marketplace for exchanging crypto assets, allowing users to develop decentralized applications (DApps) with low trading fees. 

What is Binance Smart Chain (BSC)? 

Binance later built another blockchain naming it Binance Smart Chain. While not a replacement for the original chain but instead runs in parallel to it. One of the main differences between the two is that BSC supported Ethereum-based applications and compatibility with Ethereum Virtual Machine (EVM). 

This implies that DApps running on BSC also benefit from the smart contracts feature. Since these contracts allow more convenience in terms of lower trading and transactional fees in an agreement. 

For users, applications such as MetaMask are easily configured to operate on BSC. 

However, it is essential to note that Binance Chain uses Delegated Proof of Stake (DPoS), whereas BSC leverages Proof of Staked Authority (PoSA). In PoSA, users stake their identities and reputations, while the Proof of Stake (PoS) algorithm incentivizes the confirmation of network data after staking collateral. 

In contrast, the DPoS algorithm adds a layer of voting and delegation mechanism on top of PoS – in layman’s terms, any user that proposes a valid block can become a validator. 

The design goal with BSC here was to leave the high throughput of the Binance Chain intact while introducing smart contracts into its ecosystem. It’s worth noting that BSC isn’t a so-called layer two or off-chain scalability solution. It’s an independent blockchain that could run even if Binance Chain goes offline. 

How Does BSC Work? 

There are two primary moving parts as to how the chain works; let’s break them down. 

Consensus

According to Binance, BSC achieves approximately 3 second block times with a PoS consensus algorithm, or as we previously cited, PoSA, where participants stake BNB to become validators; if they propose a valid block, they’ll receive transaction fees from the transactions included within it. 

“Keep in mind that, unlike many protocols, there is no block subsidy of freshly-minted BNB, as BNB is not inflationary. On the contrary, the supply of BNB decreases over time, as the Binance team regularly conducts coin burns,” the company explains. 

Cross-Chain Compatibility

BSC was constructed as an independent but complementary system to its predecessor Binance Chain. Accordingly, dual-chain architecture is leveraged to allow users to transfer assets from one blockchain to another seamlessly. 

This is because it offers rapid trading on the Binance Chain, while powerful DApps can be built on BSC. This interoperability provides an extensive ecosystem catering to a plethora of use cases. 

“BEP-2 and BEP-8 tokens from Binance Chain can be swapped for BEP-20 tokens, the new standard introduced for Binance Smart Chain,” Binance highlights.

DeFi on BSC 

Within this ecosystem exists a flurry of “Peggy Coins,” commonly referred to as the number of digital assets on the Binance Chain – think BTC, LTC, ETH, EOS, or XRP. The name is because these tokens are pegged assets on their native chains. 

For example, Priscilla might decide to lock up 10 BTC to receive 10 BTCB on Binance Chain. This allows her to trade 10 BTCB for 10 BTC at any time. Meaning that the price of BTCB should closely track that of native BTC. 

By doing this, Priscilla can effectively port these assets onto the Binance Smart Chain. 

This level of flexibility on Binance Smart Chain allows several different chains to be used in the growth of the DeFi space. Let’s burn through another example. An application like PancakeSwap, which lets users trustfully exchange assets, participate in yield farming and vote on proposals.

And that about wraps up relatively all you need to know about Binance Smart Chain! Check back in later to discover more explainers on how the crypto and blockchain space works.

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