What Is Binance Smart Chain?

To build decentralized applications (dApps), the decentralized finance (DeFi) project has to choose a robust blockchain protocol that offers a reliable cheap, fast, and user-friendly platform. Since its launch in September 2020, Binance Smart Chain (BSC) has demonstrated that it is one of the best blockchains for decentralized finance and DApp development.

What is Binance Smart Chain (BSC)?

Binance Smart Chain (BSC) is a blockchain system from the crypto-trading platform Binance that runs parallel to the Binance Chain. Due to its dual-chain architecture, BSC empowers its users to build their decentralized apps and digital assets on one blockchain and take advantage of the fast trading to exchange on the other.

How Does BSC Work?

The BSC system works as a dual-chain system that allows support for other features like smart contracts and asset swaps between other blockchains. Instead of being a build-off, it works as a complementary network to the Binance Chain, providing programmability to it. It is also compatible with the Ethereum Virtual Machine (EVM), a key element in the Ethereum blockchain that allows the execution of smart programs.

BSC uses the Proof-of-Stake Authority (PoSA) algorithm. With this algorithm, all participants can become validators by staking their BNB coins. Moreover, unlike other ecosystems, BSC does not mint freshly new BNB, rather the supply decreases over time, as BNB coins are burned.

BSC provides leveraged interoperability ecosystem that comes with a wide variety of functions and tools. Users can swap their BEP-2 and BEP-8 tokens from Binance Chain for BEP-20 tokens via Binance DEX, or through Trust Wallet.

BSC’s Dual-chain Communication

Naturally, there are two communication channels: BC-BSC and BSC-BC.

The first one, BC to BSC, uses the on-chain light client – a program in the Binance Chain that allows users to connect to a full node of the blockchain. These light clients will be provided by the BSC Smart Contracts.

The second one, the BSC to BC, uses a system adopted from Oracle-based blockchains. All communication requests from BSC will be executed and adequately implemented into the BSC network as “transactions”. These transactions can be viewed and stored on the Oracle and then sent to the Binance Chain.

The “Oracle” will contain all the essential information of the package, such as the sender, the receiver, and the amounts of funds to be transferred.

In addition, BSC uses the Proof-of-Stake Authority protocol which requires more block confirmations: every validator is able to create one block. So in order to verify data on the Binance Smart Chain, there should be several blocks, as data can not rely on only one validator.

In essence, every package from the BSC will be sent to the BC after being reviewed by an “Oracle Relayer”. The validators of the Binance Chain will work as “Relayers”. Their work consists of voting and submitting a cross-chain communication package onto the Binance Chain.

Differences between BSC and Binance Chain (BC)

The finality of the Binance Chain is the exchange of digital assets with a fast, dynamic peer-to-peer system. The key feature of Binance Smart Chain that makes it different from Binance Chain is that it enables smart contracts and interoperability with Ethereum products. Besides, it provides staking BNB mechanism.

Although BSC is a parallel blockchain to BC, both networks can operate as a cross-chain system. The BSC allows two key functions:

Cross-chain Communication

• Users can create financial products, digital assets, or tokenize their assets.
• The products created on BSC can be freely traded on BC, allowing a flexible interoperable system where users can manually exchange their products.
• Users can control their products in one user-interface ecosystem.

Cross-chain Transfers

• When a user makes a transaction to the other blockchain, the transfer-out blockchain locks the amount in a controlled system of smart contracts or addresses. This is an essential aspect for the dual-chain system to work.
• Next, the transfer-in blockchain unlocks the funds from the smart contract/addresses, sending them to the target address.

BNB Staking and Governance

Community governance has become a popular model for many Decentralised Exchanges (DEXs) via Staking. Through PoSA, Binance provides full community governance and decentralization. The staking process consists of the following steps:

1. Token delegation. Token holders and block validators can “bond” their tokens into the stake. Token holders can become validators by delegating their tokens to other validators, or validator candidates. After that, they can choose another validator to “re-delegate” their funds. Likewise, validators can also share their tokens with delegators.
2. Ranking. Bonded tokens work as a measure to rank validator candidates. So, the more tokens you “bond” into the stake, the more chances you have to become a validator.
3. Slashing. The BSC system uses “Slashing”, a punishment for bad behavior. If token holders and validators are punished, their delegators will be affected as well. These bad behaviors can go from double signs to instability.
4. Unbound period. Tokens will remain bounded if bad behaviors are detected by the system. During that period, the identified subject will get slashed.

Pros/Cons of Binance Smart Chain

The cross-chain system allows users to trade assets on Binance DEX, the non-custodial exchange of Binance, which is an essential milestone in the DeFi space. According to the BSC Whitepaper, the Binance team is planning to support cross-chain contract events in the near future.

The main pros of BSC include:

• compatibility with EVM;
• interoperability with Binance Chain;
• support of Smart Contracts and dApps;
• swaps between BEP-2 and BEP-8 Tokens for BEP-20 tokens;
• cross-chain communications and transactions.

However, there are some issues that come with BSC. In particular, the problem with the community governance system is the small community that can slash out the other participants. That small community is the one that meets the financial requirements, that not all users have. This is why some users criticize BSC for being prone to centralization.

Another problem with these systems is that they are prone to malicious acts of the community with the most control. Similar to 51% attacks, caused by miners who have control of the network.

Conclusion

BSC offers great opportunities to gap several blockchains with a multi-functioning, highly-dynamic cross-compatible ecosystem. The BSC will work with BC so users don’t have to leave one and move to the other. Rather, BSC will work as a complementary blockchain to offer the full benefits of the DeFi world with classic blockchains.