2021-10-29 08:45:04

Binance Smart Chain versus Ethereum

Ethereum is still far ahead in market share as it hosts 69% of DeFi applications and has a total value lock of $135.05bn. Photo: Mateusz Slodkowski/SOPA Images/Sipa USA

In mid-October, the Binance Smart Chain (BSC) received a cash injection of $1bn (£725.5m) to encourage widespread engagement by both users and developers. This billion-dollar adoption drive has placed pressure on competing crypto networks, particularly Ethereum, the world’s largest and most established blockchain for decentralised finance (DeFi).

A battle is ensuing within the crypto-sphere where the decentralised blockchain models fight for primacy. The metrics that will decide who succeeds in this conflict include transactions per second, the average fee per transaction (gas fees), scaling solutions, and the rate of adoption by developers and users.

Like Ethereum, the BSC can host smart contracts that essentially replace centralised authorities in the nascent world of DeFi. BSC is just over a year old, having been launched in September 2020. According to Binance CEO CZ Zhao, the blockchain’s rapid rise has been the result of its “low fees that attract more users and projects”.

Throughout 2021 the number of applications on BSC has steadily increased. The blockchain now hosts over 800 decentralised applications, compared with Ethereum’s 2800. 

The total value of decentralised finance applications locked into the BSC has risen throughout 2021, from $34.7bn in April to $36bn today. However, Ethereum is still far ahead in market share as it hosts 69% of DeFi applications and has a total value lock of $135.05bn.

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However, with Binance’s recent billion-dollar investment, they plan to make BSC “the most inclusive and used blockchain infrastructure in the world”

This is a direct challenge to Ethereum. However, Chris McCann at Race Captial explained that encouraging developers to utilise BSC will take more than just substantial financial injections. He told Yahoo Finance that “ease of development, developer tooling, and developer communities are a much bigger determinant of success rather than a big ecosystem funding.”

In light of the news that an Ethereum user recently paid $430,000 in transaction fees for a failed payment, how can the network still maintain its top position in this competitive environment? Gas fees on Binance are a fraction of those on Ethereum and BSC’s transaction speeds are much faster, having a speed improvement over Ethereum of roughly 4.3 times.

Binance

In mid-October, the Binance Smart Chain (BSC) received a cash injection of $1bn to encourage widespread engagement by both users and developers. Photo: Darrin Zammit Lupi/Reuters

McCann said: “High gas fees are leaving room for competitors like Solana who are seeing similar levels of growth in the DeFi apps in their ecosystem with much lower cost of transactions and much higher speed of transactions.”

Despite its high gas fees and slow transaction speeds, Ethereum is still an attractive platform for both developers and users. This could come down to it having first-mover advantage that allowed it to capture an early monopoly over the DeFi space.

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Although BSC is much cheaper and faster than the Ethereum network, it has one significant vulnerability that is causing institutional finance to be wary of approaching it for long-term DeFi investment. The Binance Smart Chain is heavily centralised. It only has 21 validators, or miners, whereas the Ethereum network has over 11,000 validators. BSC is thus deemed less robust and vulnerable to manipulation. 

The centralised characteristic of BSC has allowed it to operate at speed and at low cost, but it has raised trust concerns. This has led Wilson Withiam of crypto-data firm Messari to tweet that “it is hard not to presume that each Binance Chain validator is in some way connected or tied to Binance”.

Apart from this governance issue, BSC is also facing growing competition from a blockchain originating in Singapore that is significantly faster and cheaper. The Kucoin Community Chain (KCC) is a real contender in the space and gas fees are a fraction of the already minuscule fees on BSC. But both KCC and BSC have a commonality in that they are both clones of the Ethereum mainnet.

Ethereum five-day chart. Source: Yahoo Finance

Ethereum five-day chart. Source: Yahoo Finance

There are now at least 25 major blockchain platforms available in a market that is becoming increasingly competitive. Blockchains are still not able to handle transactions at scale compared with the centralised financial instruments used by Visa (V) and Mastercard (MA), which can handle thousands of transactions per second. 

Read more: Could ethereum overtake bitcoin?

Until this problem of scalability is solved, there will be a persistent bottleneck inhibiting the adoption and widespread practical application of blockchain technology. The comparison in transactions per second between DeFi and legacy transaction processing systems is stark. Ethereum operates at approximately 30 transactions per second, whereas Paypal (PYPL) can muster around 200, and VISA can validate on average 1,700.

Watch: What are the risks of investing in cryptocurrency?

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