Binance Smart Chain brings smart contract capabilities to the Binance ecosystem

Binance Chain is a blockchain and peer-to-peer distributed system developed by Binance and the Binance community, which launched in April 2019. The Binance decentralized exchange (DEX) is built on Binance Chain and facilitates the exchange of digital assets that are issued and listed on the DEX. Matching happens within the blockchain nodes and all transactions are recorded on-chain, forming a complete, auditable ledger of activity.

“Binance DEX is a decentralized exchange with a decentralized network of nodes, where you hold your own private keys and manage your own wallet,” explains Changpeng Zhao, CEO of Binance. “With Binance DEX, we provide a different balance of security, freedom, and ease-of-use, where you take more responsibility and are in more control of your assets.”

Binance Coin (BNB) is the native coin on the Binance Chain, and powers the Binance Ecosystem. A strict limit of 200M BNB were initially created on the Ethereum blockchain as an ERC 20 compliant asset. 50% were allocated for sale in an ICO,40% were earmarked for the Founding Team, and 10% for Angel investors.

BNB can be used to pay for fees, and provides a significant discount. Users can use the asset for exchange fees, withdraw fees, and listing fees. Every quarter, a number of BNB is burned, based on the trading volume on Binance.

On April 18th 2020, Binance completed its 11th quarterly BNB burn. This quarter’s burn was the largest in token and fiat amounts to date, totaling 3,373,988 BNB, equivalent to US$52.46M. So far Binance has burned a total of 20.12M BNB tokens, which amounts to approximately 10% of the total supply. In dollar terms at the current BNB price, this is equal to around US$330M.

The increase in business activity this quarter is largely attributable to the Binance Futures platform, which grew to be the number one crypto futures exchange in the world by volume. The futures platform hosts twenty-four different perpetual contracts, a popular derivative among traders, speculators, and hedgers. Binance has also recently launched itself into the options trading market, opening up another potentially lucrative income stream.

However, the most requested Binance Chain feature is programmable extendibility, or Smart Contract and Virtual Machine functions. Digital asset issuers and owners currently struggle to add new decentralized features for their assets or introduce any sort of community governance and activities. Despite this demand, the execution of a Smart Contracts on Binance Chain may slow down the DEX.

In light of this impasse, the developers behind Binance Chain recently released a whitepaper detailing the proposed specifications of a new smart contract enabled blockchain, dubbed Binance Smart Chain (BSC). The new chain will utilize the Ethereum Virtual Machine, which will enable developers to build decentralized apps on top of it.

The two Binance blockchains will be independent of each other, and will run in parallel. However, they will be connected by a cross-chain bridge for BNB, enabling the token to be used natively on both chains. The bridge will also support the movement of BEP2 tokens and Oracle communication.

BSC is also designed to be compatible with Ethereum. As stated in the whitepaper, “most of the dApps, ecosystem components, and toolings will work with BSC and require zero or minimum changes.” Nodes for BSC will also require similar or slightly higher hardware specifications and skills to run and operate, when compared to Ethereum.

The Binance Smart Chain developers have opted for a hybrid Proof-of-Authority (PoA) and Proof-of-Stake (PoS) consensus algorithm, citing environmental, performance, and security concerns of the Proof-of-Work (PoW) consensus algorithm. They refer to this algorithm as “Proof-of-Staked-Authority.” This should provide some notable performance gains in smart contract execution when compared to running the code on Ethereum, which currently still uses PoW.

Similar to the Delegated-Proof-of-Stake algorithm used by EOS, the novel Proof-of-Staked-Authority algorithm would have a set of twenty-one active validators who would take turns in producing blocks. The validators will be voted in by BNB stakeholders, who will have to lock up their tokens in order to receive staking rewards and vote. This mechanism can be found in other assets including EOS (EOS).

Similar to other PoS algorithms, the Proof-of-Staked-Authority consensus algorithm will feature a mechanism to protect against the illicit behavior known as stake slashing. This feature penalizes validators for signing more than one block with the same height and parent block, which is used to solve the “nothing at stake” problem.

The loss imposed on a validator through slashing would be shared with their delegators, which encourages delegators to select honest validators. As stated in the whitepaper, the blockchain remains fully secure as long as no more than six of the twenty-one validators act maliciously.

Since BSC will be using the already established BNB token, which has a fixed supply, no new tokens will be issued as block rewards. Instead, validators will receive transaction gas fees in BNB. The amount that is paid to delegators who stake their BNB is determined by the validator that they stake with, enabling competition between validators. Every validator has an equal probability of being selected to produce a block, and thus, in the long run, should each receive a similar amount of BNB.