What is Binance Smart Chain?
Binance Smart Chain is a blockchain that became live in September 2020, and is designed to enable smart contracts and staking mechanisms, similar to Ethereum’s blockchain.
Towards the end of 2020, gas fees on the Ethereum blockchain had become extortionate and simply unusable.
Imagine going to a supermarket, doing your shopping and when you reach the till to check out, you are asked for $150 just to process your transaction. Well, this is how the Ethereum blockchain was as of February 2021. For small transactions under $100, the gas fees were often higher than the actual transaction amount.
Enter into the blockchain arena BSC or Binance Smart Chain, which is fast, has much cheaper transaction fees and supports smart contract development. Binance has faced a lot of criticism over their BSC network mainly because some claim it is not really decentralised. It is possible for anybody to apply to create a validator node and participate in the network. Currently however, only Binance operate the existing nodes.
Binance Smart Chain transactions are validated by PoSA – Proof of Staked Authority, where participants stake the native token BNB, to support the network. Think of BNB to the Binance Smart Chain as Eth is to the Ethereum blockchain. BNB is the native token of Binance Smart Chain and is used to fund transaction gas fees.
In contrast, Ethereum is currently transitioning from Proof of Work to Proof of Stake validation – Proof of Work being the reason for the extremely high transaction fees.
It is common knowledge that Binance is the largest crypto exchange in the world by a long mile. However, Binance has created an entire crypto eco-system as well, including a native token BNB, a pegged dollar token BUSD, two blockchains that work in parallel and a DEX (Decentralised Exchange)
Binance has two blockchains – Binance Smart Chain(BSC) and Binance Chain. The two chains work in parallel, but only BSC supports smart contracts and is compliant with the Ethereum Virtual Machine (EVM). The two chains run independently of each other.
Because BSC is EVM compatible, developers of Ethereum based Apps and Dapps may easily deploy their projects on the Binance Smart Chain as well as the Ethereum blockchain.
Currently the biggest benefit of the BSC is that it enables smart contracts to operate at considerably lower costs than the Ethereum network at much faster speeds. Smart contracts are necessary for DeFi (Decentralised finance)
What is DeFi?
Smart contracts enable participants to stake or deposit crypto tokens into a contract for a reward – similar to earning interest at a bank.
The most common ways to earn rewards in DeFi are by providing liquidity on DEXs and staking.
Providing liquidity requires depositing two tokens ie BNB & CAKE onto a DEX for buyers to buy. Without liquidity on a DEX, there would be no tokens to buy. The incentive for providing liquidity is rewards, usually measured in APY.
For example in the image shown below, taken from Pancakeswap.finance, we can see that the rewards for providing liquidity to the CAKE-BNB liquidity pool are 139.82% – much higher than the current interest available at most banks! However, be aware that pairs of tokens similar to these may fluctuate in price, so your rewards ie Cake in this instance could also fluctuate.
To see a list of DeFi projects, head over to https://www.defistation.io
Here you can see a list of active projects in DeFi on the Binance blockchain.
Be aware when providing liquidity in DeFi projects, because if one of the tokens swings massively in favour of the other, this will affect profits and losses – this is referred to as impermanent loss. Impermanent, because the loss is only fully realised when the pair of liquidity tokens are taken out of the pool.
Probably the easiest way to interact with the Binance Smart Chain and participate in the various DeFi offerings is by installing Metamask into Chrome or other compatible browser, and adding the BSC Mainnet.
Some instructions for configuring Metamask are available here https://docs.binance.org/smart-chain/wallet/metamask.html