Let me just say from the very beginning that I fucking ?? Ethereum. Ever since I have been around cryptocurrency, I have always been curious about its potential as to decentralized finance and smart contracts. It could do so much more than Bitcoin. By way of interesting side note, the original Bitcoin code actually included the ability for smart contracts but after a major exploit was found in that code that allowed the creation of tons of extra Bitcoin and required a hard fork to undo the damage wrought by that exploit, the smart contract code in Bitcoin was turned off. Now we think of Bitcoin as having relatively little utility and that decision to not permit smart contracts is what paved the way for Ethereum. But just as Ethereum rose in prominence to challenge Bitcoin, so have other smart contract platforms risen to try to challenge Ethereum. None are close to Ethereum in terms of actual useful projects up and running on them which is mainly because the vast majority of smart contract devs want to build on Ethereum. But last year the news came out that Binance, a company headquartered ostensibly in Malta (although its founders are Chinese and it has undeniable ties to China) that runs a large very centralized cryptocurrency exchange, would be launching its own decentralized* smart contract platform. (*Note: BINANCE Smart Chain or BSC bills itself as decentralized but given that Binance itself is very centralized and appears to be responsible for a lot of the development on BSC, it is not clear how truly decentralized Binance Smart Chain is.)
What is a smart contract? What is decentralization?
Smart contracts are code built on a blockchain that automatically executes all or parts of an agreement between parties. Smart contracts generally relate to financial transactions such as borrowing a collateralized loan that may be liquidated if the loan to value ratio exceeds, say, 75%, executing a variety of derivative transactions (e.g., buying or selling crypto options or gas futures), etc. There are applications for smart contracts outside of financial transactions but the vast majority of smart contract platforms perform transactions of a financial nature. The use of the term decentralization in this context refers to the method of control of a smart contract platform. A centralized platform is controlled by a single entity or person (or group of related entities or group of persons) - for example, Binance's exchange is centralized. It is controlled by a small number of entities who are in turn controlled by a small number of individuals and investors. A decentralized platform, in contrast, is controlled by holders of its governance tokens, who are typically the users of the platform. Various proposals are put up for a vote and the tokenholders can vote on them. At a centralized platform like Binance or Coinbase, decisions are not made by users of the platform. Read more about centralization versus decentralization in this article.
There is actually an interesting argument in my opinion about whether you could consider a public company decentralized because its shares are held by the public and its shareholders in turn elect a board of directors who make big decisions about the direction of the company and hire executive officers to manage the day-to-day operations of the company. It sounds a little bit like decentralization but there are several layers of persons between the shareholders and the actual control of the company. In a truly decentralized platform the users of the protocol are the ones directly making the decisions about the protocol whereas the shareholders of a public company are not necessarily the ones who use the services or products of that company. A DeFi platform grants you way more control than being a shareholder of a public company. Holding the governance token of a DeFi platform would be kind of like having direct control over the choices your bank makes like how much fees should be charged, which instruments to put deposits in to make a return, whether there should be overdrafts, etc. Of course centralized financial institutions that grant this type of control to their users.
What is Binance Smart Chain?
As I mentioned the vast majority of smart contract development is occurring on Ethereum, which has been around for over five years. But Binance has managed in a relatively short period of time to create a serviceable smart contract platform called Binance Smart Chain. When I first heard about BSC, I was quite skeptical. I didn't like the concept of a centralized entity like Binance basically masquerading as decentralized and winning over a large share of the market. (Similar concerns to some of my issues with venture capital in DeFi.) Because Binance itself is centralized and has a lot of money to throw around, it can move a lot faster to play catch up. In a pretty short amount of time BSC has lapped many smart contract competitors and has made significant strides in catching up to Ethereum.
I am not directly addressing whether Binance Smart Chain is truly decentralized because I honestly don't know. But use of BSC does benefit Binance itself (for one thing you need to use BNB, Binance's token, to pay fees on Binance Smart Chain) and it brings people into the Binance ecosystem, which again benefits the centralized (and, in my opinion, often predatory) Binance. In some ways, it does not matter whether BSC is decentralized or not if it brings significant benefit to an entity that we know is centralized. That's not even to mention the fact that many people have asserted that Binance is essentially a Chinese company, regardless of the fact that it is incorporated, and its headquarters are located, outside China. If this is true, then Binance, like other Chinese companies, may be expected to do the bidding of the Chinese government. That may be an ethical concern for some people.
My Opinion of Binance Smart Chain
In spite of my hesitations about the platform, I was eventually persuaded to try it as a result of a couple different events. First, I heard that Binance Smart Chain would be home to Ellipsis Finance, which is essentially a clone of low-fee stablecoin swapping platform Curve Finance on Ethereum, and that Ellipsis would be airdropping its token, EPS, to holders of veCRV (which is the voting escrowed version of Curve's native token, CRV - veCRV is what you receive when you vote lock your CRV for a specified period of time in Curve's platform and it entitles you to a rather large portion of the fees generated by the platform which you receive in the form of a yield-bearing token). I have a bunch of veCRV which has turned out to have an excellent return, so, in spite of my recalcitrance, I wanted to claim my EPS. I think this was a very clever way for BSC to attract a bunch of relatively early DeFi adopters to try their platform (since most holders of veCRV have been around for awhile and probably have a pretty good understanding of smart contracts and DeFi).
So I set up Binance Smart Chain on my METAMASK wallet and seeded my wallet with some BNB (Binance's token, which you need to pay fees on BSC). Then I headed over to Ellipsis and claimed my EPS token based on having veCRV in my corresponding Ethereum wallet. They drop the EPS once a week so you have to repeatedly return to claim it (perhaps to create a habit?). And I can't lie - the process was very simple and, most notably, cheap, compared to Ethereum. Of course BSC can be cheap specifically because it has centralized elements. It doesn't have miners. Ethereum is taking steps to reduce its fees but with thousands of devs and miners it is not as simple a process as it is for Binance. That being said, aside from picking up my airdropped EPS, withdrawing it with a 50% penalty so that I can stake it to earn a lot more EPS (the tokenomics leave my head spinning), there is not too much else going on on Ellipsis at this point. There is, I think, one pool where you can swap BUSD (Binance's stabelcoin) for a few other stablecoins, and there is a place where you can buy EPS. Compare that to Curve which has around 30 different pools where you can swap a large variety of stablecoins as well as equivalent coins (e.g., renBTC for wBTC or stETH for ankrETH, etc), and Curve recently created crv.finance where DeFi protocols can create their own additional pools for swapping.
When compared to Curve, there is very little you can actually do on Ellipsis besides collect EPS and earn a metric ton more EPS plus a little BUSD if you lock it. The economic value you get at this stage mainly comes from other people deciding to withdraw their EPS at a penalty so that they too can lock it and make money from later withdrawers. The return when I locked mine was something like 2000% plus I earned EPS in the amount of around 20% of the amount of EPS I locked from the withdrawal penalties of later withdrawers. What I'm trying to illustrate is that there doesn't seem to be much true activity on this platform at this stage other than this kind of ponzi-esque airdrop, withdrawal penalty, and locking mechanism. Perhaps that will change since it is a very new platform. So, on the one hand, it was very nice to use smart contracts without paying hundreds in fees, but, on the other hand, my impression of BSC as just a playground for degens was not changed one bit by using Ellipsis. I am not above getting sucked in by my naturally degen roots, but I can still see it for what it is right now.
My other experience with BSC was when one Ethereum protocol I am involved with, Badger (a Bitcoin on Ethereum protocol), announced that it would be expanding to Binance Smart Chain. They provided that if you put BBADGER (their native token deposited to their platform) and Bitcoin as liquidity onto Pancakeswap (Binance's literal clone of Uniswap), you would get a fairly high APR, like around 100% plus some extra BADGER if you staked the resulting liquidity provider token back on Badger's BSC protocol. I've had Badger for awhile so I was like why the hell not. I used Binance Bridge to bridge both my BBADGER and some USDC (to purchase bBTC - BSC's tokenized BTC) over to BSC, which was a little finicky but also cheap af. Then I deposited my BBADGER and bBTC into Pancakeswap's pool and finally I took the resulting LP token and staked it in Badger on BSC. I think my LP token has already appreciated like 10% since then and I am earning a little more BADGER too. If I needed to get BBADGER, the cheapest way, rather than buying it on Ethereum and then depositing it to Badger on Ethereum, would probably be to bridge some token over to BSC and then swap it for BBADGER and bridge the BBADGER back.
Pancakseswap has historically had some ridiculously high returns that made me quite skeptical about its utility. But what I just described as a cheaper method of obtaining BBADGER is real utility. I am not rushing to contribute tons of liquidity on Pancakeswap (for one thing you need to worry about impermanent loss) - same reason I don't provide much liquidity on Uniswap unless there is a very good incentive to do so. But at least I can see a little bit more utility rather than pure unadulterated degenracy (although Pancakeswap still has plenty of that).
Should You Use Binance Smart Chain?
Although I have my reservations about BSC, I can't say that it should be wholly avoided. When you have a real use for it that goes beyond just trying to mine crazy degenerate gains, like swapping into BBADGER in a cost effective manner, I would recommend it. Make sure you know what you're doing. At the same time, I am not going to use BSC unthooughtfully just to try to take advantage of the ridiculous gains on tokens that appear to have no real utility. I think that is not a good use of capital and I also think that we shouldn't just willy-nilly support something that is, as I asserted earlier, probably a centralized sheep in decentralized wolf's clothing. I will try to stick with Ethereum where I can but I can see that Binance Smart Chain will likely be at the very least a strong competitor to Ethereum.
About the Author: Harvard grad and former corporate lawyer is passionate about Ethereum and DeFi and has been investing in and using crypto for many years. She was inspired to write this blog covering the basics of DeFi, liquidity mining, farming, and tips and tricks and mistakes to avoid for DeFi newbies, as well as other Ethereum-related topics, to increase the number of people using ETH and DeFi by making it more accessible.
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