Binance vs. Ethereum: What is the Distinction? – The road
The world of DeFi (decentralized finance) has a lot of competition. Bitcoin is the world’s first programmable money, but other projects wanted to make programming blockchain assets even easier. The first was Ethereum, the aim of which was to give developers an easier way to create applications that would run on a decentralized blockchain.
This enabled people looking for credit or higher returns to bypass banks and institutions that charged high fees and required proof of identity. Now individuals can use DeFi to obtain a unit of account, trade assets, credits, and more without the need or consent of a third party.
One of the biggest competitors in the DeFi area is the Binance Smart Chain (BSC). But what is BSC and how does it work?
What is binance
Binance is a cryptocurrency trading exchange founded by Changpeng Zhao. The company was initially based in China, but was relocated to the Cayman Islands after tightened Chinese regulation threatened its business.
With its extensive list of trading pairs and relatively low fees compared to its competitors, Binance quickly became one of the, if not the largest, crypto trading platforms in the world.
Binance Smart Chain
In September 2020, Binance announced its new DeFi platform, BSC, which was launched later in April. Its purpose was to offer an alternative to Ethereum and other leading DeFi platforms.
Over time, Ethereum grew beyond what its infrastructure could even handle, resulting in congestion, slow transactions, and fees so high that sending shipments under $ 100 was borderline impossible unless the time was right Perfect.
This led to the rise of other smart contract platforms like BSC, which grew rapidly as Etheruem couldn’t provide a viable platform for those who couldn’t afford the fees.
Today, BSC has a total value of $ 26 billion for the various applications that run on the platform. But what is BSC and how does it compare to others like Ethereum?
Binance Smart Chain vs. Ethereum
Binance has made great strides to catch up with Ethereum in terms of trading volume. Both also have extremely similar applications that build on them, such as decentralized exchanges and credit and credit platforms. But they work according to two very different consensus mechanisms.
A consensus mechanism is a system that enables nodes (participants) in a distributed computer system (blockchain) to reach a “consensus” about the correct data set (transactions). This gives blockchain networks their security and enables participants to check the authenticity of transactions without having to trust each other.
Different blockchains have different ways of building this consensus. Ethereum currently uses a mechanism known as Proof-of-Work (PoW), the original consensus mechanism used by Bitcoin. Binance, on the other hand, uses a method called Proof-of-Authority (PoA).
In PoA, the block creators are called validators. These validators are pre-approved and selected by Binance, as explained on Binance’s own website. To be admitted, they must validate their true identity, invest money to prove their long-term commitment, and be on a par with all other candidates.
In this model, Binance has absolute control over the blockchain. You decide who becomes a validator and remove validators at your own discretion. This requires that users trust that Binance is acting in their best interest. Should Binance decide to change aspects of the chain or the ecosystem, it has the power to do so.
Binance founder and CEO Changpeng Zhao famously said that BSC is like “CeDeFI” or centralized DeFi. The tweet he posted these comments on has since been deleted, but according to BSC’s founder, it’s not a decentralized financial application ecosystem.
In the thread that came from Zhao’s tweet, he said that the benefits of such centralized control are that Binance can itself review projects built on top of the system, but more than one project has already “pulled back” investors.
Currently, Ethereum uses the same PoW mechanism as Bitcoin. In this system, computers compete with each other to validate transactions. To win, the computer must solve complex mathematical puzzles.
Once they win, the computer adds a new block of transactions to the blockchain. These computers are also known as miners and receive Ethereum for completing a new block of transactions. This process is energy intensive and helps protect the network from evil actors.
This process is very energy-intensive and helps to secure the network. Sufficiently geographically distributed miners ensure a decentralized network without central authority, which is drastically different from the way the BSC works.
Ethereum is in the process of moving to a new consensus model called Proof-of-Stake (PoS) to lower fees. In this model, consensus is reached using an algorithm that selects a node to win a block of transactions. When a node is selected, it creates the next block of transactions in the chain. These nodes are commonly referred to as stake pools.
These wagering pools are selected based on the “wager” or the number of coins they contain. In other words, the more coins a stake pool has, the more likely it will be selected to produce a block and earn rewards. To ensure that the richest pools do not always win some randomization, other criteria, such as the number of coins wagered, can be incorporated into the selection process.
In PoS, miners are replaced by people who use their coins. Individuals can “wager” or place their coins with different stake pools, just like miners who join a mining pool to earn more rewards. In contrast to PoA, stake pools and nodes in the PoS model are not approved or selected by any central authority, which makes it much more decentralized.
So is Binance Coin a good investment?
Assessing crypto assets for quality as an investment opportunity can be a daunting task. With something like Bitcoin or even Ethereum, it’s easier to put emphasis on when analyzing their decentralization.
Bitcoin, for example, has a large number of geographically distributed nodes and miners and has survived highs and lows for over 11 years. With Bitcoin, you can know with a high degree of certainty that not a single company, government or individual is in control. Instead, the collective of its users determines its future, ie a free and open market only determines its price.
Ethereum has half as many nodes as Bitcoin, but is still orders of magnitude more distributed than Binance Coin. This is due to its PoA model, which gives the Binance exchange full control.
But why is that important? Binance has lower fees than Ethereum and is faster, right? Who cares if it’s centralized?
Each individual’s answer to this question depends primarily on their reason for the investment. Do you want to speculate with a cryptocurrency? Or are you interested in a decentralized ecosystem that solves real problems?
The problems that cryptocurrencies, particularly Bitcoin, seek to solve are related to control and freedom, not just making money through speculation.
Who should control money and its supply? Should one company or government set the rules for the rest of us? Who decides who gets access to the financial system?
These are all serious questions that humanity has been asking for most of their life. So far, the outcome of transferring control of money to a single entity has proven far from ideal. It causes currency devaluation and inflation, disenfranchisement of certain communities that do not meet the invented requirements and much more.
If you’re interested in speculation and trying to make money, perhaps Binance Coin could be an opportunity as more and more people leave Ethereum in search of cheaper transactions. If you’re interested in building systems without centralized control then investing in Binance Coin would be ironic for that cause.
To be fair, there is nothing wrong with making speculative investments. Cryptocurrency itself is widely viewed as speculative due to its reformative nature. Because of this, it can help understand why cryptocurrencies exist in the first place – to give individuals economic empowerment and self-sovereignty, and to remove control from the hands of the few and return it to the people, and Binance Coin is the direct opposite.