Binance has officially entered the smart contract war. Last week, the exchange released a whitepaper detailing a new Ethereum-compatible blockchain capable of processing smart contracts and applications. This network, dubbed Binance Smart Chain (BSC), will complement the existing Binance Chain, which launched last April to power Binance’s decentralized exchange.
The move is not entirely surprising. Binance started siphoning off token projects from Ethereum with the release of Binance Chain. Now it wants to capture some of the activity within Ethereum’s burgeoning Open Finance sector, and smart contracts are the logical next step to divert user traffic towards its “decentralized” offerings. Despite trying to downplay a potential rivalry, Binance is 100% trying to compete with Ethereum.
But doing so, the exchange is venturing into a crowded field of smart contract projects all fighting over the same pool of developers and users.
How crowded is this market?
Smart contract platforms have exploded in number over the past three years as projects strive to build a faster and cheaper version of Ethereum. Most of these launches (34 according to our screener) occurred since the start of 2018, often paid for by funds raised during the frenzied ICO bubble in 2017.
This surge in new networks has made smart contract platforms the most populated sector among base layer blockchains, surpassing currencies by the end of 2018. The trend is a clear sign the market believes smart contracts are where the money is, and that Ethereum’s perceived flaws, whether related to scalability or concerns about ETH 2.0, present an opportunity for newer, “shinier” models.
Network launches have tapered off since their 2018 peak. But even with the gradual decline, fourteen more competitors, BSC included, could go live within the next two years.
The depth of competition and limited scope of what works within the confines of cryptography and blockchains means these projects can’t win off of platform design alone. Nearly every smart contract platform that’s hit the market in recent years has a relatively undifferentiated system and similar perceived benefits, which spreads developers and investors thin.
The same rings true for BSC. Its hybrid delegated Proof of Stake and Proof of Authority design (which it calls “Proof of Staked Authority”) is reminiscent of EOS by handing control over to just 21 o̶v̶e̶r̶l̶o̶r̶d̶s̶ nodes. Like most chains, BSC trades true decentralization for accelerated transaction times and cheaper processing fees. There’s no apparent reason why a developer would select BSC over EOS by just looking at these technical features.
How BSC can gain acceptance, however, is through its proximity to other Binance products and its compatibility with Ethereum.
As detailed in the whitepaper, Binance’s new smart contract layer will have a direct connection to Binance Chain, giving BSC-based smart contracts access to Binance Chain’s token trading engine. BSC can thus provide new financial applications with a source of liquidity and existing exchange infrastructure that isn’t yet available on most other emerging smart contract platforms.
The second difference-maker is BNB. BSC relies on BNB holders to govern the network by keeping its validator set in check, a model that becomes more effective with a diverse user base. Token dissemination is easier when that asset can accrue value or serve a viable use case to generate organic demand. While the former for BNB is up for debate, it has offered a “hodgepodge of utility functions,” such as trading discounts and access to token offerings, across Binance’s product suite since its 2017 launch. Most competitors don’t have the luxury of generating token demand through complementary products like Binance and, therefore, resort to issuing inflation rewards to encourage network participation.
Binance has also decided to make BSC compatible with Ethereum developer tools at launch, enabling Ethereum-based projects or those familiar with the EVM to migrate their work over to BSC without requiring a complete overhaul. This strategy is not new. Qtum can support smart contracts written in Solidity, and Tron basically is Ethereum’s codebase with an EOS backdrop. But it provides an advantage over non-Ethereum compatible networks as Binance can lure developers away from Ethereum’s rich ecosystem with minimal switching costs.
So the question remains: How will Binance entering the smart contract race impact Ethereum?
In short, not much. Ethereum has a stranglehold on DeFi applications and stablecoin issuance due to an abundance of community developers and composability standards that make it difficult to build anywhere else. BSC won’t be able to compete starting from scratch. It also lacks the decentralized properties that actually attract Web 3 developers in the first place.
At best, it could pick off some non-financial projects that were probably already looking at Ethereum alternatives. The ultimate impact of BSC on Ethereum could resemble that of Binance Chain, which now supports a bevy of illiquid tokens with limited, if any, use cases. Not to mention trading volumes for Binance DEX have cratered below $500k in recent months. Meanwhile, most Ethereum-based DEXes had a record month in March and have remained well above their historical averages into April.
Source: Dune Analytics, script by Fredrik Haga
As for how BSC will impact the rest of the smart contract market, Tom Shaughnessy of Delphi Digital put it best: It is a net negative for other Layer-1 platforms. While fundamental factors like the developer community and application ecosystem help drive growth, crypto projects often “live and die” off of the momentum created by media attention. BSC’s development will soak up a significant amount of this attention going forward with little recourse for smaller competitors because trying to out-market Binance is financial suicide.
It’s a bold move for Binance, but a smart one that fits within its token-first, blitzscaling strategy. The new chain will add more functionality to BNB through staking and governance rights. It should also increase the appeal of Binance Chain since BEP2 tokens would have direct access to the applications built on BSC.
Despite the presumed benefits, Binance’s chances of breaking through Ethereum’s developer network-effect are slim. However, the rest of the smart contract market should be on high alert. Binance is coming.
Source: https://messari.io/ (Pro version only)