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ETH Remains DeFi King as BSC Fights for the Crown

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The DeFi world is abuzz with the following question: Is Binance Smart Chain taking over Ethereum as the ecosystem’s base layer? 

We looked at the numbers and the answer is not by a long shot ––at least not yet–– and this is assuming that BSC can actually be considered DeFi, which some Ethereum advocates will argue it shouldn’t be. 

Ethereum is still beating BSC by many times over on most important metrics: number of addresses, transaction volume, total value locked in DeFi, and network nodes. BSC wins on much cheaper transaction costs, and daily transaction count, though this last metric is highly suspect.

Ethereum has 30x the number of unique addresses at almost 140M accounts, compared with BSC’s 5.2M, according to Etherscan and BSCScan. Ethereum processed $112B in transactions last month, compared with BSC’s $15B, according to DappRadar. Total Value Locked in DeFi is at $54B on Ethereum, or more than five times TVL in BSC, according to data compiled by The Block.

Nodes Matter

Importantly, Ethereum beats BSC by orders of magnitude in node count. The second cryptocurrency by market cap has about 10,000 nodes making up its proof-of-work network, while BSC has only 21 in its proof-of-staked authority network. Validators with the most BNB staked are elected as validators every 24 hours.

This is a key difference; it means that Ethereum is more decentralized and censorship-resistant. Thousands of network participants have to come to consensus over transactions on Ethereum, unlike for Binance, where the network relies on just 21 members who can be more easily censored or corrupted.

To note, Binance Smart Chain is different from Binance Chain. Binance Chain is a public blockchain which doesn’t support smart contracts, like BSC does, and submits to anti-money laundering controls via CipherTrace. 

The lower node count is by design. Binance, the world’s largest exchange by volume, wants to optimize for scaling. Fewer nodes enable a faster and cheaper network.

While still trailing Ethereum on most metrics, BSC only launched in September, compared with 2015 for Ethereum, meaning it’s rise has been dizzying, with 1.5M addresses created in a single day last week.

As a result of the surge in activity, Binance’s Binance Coin’s (BNB), used like ETH to pay for transactions on BSC, surged by more than 70% in the last week. This compares to ETH’s 13% drop.

Can Numbers Lie?

On the surface, it looks as though BSC’s daily transaction count has started dwarfing Ethereum’s rate by two to one. On Friday, BSC’s total transactions breached 3M according to BSCScan. By comparison, Ethereum daily transaction count has never been above 1.5M.

Twitter user ChainLinkGod.eth has pushed back on Binance CEO Changpeng Zhao’s celebration of BSC’s success, pointing to a smart contract which has generated over 100K transactions in the last two days and over 750K total as an example of how the company may be manipulating the metric. 

“The hundreds of thousands of failed transactions on BSC I posted about are from an PancakeSwap arbitrage bot with a very low success rate,” ChainLinkGod told The Defiant. “It appears to be inflating the transaction volume metric which is often used to promote the amount of user activity on BSC versus Ethereum.”

PancakeSwap, an automated market maker (AMM) and fork of Uniswap, also briefly passed the latter to become the number one DEX in 24-hour volume terms on Feb. 19. The forked DEX now sits squarely behind Uniswap’s $1.6B mark with $1.2B of 24-hour volume.

Ethereum Compatible

Some, like Three Arrows Capital’s Su Zhu, see BSC’s success as a bullish sign for Ethereum. Binance designed BSC to be compatible with Ethereum wallets like MetaMask, and the Ethereum Virtual Machine (EVM), and modeled its BEP20 tokens to be similar to ERC20 tokens to draw in developers, a sign of the strength of the Ethereum ecosystem’s network effects.

BSC may emerge as a low stakes blockchain; a place where users who don’t need Ethereum’s higher level of security and censorship resistance, can transact at cheaper costs. 

Messari Senior Researcher Ryan Watkins frames BSC as an Ethereum side chain, a place for DeFi protocols to capture value from a set of users currently priced out of Ethereum because of high gas fees. 

Waiting for Layer 2

Anecdotally some traders in The Defiant’s Discord channel said yesterday they are using BSC as they wait until Ethereum’s Layer 2 scaling solutions are more widely adopted among DeFi dapps. They plan on going back to Ethereum as soon as they can.

New options protocol Hedgey Finance for example, originally released exclusively on Ethereum, took the dive yesterday, deploying their project to a second blockchain in BSC. 

“The primary driver behind deploying Hedgey on BSC has been the call from our community to find a way for Hedgey to be usable by normal people,” said a representative from the company, who also cited the compatibility with existing Solidity code entailed a “manageable conversation of the codebase to have the protocol up and running on BSC.”

The protocol’s Twitter also cites PancakeSwap’s $3.5B in locked liquidity as an attractive reason for porting the protocol.

Ethereum Power User

Binance’s addresses comprise six of the top ten addresses in terms of Ethereum gas consumption according to Etherscan.  

According to Calvin Chu, who writes the Knowledger newsletter, 10% of activity on Ethereum comes from users’ deposits and withdrawals on Binance, making it, as he said on Twitter, “Ethereum’s biggest power user.”

The exchange launched the chain in September promising low transaction fees, three-second block times, and “a supportive Binance ecosystem that funds and bootstraps many DeFi projects.”

Binance launched the “BUIDL Rewards Program” in October 2020 which pledged  to pay developers 30% of BNB gas fees that their BSC apps generate (up to $5M total for the program, which is part of their $100M fund dedicated to helping DeFi projects on BSC).

As Ethereum’s miners process blocks in a permissionless it would be more difficult to initiate such a program. Miner’s pushback on EIP-1559, which potentially cuts into their revenue, demonstrates this.

Willing to Pay 

Ethereum advocates are struggling to attract new crypto users for whom paying hundreds of dollars per transaction makes using Ethereum unfeasible. For now, those willing to pay extra for Ethereum’s decentralization and ecosystem of dozens of dapps and millions of users, still outnumber users on other smart contract chains. 

Users who have been priced out will either wait for Layer 2, or go to Layer 1 alternatives. BSC seems to be leading among the latter, but soon others will also be vying for that spot.

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