On April 18, Binance Chain went live. The next day, its native token BNB hit an all-time high USD value—the first coin to do so since the bull run of 2017 and 2018. Meanwhile, several tokens announced migrations from the Ethereum network to Binance Chain, in many cases leading to double, and sometimes triple-digit, price moves for the tokens.
Is this just hype, or is Binance Chain a real contender to become the dominant smart contract protocol?
While CZ, the CEO of Binance, has stated that Binance Chain does not currently have smart contracts and is thus not an Ethereum killer, Binance Chain should eventually be able to support Ethereum smart contracts through Cosmos (the blockchain designed for blockchain interoperability). And even if the chain cannot have smart contracts today, there’s no reason they cannot add it in the future. The token migrations suggest a motivation to develop their own ecosystem of token projects. Lack of smart contracts would substantially limit the types of tokens they could bring onto Binance Chain. With this in mind, the position of “not an Ethereum killer” seems more PR than impossibility.
Protocols need to win both developers and users, and Binance Chain is no different. The more developers building projects on top of Binance, the better. The more demand for those projects, the more powerful the network becomes.
This is the nature of the “smart contract protocol wars.” Each chain competes furiously to attract developers and users, seeking a sort of critical mass that makes it impossible for competitors to keep up. (In this respect, blockchains aren’t so different other internet platforms, like Uber and Facebook, which also want unassailable network effects.)
As they say, everything is fair in love and war.
So when a story broke suggesting that Binance might leverage its dominant market position to incentivize (bully?) projects to migrate their tokens from Ethereum to BinanceDEX, many were outraged. I was not. Here is a company that built the biggest crypto exchange looking to make use of its strengths to bootstrap a blockchain. How can one expect them not to leverage their market position?
Here is a company that built the biggest crypto exchange looking to make use of its strengths to bootstrap a blockchain.
To contextualize Binance Chain with other smart contract protocols, consider a spectrum. On the far left hand side, you have ethos-first. On the far right hand side, you have use case-first. Ethos-first <——-> Use case-first.
Ethereum would fall towards the far-left of the spectrum. The protocol was designed with a specific ethos—a pursuit of the platonic ideal of decentralization—and many possible use cases. This is apparent in the white paper itself.
Second-generation smart contract protocols like EOS fall somewhere in the middle. They were built with the design constraints of Ethereum in mind and traded decentralization for usability (e.g. faster, cheaper transactions). Whereas Ethereum and bitcoin achieve consensus through a “proof-of-work” model that anybody can participate in, EOS achieves consensus through a “delegated proof of stake” model that 21 validators participate in. This affords EOS faster transactions, but more concentrated distribution of power.
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Better usability affords more use cases, as shown by the surprising success of Tron. The laughingstock of most of the crypto community, Tron was able to attract a relatively large group of developers and users for its (mostly) gambling games, for which the design of Tron is in many cases better suited than Ethereum.
Binance falls on the far right end of the spectrum. It starts with the clear and massive use case of trading cryptocurrencies—a use case that the company excels at—and designs a blockchain around that existing use case. (Again, Binance Chain is closed source, so we cannot verify the actual implementation of the blockchain.)
Whereas the “blockchain first” projects (e.g. ETH, EOS) must search for product-market fit by encouraging developers to iterate and reach users, Binance already has product-market fit in its exchange business.
Starting with product-market fit for a centralized use case is the clear advantage of the “centralized to decentralized” path Binance is taking. There’s already product-market fit and product-market fit affords clarity of requirements for the blockchain product. Expect to see more, not less, of this path with Facebook currently raising money for its own crypto project.
The big question is whether the company behind it (and the centralization that entails) will be more of a strength or a weakness in the long run.
The twenty billion dollar question: can this approach lead to a network that sufficiently satisfies the platonic ideal of decentralization? This I do not know. But with Binance launching Binance Chain and Facebook launching Facebook Coin, these powerful contenders in the smart contract market are probably the most important thing happening in crypto besides bitcoin itself.
And what of bitcoin? Bitcoin seems somewhat distant from all this competition. Maybe it’s because bitcoin (mostly) doesn’t have or want smart contracts. Or, maybe because achieving bitcoin’s level of decentralization is too expensive for new contenders. Failure to challenge bitcoin on its strengths seems like a big win for bitcoin.
Given the wild success of Binance the company, it’s unlikely that Binance Chain is all hype. Binance’s approach to developing Binance Chain—start with centralized product-market fit and design a blockchain around it—grounds the project in real users with real needs. Binance Chain is a competitor to Ethereum and other smart contracting protocols. What remains to be seen is whether the company behind it (and the centralization that entails) will be more of a strength or a weakness in the long run.
Tony Sheng publishes biweekly on the business and strategy of crypto and invests in early-stage companies. This post has been updated to reflect Binance Chain’s position on smart contracts.