Digital Nugget: Is Binance Coin eating Ethereum's lunch?
Binance Coin has been a constituent of the Sygnum Platform Winners Index since inception on the basis of its own native chain. It has been sitting at a small weight until about two months ago when the price of the token increased 6-7x and it became the third largest cryptocurrency behind bitcoin and ether.
After a correction, Binance Coin stands at +708% year-to-date. What justifies this rise in prominence? Is this valuation sustainable? Is Binance really the number one “Ethereum killer”?
What is behind the rise of Binance Coin’s price?
The trigger was a development that surprised many: the Binance smart contract platform started taking market share from Ethereum in a meaningful way.
The Binance Smart Chain was launched last September, as a complement to the Binance Chain – the latter optimised for fast throughput but offering little flexibility to develop smart contracts, the former specifically optimised for smart contract functionality.
As the tremendous growth of the DeFi ecosystem (most of which is built on Ethereum) caused Ethereum to become congested, and transaction costs rose and transaction speed slowed, the Binance Smart Chain offered a cheap and fast alternative.
The Binance Smart Chain’s compatibility with the Ethereum Virtual Machine made it easy for projects to migrate, and projects took advantage of the lower fees and faster throughput (including one of the largest yield aggregators, Harvest, and DEX aggregator 1inch, privacy browser Brave); and recently the largest project on the EOS chain also migrated to the Binance Smart Chain.
Binance Smart Chain based alternatives to major Defi projects have been created to encourage a Binance Smart Chain based DeFi ecosystem, such as a DeFi Pulse alternative (Defi station), a Uniswap alternative (PancakeSwap), yEarn alternative (autofarm).
The growth was so significant that the Binance Smart Chain was processing twice the volume of the Ethereum network.
The surprise element also contributed to the strong price move: Binance was never viewed as an Ethereum killer, but as it turned out it wasn’t Tezos or EOS that applications flocked to when Ethereum was under stress – it was the Binance Smart Chain.
Although the Binance Smart Chain ecosystem is continuing to grow, there are risks and negatives going forward:
Ethereum is the dominant smart contract platform by a very long way, and with the talent deployed there and the continued innovation, Binance is not in a position to compete.
Meanwhile other “Ethereum killers” are also making headway – the rise of Cardano is a case in point.
And while the Binance Smart Chain is a good solution for many to the current scalability and cost problem on Ethereum, the concerns about the limited degree of decentralisation and neutrality are a limitation, and as technologically superior scaling solutions emerge, they are likely to win the day.
At the same time, there are many supportive positives as far as the price of Binance Coin is concerned:
Until Ethereum 2.0 is successfully rolled out, the opportunity remains for continued ecosystem build on the Binance Smart Chain.
The Binance ecosystem, of which the Binance Smart Chain is only one part, is very powerful, with synergistic opportunities between the two chains, the centralised exchange, and the various other business lines Binance is developing – the value of Binance Coin is supported by multiple opportunities (such as buying back and burning tokens from the profits of the Binance exchange).
Binance’s approach to building and delivering a solution that could capitalise on an opportunity (in this case the congestion on Ethereum due to the DeFi explosion) shows pragmatism and commercial acumen.
As the founder of Binance emphasised, the blockchain protocol space is not a zero sum game but rather complementary projects allow the space to expand to the benefit of all (to quote: “the infinite mindset” vs the finite zero-sum mindset).
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