INTRODUCTION
To begin this subsection of the Binance Coin Guide let's first look at some background information concerning both coins. Next, we will examine the use of the ETH and BNB coins as well as the major usage of both chains. And finally, we will examine the difference as to how each coin approaches this major usage.
BACKGROUND
As we will learn, the realm of Decentralized Finance has become paramount in the cryptocurrency sphere, and the competition is fierce. While it is true the Bitcoin was the first 'programmable money', Ethereum was next in line seeking to make it easier to program assets on the blockchain. Ethereum provided developers a simpler alternative to create applications designed to run on top of a decentralized blockchain.
The genesis of Ethereum allowed those interested to search for loans and higher yields outside the more conventional banking and financial institutions (which institutions required proof of identity and high fees). Ethereum provided those using the network a unit of account. trade means, loans, and investment vehicles absent the presence or approval of a third party.
As one can imagine, meeting the needs of the investment community caused an influx of investors into the world of blockchain technology. This growth fostered competition.
As it happens, one of the largest competitors to Ethereum rising out of the growth in the Decentralized Finance space was Binance and the Binance Smart Chain (BSC). This begs the question, what are ETH and BNB used for?
USE OF THE COINS AND USE OF THE CHAIN
"Binance Coin (BNB) is the native coin of the highly popular cryptocurrency exchange powered by the Binance Smart Chain and regularly draws comparisons to Ethereum (ETH), as both coins function in a similar way." [Crypto Wisser. "A Cryptocurrency Comparison: Binance Coin (BNB) vs Ethereum (ETH)". https://www.cryptowisser.com/news/binance-coin-vs-ethereum. (Accessed June 19,2021)]. In fact, BNB was initially launched in 2017 as an ERC-20 token on the Ethereum Chain by way of an Initial Coin Offering (BNB was transitioned off Ethereum's chain in 2019 and migrated to its native chain).
Both coins are utility coins on their native chains to enable transactions and pay transactions fees. Both ETH and BNB are investment quality assets. BNB differs from ETH as it was developed in a fashion as to tailor it to specific functions.
Outside of direct payments, the ETH network offers a wide range of available uses including Decentralized Applications (DeFi, etc.) as well as gambling and other financial systems. BNB is a divided network offering two primary uses; BNB provides a centralized finance system (the Binance Cryptocurrency Exchange, it's base platform) while also providing a Decentralized Finance utility (Binance Smart Chain).
APPROACH TO THE MAJOR USEAGE (DEFI)
In September of 2020, Binance initiated its new Decentralized Finance platform, the Binance Smart Chain, thereby offering an alternative to Ethereum and other DeFi networks. This was a welcome development as the growth of DeFi was over taxing the infrastructure of Ethereum causing network congestion, slow transaction times and sky high prohibitive tranactions fees. Growth of the Binance Smart Chain was assured as BSC offered an Ethereum alternative providing fast transaction speeds and low cost transaction fees (in other words, BSC provided a viable solution for those who could no longer afford to use the Ethereum network).
ETH and BSC have extremely similar applications built on top of their networks providing decentralized exchanges and lending/borrowing platforms. However the two chains diverge as they operate on two different consensus mechanisms.
A consensus mechanism is a fault-tolerant mechanism that is used in computer and blockchain systems to achieve the necessary agreement on a single data value or a single state of the network among distributed processes or multi-agent systems, such as with cryptocurrencies. It is useful in record-keeping, among other things.
[Frankenfield, J. Investopedia. "Consensus Mechanism (Cryptocurrency)". https://www.investopedia.com/terms/c/consensus-mechanism-cryptocurrency.asp, (Accessed June 20, 2021)].
Currently, Ethereum uses a Proof of Work consensus mechanism. In this system, miners use computers to compete with one another to validate transactions. To win, the computer must solve complex mathematical equations. Upon solving the equation, the computer adds a new block of transactions to the blockchain and the miner is paid in ETH.
This mining system is highly energy-intensive but provides security for the system. The geographic diversity of the miners location results in a decentralized network absent central authority. As such, Ethereum is a trustless system. It is in this manner that ETH consensus varies from BSC.
In BSC, a Proof of Authority mechanism is used for consensus. In the Proof of Authority environment, validators create new blocks for the network. In Binance, there are only 21 validators who are pre-approved and in fact chosen by Binance itself.
Using this Proof of Authority consensus mechanism gives Binance full control over its Blockchain (centralized). It is Binance's decision who can become a validator and Binance retains the right to remove a validator at will. Further, at its sole discretion Binance can effect any change to the ecosystem at any time under any condition. Therefore, customer trust in the system is required.
By now, everyone should be aware of the upcoming upgrades to Ethereum, coined Ethereum 2.0. The major upgrade coming to Ethereum is its transformation from a Proof of Work consensus system (discussed above) to a Proof of Stake system. In this new system, miners are replaced with individuals who 'stake' their coins. These individuals, who so decide, may join 'stake pools' (much the same as miners' could join 'mining pools') to earn additional rewards on their coins. Unlike Binance's Proof of Authority model, Proof of Stake 'pools' and nodes are not chosen by a central authority making Ethereum in either instance (PoW or PoS) more decentralized than Binance.
