16 March 2021
The Binance Smart Chain has risen in popularity over recent months, drawing thousands of users and active wallets into its ecosystem. Its EVM compatibility has jump-started this growth, as more projects integrate their dApps onto the platform. With Ethereum gas fees rising to $40 or more for a single, simple transaction, low cost alternatives are becoming all the rage. While some “Layer 2” options and side chains have begun to gain traction, none have done so as quickly as the Binance Smart Chain - which was created and maintained by the longstanding crypto organization: Binance. Such branding comes with inherent legitimacy and trust, but is it misplaced? While people flock and FOMO into new BSC-based dApps, some investors are watching waiting on the sidelines -and for good reason.
First we must understand how exactly the BSC works. The chain launched in September 2020, and utilizes what it calls the Proof-of-Staked Authority (PoSA) algorithm, which is a blend of proof-of-stake and proof-of-authority models. Validator nodes on the network have staked an amount of BNB, and then receive transaction fees in exchange for processing network transactions. This PoSA algorithm allows the BSC to reduce its block time to a mere five seconds, creating a larger transaction throughput (and subsequently, lower fees). Its optimized performance is empowered by its limited number of validator nodes, which allows the network to achieve consensus much faster than, say, Ethereum. This is all well and good, until the “authority” comes in. In this case, the “A” in “PoSA” is Binance itself.
Binance must approve all Validator nodes before they can operate on the network and begin processing transactions. The unfortunate result of this is that, at time of writing, all BSC Validator nodes are also owned and operated by Binance itself - flying in the face of decentralization. This centralized ownership of nodes prompted CZ himself (the CEO of Binance) to call BSC “CeDeFi” - short for “Centralized DeFi”. An oxymoron, to say the least.
Transactions Questioned by Developer Community
As if “Centralized DeFi” wasn’t eyebrow-raising enough on its own, some shady activities happening on-chain have been noticed by crypto Twitter. Shortly after CZ published a tweet boasting about BSC transactions eclipsing ETH, a user by the name of ChainLinkGod.eth posted a thread showing hundreds of thousands of failed transactions spamming the network in less than a day.
The thread points out the spam transactions, and accuses Binance of wash trading CeDeFi applications to fake user activity. He concluded by saying, “If your funds are on BSC, be aware you are giving custody over to a bad actor who will do anything to get ahead.” The thread has been retweeted 836 times. The smart contract at the source of these failed transactions continues to spam the network, which can be viewed here. Another address following a similar pattern has been spotted, adding an additional 25,000 failed transactions to the pile.
Rumors have circulated that all BSC wallets are actually “multi-sig” wallets (e.g. Wallets that require two signatures for each transaction) with CZ as the co-signer. However, we were not able to verify these claims.
Meerkat Finance Rug Pull
Meerkat Finance - a BSC fork of Yearn - has been an early highlight of BSC’s CeDeFi saga. The yield vault project experienced a “rug pull” one day after launching, resulting in a total loss of $31M of user’ funds. Members of the community noticed that the Meerkat deployer contract was altered shortly before the attack to allow the vaults to be drained. But since Binance controls the on/off ramps to BSC, the attacker was not able to withdraw their funds. Two days after the attack, a Telegram group called “Meerkatrefunds” appeared, with the supposed founder of Meerkat finance saying that the whole thing was merely to test human greed and that they would be refunding all users.
This situation coincided with BSC shutting down their bridge (a program that allows users to move funds between BSC and ETH). During the shut down, users could not move funds from BSC to ETH, but could still move funds from ETH to BSC. Some have speculated that this was to prevent the founder of Meerkat Finance from realizing his stolen profits.
Other skeptics have resorted to posting obscene and offensive content on the BSC chain in an attempt to test the extent of its centralization. Most notably, a token called “Tanks of Tienanmen” appeared in late February, and has yet to be taken down. The token was created in reference to the infamous incident that occurred during a protest in China in 1989 - about which the Chinese government forbids discussion. If Binance is “in bed with China” as some speculate, and is centralized, China will almost certainly force CZ’s hand in taking it down.
Decentralization is only as good as its weakest link. Despite BSC’s impressive block time and throughputs, it cannot be considered DeFi in the truest sense. Nonetheless, “CeDeFi” may not be all that bad. If CeDeFi enjoys the benefits of DeFi but removes some of the risk (a la Meerkat), it could be beneficial. Time will tell, as the BSC network of Validators grows and perhaps diversifies beyond Binance itself. Remember to exercise caution, and do your own research!