Binance "DEX" Review

Binance Chain & Binance DEX are being increasingly hyped in crypto, but will they really deliver? Our Binance DEX review looks at all the angles.

Binance "DEX" Review

Please note that at the moment of writing Binance Chain and Binance DEX have not been launched yet. The material presented in this article is our forecast into how Binance DEX will work from a technical perspective, what features will be available, and what it means for the crypto ecosystem.

In Q1 2019 Binance, the largest centralized cryptocurrency exchange that makes more money than Deutsche Bank, has promised to bestow its DEX (decentralized exchange) upon us. With the limited information available at this time let's venture into how Binance's DEX might work and what features it will have at launch.

Binance Chain

Before we get into Binance's DEX, we need to talk about Binance Chain.

Binance already has a token, BNB, that currently runs on Ethereum chain. With the looming uncertainty about what is going to happen to existing tokens after the Ethereum 2.0 upgrade scheduled for next year, it seems only natural that Binance, as a stable profitable business, should distance themselves from the unicorn believers without a stable platform.

The best source for all things Binance is their CEO, CZ. Based on what he said, here's what we can derive about Binance Chain.

  1. Hardware wallet support from day 1. Seeing that Binance now also owns Trust Wallet we can also assume that Binance Chain will be supported by this mobile wallet since day one as well.
  2. Flat fee for token transfers on the chain, at around 0.01 BNB. It is unknown whether Binance-the-company will claim these fees or whether they are burned.
  3. 1 second block time, all blocks are final (no reorgs, no 51% possible). Thousands of transactions per second!

The latter point is worth discussing in more detail. These claims sound really cool from a product perspective and consumer-friendliness perspective. However, as with anything in life, if you want something you need to pay for it. In case of Binance chain, it seems that they are paying with decentralization.

Wouldn't you think that the genius Satoshi Nakamoto, or the whole army of brilliant and well funded Ethereum developers would not be able to figure out how to get to the same "safety" and performance numbers after all these years? Decentralization is a feature too and the cost you pay for it is being potentially vulnerable to 51% attacks and limited on-chain throughput.

So far it sounds like Binance Chain is closer in its implementation to Ripple's XRP rather than to Bitcoin or Ethereum. The difference between XRP and BNB would be that Ripple isn't a blockchain, but is rather a sequence of "ledgers", while BNB will be an actual blockchain. As far as consensus mechanism* goes it will most likely be a highly centralized form of POA (you can read more about proof-of-authority in our article about JP Morgan's Quorum chain). dPOS (like TRON and EOS) could be another option for consensus, but I highly doubt that it would allow the chain to have 1 second block time - public internet is just too slow for this. Most likely Binance and its partners would run "mining" software in privately owned datacenters, potentially distributed across the globe in multiple friendly jurisdictions, with guaranteed interconnect between them.

Don't be mistaken - what I've described is a 100% centralized chain. And yet unlike traditional centralized services, using a blockchain and multiple datacenters in different geographies will provide enough redundancy to ensure that BNB never stops (unlike NEO).

In this sense, Binance Chain is an evolution of centralized fintech services, rather than a revolution in decentralized computation.

Binance DEX

Binance DEX will be a dApp that runs on Binance Chain. So far, the best information resource on Binance Chain is this video.

Here is what we can tell from this video and the information we have obtained about Binance Chain.

  1. Binance DEX will be integrated into Trust Wallet. I have been telling people for a long time that the biggest feature of Binance is not the exchange itself (it is the second-biggest feature and the funding mechanism). The real biggest feature is that Binance is simply the most convenient wallet for all the cryptos. If you have ever tried to diversify your crypto portfolio into at least top-10 coins you would know that is is a nightmare to download, install and sync all these wallets, as well as securely store the private keys for them. And on Binance you just buy the coin with your credit card, HODL it on the exchange itself and feel SAFU. The only problem with this approach is that Binance is pretty much desktop only. Native integration of Binance DEX & credit card purchases into Trust Wallet will allow Binance to tap into the emerging mobile market and position Binance for success with Gen Z consumers in developed countries and mainstream consumers in emerging markets.
  2. Binance DEX will natively integrate with centralized Binance exchange. Take a quick look at this video. Notice that the person just submitted an order and it "automatically" got instantly filled. This leads me to believe that there is a centralized Binance matching engine (the same one that they use for their centralized exchange, so liquidity will be high on day 1). The matching engine will now also post trade logs to the chain for greater auditability and transparency, while the orders will be stored on Binance's servers. This model is very similar to what IDEX does on ETH chain with their fake DEX.
  3. Binance chain will support token creation and will not support smart contracts. This will significantly limit the use case of Binance Chain and the types of tokens it supports (i.e. no decentralized betting like Augur, no decentralized stablecoins like DAI, etc.). To be expected - Binance does not care so much about decentralization and dApps, but it cares deeply about having multiple tokens to be traded/speculated upon. On the other hand, this chain will be great for launching security tokens! Combined with Binance Launchpad, this will probably kill all other STO platforms and will dominate that market.
  4. Binance DEX will support all tokens listed on Binance.

Let's dig a little bit deeper into that last point. If ETH and BTC are separate blockchains, how would Binance DEX support them? The answer is simple: Binance will launch Tether-like stablecoins for every listed currency. Deposit real BTC to Binance, they credit btc-token-on-binance-chain balance to your account for trading. When you want to convert back to real BTC you'll most likely have to pass KYC and burn btc-token-on-binance-chain, and Binance will send the real BTC to the address you provide, just like on a normal centralized exchange.

What Binance DEX is really replacing is not the Binance Exchange. It is replacing the user account model. Recall that on a typical service (like twitter, facebook, mt.gox, coinbase or binance) the first thing that you need to do is register and create an account. Blockchains replace this insecure account model with asymmetric cryptography - your private key is your account. This new authentication mechanism will supplement existing Binance account model making interactions with the exchange smoother and more secure, and will make it much easier to onboard billions of customers from emerging markets.

With this approach, Binance will gain an even bigger market share of the cryptocurrency universe and will act as a trusted custodian. Another side benefit (for Binance shareholders) is that if you lose your private key what will be burned are the tokens on Binance Chain, while real BTC will stay in Binance's vault.

Summary

Based on the information we have today it does not sound like Binance DEX will be the decentralized revolution it was hyped to be. Rather, it will be an evolution of an established centralized business. Admitting centralized control and playing it out to the max will allow Binance to offer the best possible service to its customers while greatly improving transparency. Binance will truly become the most evolved and advanced centralized exchange on Earth, and the best possible tool for speculators.

The only question that remains is: if what you want from crypto is decentralization, then why would you support centralization of the industry?

Update 07/02/2019 - Binance has now confirmed that Binance Chain will use a modified Tendermint PoS consensus algorithm.

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