Binance Global Inc., operator of the world’s largest cryptocurrency exchange, said it will run a hard fork on its BNB Smart Chain (BSC) network on Wednesday to address a weakness that led to the theft of US$100 million worth of the network’s native token BNB on Oct. 6.
The network that supports two of the top ten cryptocurrencies by market capitalization was due to undergo the fork at around 4 p.m. Hong Kong time, according to Binance. While the move is to improve security, it also raises perennial questions and debate about decentralization vs centralization in the crypto industry.
A hardfork is when a blockchain protocol is changed, typically to address a problem on the network, creating a new chain and rendering older versions invalid. Controversial hard forks have happened before, including on Ethereum, the world’s largest blockchain after Bitcoin.
“Forking the network on this kind of basis [has] very, very big trade-offs because it to a certain extent [does] undermine the principles of a ledger that is immutable — and immutability is a really important function of these decentralized networks,” said Jonathon Miller, Australian head of the U.S.-based cryptocurrency exchange Kraken, in an interview with Forkast.
Binance was quick to suspend transactions on the network once it was revealed that hackers had extracted 2 million BNB tokens worth US$572 million at the time from the cross-chain bridge, BSC token hub. About US$100 million actually made it off the network before the shutdown, and of that US$7 million was frozen.
BNB has fallen 7.7% in the past seven days and was trading at US$271.48 at 4:15 p.m. in Hong Kong.
While BSC’s swift action was generally applauded, it was able to shut the network down so quickly because it uses a centralized system of 44 validators, of which 26 were active and able to quickly coordinate the action.
Narek Gevoryan, founder and CEO of crypto portfolio manager CoinStats, told Forkast via email from an incident management perspective, the exploit was handled well, but it also highlighted weaknesses in the network.
“In such an unfortunate situation, both the decentralization and security of the BNB chain were put into question,” he said. “It revealed the network has a single point of failure and the trust of few people is needed to keep the network running.”
The same cannot be said for Bitcoin — widely regarded as the gold standard in decentralization — Gevoryan said, or Ethereum, which is supported by over 440,000 active validators, according to Ethereum data aggregator beaconcha.in.
Advocates argue that BSC was deliberately designed this way, to focus on simplicity for the sake of efficiency.
That central question
Given the size of Binance in the industry, BSC’s popularity is not surprising, Ben Caselin, head of research and strategy at Seychelles-headquartered crypto exchange AAX Ltd Inc., said in an email.
But given the nature of its fundamental infrastructure, the issues now being seen should also not come as a surprise either, he said.
“There is a place for low-quality chains that benefit from centralization,” he said “but as truly decentralized primary layer blockchains like Bitcoin and Ethereum evolve we can expect innovation and activity to gravitate to safety.”
Binance founder and chief executive officer Changpeng Zhao, known as CZ, weighed in on the topic in a Sunday blog post, saying decentralization exists in gradients and is not a black-and-white question, adding that even Bitcoin and Ethereum can be seen as not particularly decentralized from certain aspects.
While Ethereum is often cited as an example of a more decentralized network, it too has seen hard forks over the years.
In 2016, under circumstances similar to what happened on BSC, the network suffered a hack of 3.6 million Ether and was subsequently forked to create what is now the Ethereum mainnet with the original being renamed Ethereum Classic (ETC).
While both continue to exist, ETC is much smaller than the mainnet, with a market capitalization of US$3.3 billion, as opposed to Ethereum’s US$158 billion, according to CoinMarketCap.
“I thought we had learned some of those lessons,” Kraken’s Miller said, reflecting on the comparison between the two hard forks. “This idea that you can edit the past is not really compatible with money. For example, we don’t want to go and edit previous transactions because it undermines the system.”
Ethereum also went through another fork amid the highly anticipated Merge last month, where miners protesting the network’s transition to proof-of-stake forked the network to keep part of it running on proof-of-work. It has seen minimal use, however.
Miller said the debate around decentralization will not be the primary consideration for the Binance network at this time.
“Confidence in the system is the thing that the managers of the platforms will be keen to restore,” he said.
“Loss of confidence in these systems is obviously never good in both traditional markets, but also in new technologies like this where you’re relying on an infrastructure for financial services.”