Blockchain Without Crypto Is Like Internet Without Computers: Binance Interview Part 2
Binance, as discussed in part one of this interview, is not tied down to any one country. This may sound pretty decentralized already, but Binance CEO Changpeng Zhao (widely known as CZ) wants to take it to the next level. Binance is currently developing a decentralized exchange in which anyone can list a token. “Decentralized exchanges are the future,” CZ says. “But it’s going to take a while to get there.”
This decentralized exchange would be separate from Binance’s current exchange, which is the largest in the world by volume. “We, together with the community, build a protocol,” CZ explains. “Whoever wants to run the infrastructure can run it, and they will get proportionally rewarded, based on trades and commissions.”
Binance's move into the decentralized exchange space is part of a larger trend, and various decentralized exchanges are already in operation. Earlier this year, hackers stole more than $500 million in cryptocurrency from the Japanese exchange Coincheck, raising further questions about the security of centralized exchanges. Because centralized exchanges take custody of so much wealth, they can become honeypots for thieves. Binance itself was targeted by hackers, although the company says it thwarted the attack.
Decentralized exchanges help address the honeypot problem. In the case of Binance's decentralized exchange, users wouldn’t have to deposit money with the exchange, which would hold no customer funds. Users can be more anonymous. People just exchange blockchain assets with one another, on the blockchain. But decentralized exchanges have drawbacks as well, CZ says. Fees will be higher, he says, because theoretically it will cost more to run the same code 1000 times on 1000 computers, compared to one time on one computer. Trading will also be slower, and there will be less liquidity compared to centralized exchanges. “Because decentralized technologies are slower than centralized ones, they will not handle the kind of volume that we are handling today,” CZ says. “Over time the speed and performance will improve.”
If law enforcement is already concerned about criminal activity in the crypto world, a decentralized exchange sounds legally challenging, to put it mildly. How would one even begin to regulate this space? “I don’t really know, to be honest,” CZ says. “It’s the same as when Bitcoin first came out. None of the regulators knew what to do with it.” More simply, how do you prevent people from listing coins that have little to no value? “It’s really up to the investor to figure out which coins are valuable,” CZ says, adding that pricing will be driven by the market.
CZ has another plan that is radical in a completely different way. Binance has long been a crypto-to-crypto exchange, staying away from fiat currency like dollars, euros and Chinese yuan. This has contributed to Binance's geographical flexibility, as well as its ability to operate without a bank account. Now, CZ says, “we do want to deal with fiat, if possible, but we want to deal with it in a very proper, regulated way. All the customer funds would be stored in separate, segregated bank accounts." This is what the traditional stock markets use, he says. "The only time we will touch fiat is to do that kind of service.” Binance is working toward making this a reality. “Every bank, every regulator we talk to, we ask for this.”
He is drawn to this fiat model because he believes this will be a “triple win.” Customers have peace of mind that their funds are safe in a bank. It will be easier for authorities to regulate the money flow. And banks will get to hold large sums of money. Incorporating fiat could also be a way to increase Binance’s scale even further.
CZ believes cryptocurrency increases the freedom of wealth, and that initial coin offerings are an essential part of that. “ICOs are necessary for the future of economic development.” Many outside of the crypto world will find this to be counterintuitive. As ICOs allow startups to raise large sums of money at lightning speeds, some associate them with a “gold-rush mentality" or flat out con artists. Sure, there are scams, CZ says. But he thinks ICOs are more likely to succeed than venture capital-backed projects. This is because they can raise a huge amount of money, fast, without having to deal with due diligence, board meetings and term sheets.
“Let me give you ourselves as an example,” CZ says. “If Binance went through VC funding, the initial round of funding would may be 200,000 to 500,000 dollars. Maybe 3 to 6 months later we’d get another 2 to 3 million, and another year later we would get another 5 to 15 million.” This might not sound so bad. But the problem is that, according to CZ, this hypothetical, entirely VC-backed Binance wouldn’t exist. It would have been crushed by its ICO-backed competitors. “In my head, I’ve played that scenario many times. If we did a traditional VC round, we would not be able to compete with the company that we are today.”
Binance did an ICO in June 2017, in which they raised US $15 million (or its equivalent in Bitcoin and Ethereum) in two weeks. The fundraising was held over five different sessions and each session lasted about 10 minutes. So actually, CZ says, it was more like Binance raised $15 million in a single hour.
He believes that that this kind of super-fast fundraising allows companies to cover their weaknesses. “If a founder is weak in technology, now they can hire a very strong CTO [Chief Technology Officer].” This, of course, is giving ICOs a huge benefit of the doubt. Sure, a start-up could use its newfound wealth to get a world-class CTO. But some would argue that they could also spend it on the Lamborghinis that are so famous in the crypto world, and then disappear. CZ says that the same thing could happen in the VC world. “I’ve seen VC investors colluding with startups and giving them a lot of money, and then they split the money and they both buy sports cars and do bad things,” he said. Crowd-sourced ICOs, he believes, offer greater protection against scams. “It’s actually much harder to scam 1,000 people than to scam one VC. Most people underestimate the power of crowdsourcing, of crowd due diligence, of crowd information sourcing.” In other words, the crowd can dig out information that a VC doesn’t have time to find.
CZ, whose exchange lists more than a hundred coins, has had plenty of opportunities to review new tokens. He says that projects suggest their own listing fees, and that the range varies widely. Those who pay higher fees get reviewed sooner. Tokens that Binance considers to be particularly good, like NEO and Ethereum, are allowed to list for free. With so many tokens out there, how does Binance do due diligence? “We have a very strict process, but the philosophy is quite simple,” CZ says. “We look at project teams, history, product and number of users. If they have a lot of users, and the team has a previous history of success then they are much less likely to be a scam and run away.” He adds, “We like to see things where there is a product. We don’t care too much about concepts.”
CZ says that the results speak for themselves, and he does have a point. Earlier in May, the Longhash data team found that only 16% of Binance tokens dropped more than 10% below their initial listing price, the lowest rate among the world’s top five cryptocurrency exchanges.
CZ is, of course, bullish about the future of crypto. CZ cites the investor Tim Draper’s estimate that Bitcoin would hit $250,000 by 2022. “I think that’s conservative,” he says, “I think it will happen faster than he predicted.” He adds, "Bitcoin is actually backed by a larger community than many government-issued coins,” he says.
He also disagrees with the idea that you can have blockchain without cryptocurrency. “The token incentive is required for the decentralization, for decentralized consensus. Without that, you have a bunch of guys doing that for free. Volunteering. And you can’t do that for the long run, unless you have some other commercial benefit,” he argues. “Many people think, let’s promote blockchain without promoting crypto. I think that’s kind of like, we want to promote the Internet but not computers. It doesn’t quite work that way.”