Unchained - How Binance Could Become the First Decentralized Autonomous Corporation - Ep.110

Episode Date: March 12, 2019

Tushar Jain and Kyle Samani, managing partners of Multicoin Capital, discuss Binance, Binance Chain and BNB token, and why they believe Binance will become the first centralized company to successfully decentralize itself and migrate the value in itself to its token. We cover what Binance, the centralized company has so far achieved in terms of trading volume, fiat on-ramps, and regulatory arbitrage, and whether the company has any more regulatory risk than any other exchange. We also look at the features of Binance Chain, how they compare to other decentralized exchanges such as 0x, and why Multicoin believes that it will have more liquidity than previous dexes. We then explore BNB token — how it works now, the regulatory risk for BNB token, and how it will function on the dex. Finally, we touch on Binance's decentralization strategy overall and how it could fail. Thank you to our sponsor! CipherTrace: https://ciphertrace.com/unchained Episode links: Multicoin Capital: https://multicoin.capital Kyle Samani: https://twitter.com/KyleSamani Tushar Jain: https://twitter.com/TusharJain_ Multicoin Capital BNB report: https://multicoin.capital/2019/02/19/binance-coin-analysis-and-valuation/ Unchained episode with CZ: https://unchainedpodcast.com/how-binance-became-the-most-popular-crypto-exchange-in-5-months-ep-84/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I'm your host, Laura Shin. I've got one more announcement about my live podcast recording with Vitolik Boutterin. We have chosen a venue. On March 20th, Vatolic and I will be on stage at Columbia Journalism School in the Joseph D. Jemail Lecture Hall on the third floor. As I said on Twitter, this is especially meaningful for me because I went to Columbia, school and never imagined when I went there that I'd be holding an event in the same building 11 years hence. This choice of venue actually has nothing to do with my alumni status. It is pure serendipity, which makes it all the sweeter. The evening starts at 6 p.m. with food and drinks. Botolic and I will start a conversation at 7 and will wrap up around 8.15. There will be a short Q&A at the end, plus a few giveaways, and we'll round out the night with more drinks and networking until 9 p.m. If you haven't yet bought your tickets, I suggest you do so ASAP as there are only a few left. Go to the Eventbrite link inside your podcast player now to get a see at what is shaping up to be a

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and I will see you at Columbia. Within months, cryptocurrency anti-money laundering regulations go global. Are you ready? Avoid stiff penalties or blacklisting by deploying effective anti-money laundering tools for exchanges and crypto businesses, the same tools used by regulators. Cypher trace is securing the crypto economy. The topic or topics of today's episode are Binance, Finance chain, and B&B tokens. My guests who will be discussing this are Kyle Samani and Tushar Jane, managing partners of multi-coin capital.

Welcome, Kyle and Tushar. Hey, Laura, great to be on. Thanks for having us. Hey, Laura, great to be on again. So let's just be clear for the listeners, your firm has invested in B&B tokens. So I just want everyone listening to be aware of that. In general, hopefully most listeners are aware that anytime I have investors on my show, of course, they're going to talk positively about. anything they've invested in. But Kyle and two-star, I wanted you to come on the show because

Multicoin recently did a pretty in-depth look at Binance and its strategy to decentralize. And Binance is obviously a hugely important company in the crypto space. And there were a lot of really interesting observations and bold forecasts you guys made that I thought we could unpack. And for listeners who haven't listened to my episode with CZ from last summer, I urge you to do so to hear more about Binance's background. And also really, just to get the flavor of what's easy is like, honestly, I'm not going to lie, that's probably my favorite interview I've ever done. He's just the kind of person who really has strength in his convictions and it really shows. And it was just a really, it was just a fabulous conversation. But so Kyle and Tushar, why don't we start

by describing the success of Binance and its centralized exchange so far? Yeah, absolutely. So this is Tashar, and we've been watching Binance and their execution ever since they launched in 2017. And we've been incredibly impressed by how well they've executed at really just dominating the crypto spot trading market. they have by far the most volume of any other crypto exchange that offers spot trading. And in fact, they have more volume than the other top three competitors combined. Now, all of these numbers are subject to some modification to remove some of what we call wash trading. So if you go look on coin market cap and you look at top exchanges, those numbers aren't exactly accurate. So in our report and in our research, we referenced some findings from the blockchain transparency institute, which looked at all of these exchanges and tried to determine the amount of real volume as opposed to, you know, just reported volume.

Binance has also been incredibly aggressive in listing tokens, and they offer the most token pairs of any of the major spot trading exchanges out there. So, you know, their dominance in both volume as well as token pairs is unquestioned. And one thing that I always just love about their story. And again, if you haven't listened to the episode with CZ from last summer, definitely do so because he describes on there how he had never even heard of an ICO. And then within like, I think I forget the time frame. It was just a few weeks, I forget, like three weeks or 15 days or something after hearing of an ICU for the first time, he was holding an ICU. And he raised, I should have flick these numbers up before we started again, but I think it was like, was it 15 million? Yeah, it was about $15 million. Yeah. And then within

five months became the number one crypto exchange. So it was just, I mean, you know, obviously the cliche term to describe that is a meteoric rise, but that is just such a good description. of what happened there. So one of the things that you mentioned in your report was that what's been especially impressive about finance becoming so dominant is the fact that it doesn't offer any fiat pairs. So why is that such an impressive feat? Yeah. So, you know, if you consider getting into crypto, right, assuming you have no crypto, you want to convert some of your fiat money into Bitcoin or Ethereum or something else. And you need to be able to do that with a fiat to crypto exchange. So Coinbase in the U.S. is probably the most dominant fiat, crypto exchange.

In different countries around the world, there are other exchanges that have kind of local dominance for getting people onboarded in the crypto. But then a lot of the exchange bank, finance until very recently did not have any fiatta crypto support at all. I'd only support trading crypto to crypto. And so what's actually probably most remarkable and really most counterintuitive about finances rise has been that they became the world's dominant spot trading exchange, despite the fact they did not have any. Fiat the crypto. So that means people came in, you know, Fiatto crypto on Coinbase or on Wabi or on Bithum or whatever exchange in their local jurisdiction, got into Bitcoin or Ether and then went to Binance and then kind of did most of the rest of their trading there.

And it's pretty remarkable that that's led to the most, you know, Binance being the most dominant exchange. Yep. And I'd like to add a few more stats here that we pulled up from the report that we published recently. And what we see here is that Binance is the top traded exchange for 82% of the top 50 tokens. And Binance is facilitating 36.6% of global crypto spot trading volumes. So those are just some numbers to help put that into perspective and to have accomplished that without having any support for fiat currencies during the period that we're describing.

is quite simply phenomenal. Yeah, because of course, at that time, when Binance had just launched, you know, that was the summer of 2017. So at that moment, kind of awareness of crypto maybe was sort of hitting the mainstream. But definitely it was before we saw the real, real massive run up with all kinds of everyday people getting into crypto, which happened more in the fall. So after that crazy bull run, how has Binance been faring so far in this crypto winter? It seems from our observations that Binance did not make the same mistake that many other organizations in crypto made, where they overinvested and they grew too large during the bull market and had to go and, you know, cut things back through crypto winter. From what we have found, Binance has not undergone any meaningful layoffs.

They actually seem to be growing at a healthy pace. And from the latest information that we have, they have about 400 employees around the world. So I think that they have been quite disciplined in how they grew, and this is paying off for them now as they're able to continue investing throughout the crypto winter, while some other organizations maybe are having to pull back. Yeah, I wonder if some of that discipline you're talking about is, I mean, I didn't ask CZ this, but I do remember I asked him kind of about all his newfound wealth. And he said something about how it hasn't really driven him to purchase or spend anything flashy because he said just the knowledge that he could find that was enough. So maybe if he has sort of a similar kind of attitude toward his business, you know, to be. to be pretty frugal or just to not let things go to his head, then that might have been the case. And what about trading volumes on finance during this crypto winter? So trading volumes, just if you denominate in fiat,

just are generally going to match market prices. So you can see that, you know, trading volumes across all exchanges are down about the same as the market is down. So that is definitely affected Binance just as much as it's affected the other exchanges. From our analysis, this was all proportional. And none of the major exchanges, you know, Binance, Bitfinex, Coinbase, Cracken, and other top exchanges of the world seem to have benefited or been hurt disproportionately through crypto-winter in terms of volume.

And I know some people have been making noise. about Coinbase seeming to have changed its philosophy entirely almost, as some people are surmising, it's kind of reaching for revenue. Do you feel like Binance has changed its, any part of its operating ethos, I guess, due to the fact that volumes are down? No, we don't really think it has. I mean, the most remarkable thing about finance is that they really executed this regulatory arbitrage strategy from inception, right? They moved to headquarters, I think five times, if I'm not mistaken. And so they're just kind of structurally a very decentralized organization,

and they have been since inception. Their 400 employees are spread across 40 countries or so. So given that, by finances, has been pretty true to their mission of enabling people to, I think they call it their tag, I think it's exchange anything or exchange the world. Exchange the world. Yeah, that's the tagline. And it's been pretty clear from day one that that's been the mission, and their growth path and trajectory has aligned very strongly to that.

If you look at all of the new initiatives they're rolling out over the course of 2019, those are really just in acceleration of that mission. So things like finance chain and the centralized exchange, the decks, that is very large implications for the future of finance team and employees, launch pad as a capital formation and fundraising platform, look at finance research and look at the Fiat exchanges. I mean, everything they're doing is in support. of that mission, but, you know, doing so in a way to be, do it in a compliant way and to do it in a way

that bridges the old world to the new world. Yeah, and we're going to get into all of that more deeply in a second, but I want to establish a little bit more stuff about finance before we get into its decentralization strategy. So, you know, we've been talking about kind of what it's been doing or just how it hasn't seemed to really change its strategy. But so what business moves has it been making this past year? Like I know, you know, adding Fiat is one of them. Like, what are some of the things that you see it's been putting into place? Yep. I think Binance has been fairly aggressive in expanding out their business and taking advantage of this bear market as an opportunity to really build. And so a few of the key initiatives

are, as you mentioned, fiat exchanges. They brought on fiat exchanges in Jersey. which supports euros and pounds. They, I believe, have also brought on their Singapore exchange, as well as one in Uganda. And from what we found in our research, it seems their plans are to bring on 10 crypto-to-fiat exchanges over the course of 2019. So that's a fairly meaningful initiative on its own. On top of that, we have the launch of Binance chain, which will offer a decentralized exchange, for which they've released a TestNet fairly recently. And this decentralized exchange is, in our opinion, the most important and largest initiative that Binance is taking on right now. And just to show, you know, how committed they are to the decentralized exchange, in order to attract volume,

to the decentralized exchange, the fees are actually lower on the decentralized exchange versus a centralized exchange, something that we haven't really seen elsewhere. In addition to that, they've recently executed the first two successful sales on the Binance Launchpad platform, which is effectively a platform for ICOs or initial coin offerings. And they have a schedule set out where they're going to be doing one sale per month. Both of the first sales that they did sold out extremely quickly. So they've shown some success with the launch pad product as well. And last but not least, they've been devoting a lot of energy to their research initiative and really sharing research with their clients and their users and trying to create a better informed crypto community.

And while that doesn't necessarily have the direct monetization opportunities as those first three initiatives, I think it's also incredibly impactful. And being a very mission-driven culture, I see how this fits with what finance is doing. And can you also describe the secure asset fund for users and why that's important? Oh, absolutely. So many exchanges have been targets of hacks or, other types of security problems in the past. You know, everyone knows about the infamous Mount Gox incident. And, I mean, even more recently, we have things like Quadriga in Canada.

And there were a few attacks last year as well, primarily on some Asian exchanges, if I recall correctly. And so in response to those types of events, Binance has created what they call the Safu Fund, S-A-F-U, which I think is named after a typo that C-Z had on Twitter. Just like Hoddle, we in crypto love our typos becoming means. But they went and they created the Saffu Fund, and I believe that is capitalized through some of the trading fees that Binance earns and is made available to ensure against losses in the event that Binance's security is breached.

However, as far as we are aware, we have no evidence that Binance's security has ever been breached or that any funds have ever been lost. But it's nice to know that there is an insurance fund in place in the event that that does happen. And I also wanted to ask about this fact, which I find pretty distinctive about Binance, it doesn't have a bank account. So where does it hold its assets? So Binance holds their crypto assets in a variety of cold storage wallets. From what we understand, those are distributed across the world. And I believe that the Binance fiat to crypto exchanges have bank accounts in the jurisdictions in which they're domiciled. So you'd expect Binance Jersey to have a bank count in Jersey.

And Binance, Singapore will have a bank count in Singapore. But the core entity is still free of the fiat system. And so if they're accepting payment for something, it has to be, or this other party has to pay them in crypto? Is that how that works? I believe so. And I believe they also pay people in crypto. Now, I know that a large percentage, I think the vast majority of their employees take a significant part of their salaries in B&B tokens. but other cryptos that are used to pay employees, you know, most likely include assets like

Bitcoin or USDC and other stable coins. Those are quite useful for payments. And why does it not have a bank account? I think that the regulatory arbitrage strategy, which they undertook in the early days, would have probably been harder to execute if they were reliant on a bank account. and given the fact that they were operating only a crypto to crypto exchange and didn't have any fiat support, I think CZ and team probably made the determination that a bank account was more trouble than it was worth at the time.

And this goes back to, I think, a comment, maybe it was Kyle made earlier, which is about how it's not clear which government has jurisdiction over Binance. So why is that not clear and why is that significant? Yeah. Yeah, so, I mean, it's not that any one government doesn't have this jurisdiction. It's just that Dynans operates across many jurisdictions. They have now settled kind of a home base in Singapore. They also have set up another, you know, HQ1, H2 kind of a thing in Malta.

It appears they're working on some sort of HQ3 in South America somewhere, although that's still TBD, you know, where that's going to end up. So, I mean, they are subject to jurisdictions in those local regions, but they now have the level of scale. such that they can negotiate with governments and get, you know, get favorable treatment and guarantees that they're not going to get like. Binance launched in China in July 2017. And two months later, the Chinese government shut down crypto.

Like that, that was obviously a very scarring experience for finance. And so now I think as they operate on a go-forward basis, they're going to try and structure deals with, you know, regional governments to ensure that, you know, something like that doesn't happen again. So this is something that I pressed CZ on in my episode with him. And I did recently see he tweeted that he felt like some of the questions were misleading, which I have a feeling what he's referencing is this point in our discussion where it wasn't clear

to me that he fully understood kind of like how a security is defined in the U.S., which is obviously different than other jurisdictions. And also, or maybe he does know, but at least when it comes to as you see, I think that they say, if you're serving U.S. customers, then they have jurisdiction. So I noticed in your report, you said that you actually thought that finance had little risk of being prosecuted for listing unregistered securities. And of course, with a huge amount of tokens, they have most likely at least a few probably are. So why do you think there is little risk of that? There's a couple of reasons. One reason is that, you know, we have seen that the SEC and other American regulators are really taking a good faith approach to the industry. We haven't seen

the regulators really go after anyone who was operating in good faith and who did the best to comply with the regulations given how gray the regulations really are. And from our research, you know, specifically looking into Binance's listing process, it appears that they're operating in good faith. And so, you know, we, you know, we, We think that they are no more at risk of being in violation of listing potential security than any other exchange, you know, an exchange like Crackin or Coinbase or BitFinex. And so we don't think that the SEC is likely to go after any one of those exchanges alone, given that they've all engaged in the same activity.

And we do think that the good faith approach practiced by Binance in this case, it does de-risk it a little bit. Now, that doesn't mean that there isn't a risk there. That's definitely a risk. There's an unknown that, you know, how will the regulators actually act and, you know, what happens from here. But all the evidence that we have so far points towards, you know, actors who have acted in good faith are not at risk. And why do you say you don't feel like their risk is in greater than these other exchanges? Because they had such a, or they have still, such a, you know, larger number of tokens that they offer. So wouldn't it be, I mean, maybe the argument could simply be that they just offered many more

than these other exchanges, so they might be more of a target? Plausible, but I mean, you look at Coinbase just listed XRP. BitFinex has a very large number of listings that, you know, are a significant subset of Binance. Cracken has, you know, a very large number of listings as well. It just, it seems unlikely that Binance gets singled out in this example, though, you know, we can't predict precisely what the regulators will do. And then also when you were saying it looks like they made a good faith effort, how are you defining good faith? Is it because they have like a vetting process or, yeah, what constitutes good faith? Yep. It's, you know, they have a structured

vetting process. There's, you know, multiple people within the organization that seem to need to sign off before anything is listed. You know, they are requiring from what we understand, a legal opinion saying that a token is not a security before it is listed. So between those various aspects, I think that's what, in our opinion, constitutes a good faith effort. They've also been proactive in delisting assets when there's been some teams that, the teams maybe were trying in good faith to build whatever they said they were going to build, ultimately gave up or failed for whatever reason, and that the team is basically going to shut down, shut down shop. Binance has then been proactive in delisting those assets as well.

And then I noticed in your report you also had this section about money transmission laws. How well does Binance follow those laws and what risks is it taking in regards to money transmission laws? So we are not necessarily experts on, you know, the specifics of global money transmission regulation. From what we have understood, you know, a lot of those laws really apply to the Fiat side of the world. And now that they have finally launched some Fiat support, I'm sure they're, you know, working with those regulators in those jurisdictions to be compliant with all. applicable regulation. So, you know, we're not, we're not lawyers. We're not, we're not anyone's attorneys. So, you know, we can't say that they have a absolutely clean bill of health. But from what we've seen, I think that everything is in compliance. Okay, great. So we're going to discuss

Binance's plans to decentralize and the B&B token after the break. But first, a quick word from our fabulous sponsors. Face it, regulations can stall or kill a fast-moving crypto business. New, FafT and EU cryptocurrency AML laws are coming soon. You could be hit with stiff fines or blacklisted, no matter where your servers are in the world. Prepare now. Deploy the same powerful CipherTracuse tools used by regulators. Protect your assets, streamline your compliance programs, and keep your exchange or crypto business out of the regulators' crosshairs. Learn how effective anti-money laundering tools help keep your crypto business safe and trusted. Learn more at ciphertrace.com chained. Cipher Traces securing the crypto economy.

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Back to my conversation with Kyle and Tushar of Multi-Coin Capital. So yeah, so now let's start talking about Binance's plans to decentralize. You described Binance chain briefly before, but why don't you go more into detail on that? Yeah. So Binance has kind of recognized that they want to fulfill the crypto vision in the long run of decentralizing kind of core financial infrastructure and technology infrastructure for the world at large. And it's not beyond them that they are running currently a centralized exchange business, which obviously is not decentralized.

And so Binance has started to make a pretty proactive effort to build a blockchain that will really support high throughput trading of assets. And that chain is going to be called Binance Decks. Binance, it seems like, started working on this really in earnest, probably six months ago or so, maybe a little longer, six, nine months ago. They rolled out of TestNet pretty recently. And I think the finance chain is going to be going live in production at some point in March. So we're pretty excited to see that come out. The really cool thing on a finance chain is that it will allow for truly decentralized peer-to-peer exchange. Binance Inc. or Binance the company will not be in any way able to censor trades, hold user funds, innovate their accounts.

Users will be in control of their own keys. And so it's a pretty radical approach in that direction. The other major, major, major breakthrough here is in understanding the capital flows of the system. Today, in centralized exchange world, finance takes. some fees on every trade that happens. So if you trade, let's say, one Bitcoin for 10 ether, then finance is going to take, I don't know, 10 basis points or 20 basis points or whatever the fees are of that trade. In the finance chain exchange model, different people can run the validators.

The chain is going to start off somewhat centralized with 11 validators, but the plan is to make that, to grow that number pretty quickly. And at some point, anyone who owns BNB tokens is going to be able to stake their tokens towards being a validator. And then if you're a validator in the finance chain, then every time other people trade on the finance chain, the validators in the network will actually receive those fees. The fees will not go to Binance Inc.

They will go directly to validators or being directly to B&B holders. And so this is a major, major shift in strategy and how revenues ultimately collected through the system. And that is really exciting for both the future of democratizing kind of this financial infrastructure and for the future of the BNB token holders and investors. And can you just contrast that set up with some of the other popular decentralized exchanges or exchange protocols that are out there like zero X?

Like, I don't know if it's a very different model or similar. Yeah, so Binance's model is pretty substantial to different. So the zero X protocol lives on top of the Ethereum blockchain. The founders at Zero X realized pretty early on that if you wanted to do a decentralized exchange, on top of Ethereum, it would be pretty difficult to do what's called an on-chain order book. So in a traditional order book, you have limit orders, people saying, I'm willing to sell one Bitcoin for 10 ether at that ratio of 1 to 10. Some other person may say, I'll sell one Bitcoin for 9 ether, right? So that's a different price or a different ratio.

So you need to be able to host that order book of all of these different limit orders. In Ethereum, the block times are about 15 seconds, and the throughput of the system is not super high. and so putting limit orders on the blockchain directly is simply unfeasible. The zero-x team realized that from it, basically from inception, and so they started building a system where people could basically match those orders off-chain and then just do the settlement on-chain. So just the actual part where you trade the Bitcoin for the ether, but not the part of price discovery and hosting limit orders.

And so that's what the zero-x contract does. That was a big step forward for decentralized exchanges on top of Ethereum, but unfortunately what we've kind of seen in practice, is that there's still a few practical problems that have really prevented market makers and liquidity providers from providing liquidity on top of the X protocol. The first is that if you want to cancel an order, you need to pay gas fees in the zero X model, and that becomes very expensive. Most, for those of you who don't know how market makers behave, market makers are placing orders

and canceling orders a ton. It's actually very common that market makers may cancel 70, 80, or even 90 percent of the total orders they place on the order book, because as prices move around, they will cancel old orders that have not been filled. And so given that, it becomes prohibitively expensive for market makers to maintain liquidity on zero-x-based three layers. The other big problem with the zero-x model is lack of deterministic order execution. And what we mean by that is because the block times are very 15 seconds, and because miners

in Ethereum control ultimately which transactions are included in the block, even if a market maker thinks he has matched, he or she has matched an order with another trader, you don't actually know that order has been filled and actually settled on chain until you see it in a block. The next block could be in two seconds. It could be in 10 seconds. It could be in 35 seconds. You don't actually know when that's going to be filled or if the minor is going to replace your signature with someone else's and fill it themselves.

And so it creates a lot of uncertainty for market makers on how trades actually get executed and filled. And so as a result of these problems, we just haven't seen liquidity on zero X-based relays on top of Ethereum really take off in a meaningful way. I think last time I looked, volumes were like under $2 million a day or maybe $1 million a day. It's pretty low. So Binance chain, finance obviously these guys know how to run a centralized exchange. And so they've designed the exchange from the ground up to solve both of these problems in a meaningful way. Canceling orders will be free. And then trade block times or one second. And the the validators in the system rotate in a deterministic way.

Finance chain cannot offer perfectly deterministic order execution in the way that a centralized exchange can, but it can do it in a way that's 10 or 100 times faster than kind of what's the status quo on top of Ethereum. And so the expectation is that, you know, with those problems solved, the finance chain will be able to offer an on-chain order book with no cost of canceling orders with nearly perfect deterministic execution. Well, and, you know, I didn't mean to like only pick on zero X, but, you know, just in general, as you were describing, a lot of these dexes have pretty much almost no liquidity and no adoption. So is it just pretty much the speed and the fact, you know, that this chain is built for this, are those kind of the main reasons that you think this will be different? Like, like, you know, what are the scenarios in which also it could end up with very little liquidity and adoption? Yeah, I mean, it's possible if people don't want to trade on it, then it's totally possible that it ends up with no liquidity.

One of the ways finance is trying to mitigate that risk specifically, I mean, finance here is very much trying to cannibalize their own business. That is the kind of explicit goal here. And one of the ways they are encouraging people, both makers and takers, to move over to finance chain, is actually offering lower fees on the decentralized exchange and the centralized one. So there's actually a fundamental economic motivation to move over, coupled with general trade execution. it's our expectation that Binance will solve the cold start problem that has really plagued most decentralized exchanges historically. In addition to that, they are also supporting hardware wallets from day one.

So they've announced that Ledger will be supporting the Binance chain and the decentralized exchange from the day that Binance Chain is launched. They have also already seen implementations of Binance Chain. through trust wallet, which is their Web 3 wallet that they acquired recently. And so I think that they will have much better tooling already available in order to attract volume to their decentralized exchange. And while we don't have any details, I do expect that there will be some mechanism to bridge liquidity between their dominant centralized exchange and the new decentralized exchange.

Oh, well, that's interesting. You say that because in the report, it seemed that you guys were pretty certain that they would draw on the liquidity in the centralized exchange to overcome that problem in the decks. But you're not actually 100% sort about that? They just haven't released any mechanisms or details regarding that. However, from everything that we can tell from their business strategy, it seems pretty clear that there will be some mechanisms. but until we see the mechanisms themselves, we can't comment on the effectiveness. Okay. And I did see you guys kind of got into some of the details around the fact that it's utilizing

tendermint. Can you talk a little bit about, you know, how that affects the performance, I guess, of finance chain or, you know, why that's significant? Yeah. So, tendermint is really today the gold standard in proof of stake consensus algorithms. The Tendermint protocol was invented by J. Kwan and Ethan Bucklin from the Cosmos team. And they started working on this, I think, in 2014. They've been working on this for quite some time.

Tendermanent is, we spent a lot of our time working with early stage entrepreneurs building all kinds of different proof of stake contestant algorithms. And the general recognition among everyone is that Tenderman is really just the gold standard in the construction of them. It's the simplest. It's not straightforward. forward. It makes the kind of the least assumptions in terms of kind of protocol operation. And it offers very high performance. So, but finance, I think, very smartly chose to fork kind of the core Cosmos SDK and the core Cosmo system, which means they are kind of receiving tendermint and all of its benefits as part of what they're building. The net effect of that is the system will be fast,

and it will offer nearly nearly perfect deterministic order execution, which is what traders need. Yep. Some of the details are, I think there will be one second block times with one second finality. And so you don't have the problem of, you know, when will my trade be settled? When can I know if the trade actually happened? You know that it's one second per second. Or one block per second. And that's something that proof of stake systems allow, which proof of work systems simply do not. And I think that's an enormous advantage for finance. chain. And then one other thing is that apparently finance chain will only support the assets that Cosmos supports. So how will Bitcoin be traded on Binance chain? That's a great question. While Cosmos and their internet of blockchain system, you know, is unlikely to be able to integrate with Bitcoin in the early days, finance seems to have adopted the gateway model in order to support trading of of assets that are not immediately supported by Cosmos or issued on Binance chain itself. And what does that mean, the gateway model?

So the gateway model is one where it's similar to wrapped Bitcoin, if you're familiar with WBTC, which is Bitcoin that has been deposited with BitGo along with, I think, a certain number of other members in that consortium. and they then issue an asset called WBTC, which is an ERC20 token, which basically puts Bitcoin on the Ethereum blockchain. And the gateway model does introduce some counterparty risk in that the gateway that you're depositing the actual assets into and receiving the token that represents those assets from, you know, you have to trust that gateway.

However, those are fairly easily audited. I believe that for the WBT product, you can go and verify those Bitcoin on-chain match the number of WBTC that has been issued, and that information is available to everyone to see all of the time. And so the Gateway model is a good short-term step until inter-blockchain communication grows more mature and, you know, potentially integrates with other blockchains like Bitcoin. Since, since Binance chain is going to be decentralized, how will they decide which assets to list? Like, just is it, you know, like right now, Binance itself has this vetting process,

but how is it going to be decided for Binance chain? Yeah. So we don't have, I think, all 100% of the details, but we have the general structure is known. And it's going to be basically kind of a community voting model. people, if you want to propose a new token be listed on finance chain, the kind of the issuer will need to buy and I believe burn or I think burn or spend B&B tokens. It's going to be a pretty large number. I think they've said it's going to be, I think on the order of $100,000 or more. The intention is to scare away all of the lower quality projects.

And then there's going to be some frequency of voting where B&B holders can vote and say either yes, we want to trade this asset or no, we don't. All the details of like the. timing of those cycles, how many, you know, is there a new vote every week? Those kinds of things are still unclear. But the general structure is known. Yeah. So let's talk a little bit more about B&B token. Let's talk about how it's structured now. You've defined it as a discount token. Why don't you explain what that is and just explain generally how it's used in the current finance universe? Absolutely. So the finance token is an interesting hybrid.

of many different use cases. The first use case is really that of a discount token in that if you pay your trading fees on Binance, the centralized exchange or the finance chain decks, in B&B tokens, you get a discounted rate. And this incentivizes traders to hold B&B tokens in their accounts and use them to pay for their trading fees in order to pay, you know, what is a substantially discounted rate.

In addition to being a discount token in that regard, it is also a staking token and in multiple ways. First, users who hold a significant amount of B&B get discounted fees on the centralized exchange. So just by holding some B&B, you also get an additional fee discount. Also, if you hold a significant amount of B&B, I believe it's 500 B&B at the moment, your referral fees from actually sending out your referral code to invite new users to the Binance Exchange are doubled. And so that provides an additional incentive. And last, but certainly not least, and actually, in our opinion, one of the most

important pure utility aspects of the Binance chain or the B&B token is, staking B&B tokens as a validator on Binance chain, in being able to earn a percentage of all fees that are paid on the finance chain. And I think that's extraordinarily valuable. Those are all of the on-chain kind of properties that are inherent to the Binance token. But in addition to all of those, the Binance company has also committed to using 20% of their profits to buy and burn B&B tokens until they have burned 100 million tokens in total. There were 200 million tokens created.

No more can ever be created. And so this buy and burn would remove at least half of all B&B tokens ever created from the supply. Now, on that topic, I do want to go a little bit deeper and talk about some concerns or open questions about this buy and burn model. You know, there have been some open questions about, you know, is Binance actually buying those tokens that they're burning from the open market? Or are they just using some of the B&B that they're being paid as fees as part of the exchange, accumulating those and then burning those later?

The answer to that is it's not clear which of the two that they're doing, but it doesn't really matter at all. because at the end of the day, the number of B&B outstanding is decreasing, and this means that each and every B&B that you do hold has greater utility in all of the aspects that I mentioned earlier. So, you know, let's say there's 175 million B&B outstanding today, and you own, you know, 175,000 B&B. You know, you have 0.1% of all the B&B in existence. once Binance Inc. is done burning the remainder of the B&B that they have committed to burning, then you will own a substantially greater percentage of the total outstanding B&B. And so if you stake those in finance chain, you will earn a larger reward or a larger percentage of the fees without having to, you know, go and buy any more tokens.

So this is kind of similar to how stock buybacks will increase earnings per share. in the equities world. This isn't an equity. And, you know, there are some differences there. But I think some of those heuristics can be borrowed in order to understand the mechanics behind the buy and burn here. Yeah. One of the most fascinating parts about this whole description is that it's one of the coins, I feel, where you can look at it. And just from your description, there's, they've got kind of the utility aspect, right? Where there's going to be, because it has utility, there's going to be high velocity. There's going to be a lot of turnover.

People are going to be using the token, you know, and it really only has that use. But then on the flip side, in terms of the value of the token, as we know, the higher your velocity, the lower the value. And so then there's that staking element. or this other stuff that you mentioned about how your referral fees get higher, the more you hold, where that kind of like reduces the velocity. And so helps prop up the value. And then the burning, obviously, you know, they can't do the exact Bitcoin model,

obviously, since they did do an ICO. But it's sort of a similar concept where kind of like getting real estate now, when there's like a lot of them out there kind of helps you later on as the, the supply decreases. So it's just really fascinating. It just seems like they've really thought pretty carefully about how to preserve the value of the token, but also obviously make sure that it's useful for something. However, so going back to what I mentioned earlier, and obviously I'm not a lawyer either, as you've been saying, but just from my understanding of the Howie test, I do think B&B, at least right now, you know, let's disregard the part about finance chain, that it does

fit the definition of a security in the U.S. And that's because the definition is that it should be an investment contract in a common enterprise whose profits are dependent on an identifiable party, which in this case would be finance. So do you really think, I mean, you know, we kind of discussed this issue about the company and, you know, whether or not. they'll face certain regulatory risks. But what about for the token, for its ICO, how big do you think the legal risk is for them for what they've issued? That's a great question.

And so first, you know, I want to say that securities aren't necessarily a bad thing. You know, we are not the right group to determine, you know, is B&B a security or not? that's going to be up to the regulators and the courts to decide. But, you know, being a security isn't, you know, just an unequivocally negative thing. You know, there's certain restrictions that come with it, but otherwise, you know, I own plenty of securities personally. You know, Apple shares are a security. So it's not just like some negative thing to be.

Now, let's look at, you know, what happens if the courts do determine that B&B is a security. Well, there's a couple of things that are possible. The first is that they ask any venue that is trading this unregistered security to delist it. Given that the vast, vast majority of B&B trading volume occurs on Binance itself, this seems to be a low risk to us, just because Binance is not within, entirely within the U.S. jurisdiction. And so it seems unlikely that liquidity would just vanish if that statement was made by the U.S. regulators. Or the other thing that we've seen with unauthorized securities offerings is you have to give investors in the ICO a put right, where you have to give them the ability to get their money back at the price that they paid. However, I would be absolutely shocked if any of the original B&B ICO investors,

decided to exercise that right if it was provided to them, given that it would be entirely economically just irrational to do so. Binance coin has delivered extremely attractive returns since the ICO. And so even if it is determined a security, I do not think that any rational investor would actually try to exercise that put-right and get their money back, for lack of a better term. So while there is some risk, there. It's just something that, you know, we as investors are willing to take on. You know,

we are compensated for taking risk. And, you know, if we didn't want to take any risk, we would just be investing in U.S. treasuries. So one other thing I wanted to talk about was, in your report, you made a pretty bold claim that finance will become the first company to start out centralized, achieve scale, and then to centralize itself and migrate value capture from Binance to the B&B token. How can you feel so confident of that now when it's pretty early? Yeah, so I mean, I think throughout the report, we highlight some quotes from CZ that he's made over the last year

that pretty strongly insinuate that that is the game plan. And then it's also just very clear if you look at just generally how Binance is evolving as an organization, like that is the game plan. CZ, the company is already quite decentralized in a lot of ways. I mean, the 400 people work across 40 countries. They are a very global company in nature. Yeah, the current centralized exchange does,

that is centralized kind of architecturally. But they're launching B&B and the finance, they're launching the finance chain to disrupt themselves. And the ultimate manifestation of disrupting themselves with finance chain is that they decentralized themselves. And so that's very clear. That's the kind of long-term vision. It's actually unclear if that will happen.

But if there is a company that is going to start on centralized scale and then decentralized itself, it's hard to imagine it being anyone other than Binance. And at what time scale do you imagine that happening over? It's hard to say at this point. This is definitely going to be slow. I can't imagine it would be, A, what does fully decentralized mean that that's somewhat ambiguous? But I'd expect at least five years. And you also said that you imagine finance will become the first decentralized autonomous corporation. How do you define that and how is it literally just that they'll disrupt the actual existing company and what will be left is the Binance chain and B&B token or how will that happen? Yep.

So I want to start with a quote from CZ. This is from the most recent quote unquote earnings announcement and token burn. And so in that CZ says from an earning standpoint, Binance Decks will not directly increase profitability for Binance, but it will certainly increase the utility of B&B in a big way. That should be good for B&B holders. Binance is also a large holder of B&B, so we benefit the same way as all B&B holders.

The more people using Binance chain, the more value is created, or the more successful we all become. And from that and other quotes, similar to that, what we see is that, you know, I think CZ really understands that the vision for blockchain technology is to remove rent-seeking middlemen and allow users of a network to actually own that network. And the same is true of an exchange. An exchange is just a network.

It's another type of network. You know, it's not just, it's not a network in the same way that a communications network is necessarily. But it's a network and it benefits from the same types of network effects. And so what we see as the actual way that this happens is that more and more of the trading volume and almost eventually all of the trading volume moves to the decentralized exchange as a decentralized exchange has lower fees and also allows the users of the decentralized exchange to own some percentage of the exchange themselves. And then, you know, finance is basically become a decentralized autonomous corporation. You know, combine the earning of the fees, you know, being paid out to B&B holders as part of finance chain with the fact that B&B holders will be voting on what tokens are listed on the chain. And I'm sure there will be some other details revealed about governance of, you know, upgrading the system, etc.

So in that case, it turns B&B into basically the ownership token of the Binance chain. And the finance chain is that, quote, unquote, decentralized autonomous corporation. And in that vision, does Binance itself still exist? I believe that the fiat to crypto portions of Binance cannot actually be decentralized. I mean, those require an actual bank account. and that that's going to be impossible to decentralize unless we see, you know, some massive changes in regulatory structure. So there will still be some centralized components to Binance that continue to exist. And one thing is when you were describing this vision, I've heard you guys also talk about sort of like, well, basically, finance employees and how they've bought into this vision or just kind of, kind of.

of seeing part of this movement. So how would you describe kind of like B&B employees, what, you know, why they've decided to join the company and, and stuff like that? Absolutely. I think one thing that's, that's very clear from our interactions with both the, you know, the leadership team at finance as well as, you know, many of the, the everyday employees is that this is a company that really has a missionary culture rather than a mercenary culture. We can tell that they truly care about this industry. They really want to do what's right for increasing adoption. And I think that came through in your interview, Laura, with CZ last year.

It was, I think, pretty clear to anyone who listens to CZ speak that, you know, here is someone who really isn't just motivated by the money, is really motivated by the mission and what blockchain technology and crypto can. and accomplish for billions of people around the world. And so culture really does flow from the top there, and I think CZ is an excellent representation of that. The parallel that I actually drew in the blog post that we published announcing the report was to Jeff Bezos, where it's very clear from looking at Jeff Bezos's actions and quotes over the past 20-plus years that he believes in putting the customer first in everything

that Amazon does, they put the customer first. His most famous quote, at least in my opinion, is your margin is my opportunity, because it gives an opportunity to cut prices and benefit customers. And so, you know, seeing that same ethos here with CZ is something that, you know, I as an investor find extremely attractive. And then in addition to, you know, all of those philosophical aspects, just from a pure financial perspective and a pure, you know, aligned incentives perspective, we do know that a very large percentage of Binance employees are taking a significant portion of

their core salary, not bonuses, their core salary in B&B tokens. And we know that Binance Inc. is incentivized, you know, by holding a large amount of B&B tokens as well. And so, you know, while being in business with, you know, people who really believe, believe in what they're doing and are doing it for the right reasons is very important. So is making sure that incentives are properly aligned. And I think both of those conditions are present here. Yeah, I've also heard you guys say that a lot of the employees have taken pay cuts to work at finance. So to not only take a pay cut, but then to be compensated in the company's own token, I definitely would say a lot of them have really bought in. So this has been super fascinating,

but and definitely you've painted like a very kind of bullish picture and you know as I mentioned I really I just had so much respect for Zizi after our interview because I really grilled him hard and he you know like I said he just really kind of believes in what he's doing and and he didn't take it poorly at all like I did a 100th episode where listeners and past guests could send in recordings and he sent in a recording and he said it was his toughest interview But anyway, so, you know, with all this stuff that we've said here, obviously, you know, I know you guys believe in finance and what they're trying to do around decentralization, but what do you think are the biggest risks to their decentralization strategy?

Like, you know, if five years from now or whatever, we say, okay, their plan to decentralize failed, what do you think will have been the factors that kept it from succeeding? That's a great question. I think that there are. really two categories of risks here. Category one of risks is, you know, risk to the existing business. And, you know, some of the main risks to the existing business,

many of these which we noted in our report, are competitors accelerating token listings and being successful in attracting volume away from Binance. You know, we have seen that, for example, Coinbase has gotten very aggressive in listing new tokens recently. However, we do think that this risk is mitigated or is quite low because, you know, we can look at the actions from, you know, let's look at Coinbase in particular. You know, they listed CVC, they listed Loom, they listed Manna, they listed GNT. And those tokens are really not,

or Coinbase was not able to attract a significant portion of the volume away from Binan. on those tokens. And so we don't really see competitors coming in and listing these tokens as being that large of a risk. Another risk is that competitors start lowering pricing. Binance has the lowest fees in the industry, and they are able to sustain this through scale. This is, you know, why they are one of the largest exchanges in the industry.

If one of these other exchanges is able to cut their fees to compete, you know, they may be successful in attracting some. volume. However, that might be difficult in this crypto winter, given that some of these exchanges are out there looking to raise capital or have recently raised capital and need to justify, you know, having revenue at certain amounts in order to really meet investor expectations. So it becomes really hard to cut fees in that scenario. Are there any other factors that you think will have kept it from succeeding? Yep. So now let's get to the second category.

of risks, and these are risks around execution of these future projects, namely Binance Chain. I mean, Binance Chain is not live yet. We have seen a TestNet. We played with the TestNet. The test net is pretty cool. It seems to work, but, you know, it's not in production. And until it's in production, we cannot know for sure how it will work.

There could be failures with tendermint. We, you know, we don't have a tendermint chain in production that, you know, we can point to operating for the past X-E. years with, you know, perfect security and finality. So there could be some failure there as well. And so there is meaningful technical risk here. And if that technical risk plays out, you know, we could see that that finance chain fails for purely technological reasons. I think that's probably the most material risk facing B&B today. Okay, great. Well, thanks so much for joining the show to talk about B&B and finance and finance chain.

Where can people learn more about both of you and multi-coin capital? Yeah, so you guys can learn more about multi-oan capital at our website. It is multi-coin.com. That's it. There is no.com. And then on Twitter, you can follow me. My handle is at Kyle Smani, K-Y-L-E-S-A-M-A-N-I. And my handle on Twitter is at Tushar Jane with an underscore at the end.

someone else has the at-Touchard Jane handle. He's probably not as famous as you. Oh, I'm flattered. You know, he has the Twitter handle. Maybe one day I'll be able to buy it off him. All right. Well, thanks to both of you for coming on the show. Thank you, Laura, for having us.

It's been a lot of fun chatting with you. Thanks, Laura. We had a blast. I can't wait to hear this one in the real world. Great. Thanks so much for joining us today. To learn more about Tushar and Kyle and Multicoin, check out the show notes and site.

your podcast player. New episodes of Unchained come out every Tuesday. If you haven't already, rate review and subscribe on Apple Podcasts. If you liked this episode, share it with your friends on Facebook, Twitter, or LinkedIn. And if you're not yet subscribed to my other podcast, unconfirmed, I highly recommend you check it out and subscribe now. Unchained is produced by me, Laura Shin, without from Rayling Gallup Polly, Brastard Recording, Jenny Josephson, Daniel Ness, and Rich Struffelino. Thanks for listening.