Decentralized finance is in full swing, and one of its biggest supporters appears to be the exchange Binance. The platform’s United States branch recently joined the Chicago DeFi Alliance, with the aim to further develop the U.S. DeFi industry. Additionally, Binance’s support for new DeFi projects continues to grow. Most recently, the exchange has demonstrated close ties with BurgerSwap, a new decentralized exchange that aims to improve upon Uniswap.
While it’s clear that Binance has taken a tremendous amount of interest in DeFi, it’s notable to point out that Binance’s CEO, Changpeng Zhao, has been bullish on DeFi for a while. Cryptox had the pleasure of sitting down with CZ to learn more about what DeFi actually means, why this sector has started taking off, and what we can expect moving forward.
Cryptox: First, I’d like you to explain what DeFi actually means.
Changpeng Zhao: There are a couple different interpretations of DeFi. Originally, the word meant anything related to decentralized finance — so, anything that’s a decentralized version of financial offerings. Initially, the term related more to decentralized loans or loan platforms.
But then something happened early this year where people started staking coins in a liquidity pool. These coins are intended to be used by an automated market maker to provide liquidity for other people to trade against. This way, other users have much lower spreads and get a much better price when they trade.
“This type of DeFi is really hot right now. But the competition continues to intensify as people compete to get the highest interest to the liquidity providers. People are coming up with more aggressive ways to do that, including issuing new coins and having those coins act as rebates. That’s the current situation. However, I do think that the incentive structures we are seeing now will probably not last.”
CT: Why is DeFi gaining popularity now?
CZ: To be honest, the momentum started late last year or the beginning of this year. The automated market makers use a pricing mechanism that follows a curve. So, they hold a constant ratio of different assets in the liquidity pool. This type of curve with automated market making has a strong advantage, being that is very transparent. If I lose money, I know why. So, there is potential for users to lose money, but they know exactly why. There’s not a lot of cheating going on.
This type of pricing works really well when assets go up and down relatively. This works well for stablecoins because stablecoins by definition should be stable. They do fluctuate a little bit based on demand. This actually created a very good market for people who want to convert between stablecoins.
CT: How is Binance getting involved with DeFi?
CZ: Even though a lot of people perceive that these types of projects may actually compete with or take away liquidity from centralized exchanges, we still want to promote innovation. Therefore, Binance lists DeFi tokens fairly aggressively.
We are also learning from the DeFi model, and we’re actually incorporating this into the centralized finance space. Right now on Binance.com, we have a Binance liquidity swap product. Our target users are more so the novice users who don’t want to hold their own keys because they are afraid of losing them. We provide a much easier user interface for those types of users to enjoy the same type of mechanism. We also launched a third product called Binance Pool that basically allows people to just stake coins like BNB and get all the new incentives and rewards.
On the decentralized side, we’ve been working on Binance Smart Chain for over a year. Binance Smart Chain is an Ethereum-compatible smart contract. Featurewise, it’s 100% compatible with Ethereum. But speedwise, it is actually much faster, which helps reduce the high gas fees and traffic congestion problem on Ethereum, given the increased traffic that DeFi has brought.
Binance Smart Chain is another offering we were putting out there to allow developers to launch their DeFi projects very easily. They basically just take their smart contract on Ethereum and copy and paste it over. We also recently launched a $100 million fund to fund more DeFi developments. We ultimately want to encourage innovation in DeFi.
CT: What are your thoughts on Ethereum 2.0? Will Binance Smart Chain impact this?
CZ: I have really high hopes for Ethereum 2.0. For Ethereum 1.0, I underestimated Vitalik. When he was talking to me about the project in 2015, I said, He took too big of a bite to chew. But to my surprise, he proved me wrong. He delivered Ethereum. I think Vitalik’s team and the community are capable of delivering on some really hard technical challenges. And they’re strong innovators.
“But I think Ethereum 2.0 is really hard to deliver. It’s just one of those things that need full features and very high flexibility. Also, this has to run on a laptop with high speed, and you want it to be decentralized. Those problems are hard to solve.”
Ethereum 1.0 fulfilled a mission that proves it can do anything, but it doesn’t do anything right. For instance, it doesn’t have high capacity. My background has always been taking technology and applying that to applications. And when you apply that to applications that mass consumers have to use, these applications must scale and have high capacity. I’ve always been involved in building high-performance, high-throughput systems. That’s what Binance Smart Chain’s original direction has been. And to be honest, Binance Smart Chain is already being built by a community.
I do have high hopes for Ethereum 2.0, but I think it’s going to take a while for it to really come out. If you look at the Ethereum 2.0 schedule, they have to convert to PoS mining first, and that is a big change. If they get through that change this year, then that’s pretty good.
CT: So, the DeFi space is here to stay, unlike the ICO boom and bust that we experienced in 2017?
CZ: If you look strictly at ICOs, it’s a boom or bust. But if you look at the underlying concept of blockchain fundraising, I think that concept has stayed. If you had asked me in 2016 about blockchain fundraising, I would’ve said that I don’t really know if that is going to be a thing. But in 2017, blockchain fundraising was the trigger for the bull run.
Within any new sector, there is always the initial concept, then the attraction and then overhyping. Yes, there are definitely bubbles that are forming, but the fundamental concept of blockchain fundraising has actually stayed. It turned into IEOs and other forms of fundraising. I think what ICOs taught us was that it is possible to raise funds on the blockchain globally from people who like certain projects.
And while I do think most of the ICO projects failed, there were a couple of successful projects, Binance being one of them. We issued an ICO, and we actually built a pretty strong company out of it. There are a number of other successful examples, as well. I think DeFi is probably a similar situation, to be honest.
“For instance, I’m seeing a lot of bubbles in the DeFi space. There are a lot of projects with empty promises and with nothing going on. And many DeFi projects are only hot for two weeks, and then they die. But the fundamental concepts of automated market making and staking coins for liquidity are concepts that will stay over time, but in a much less flamboyant fashion. I think things will slow down, but there are some core innovations that will stay.”
