Three Big Lessons from CZ.

[Amedon4dpeople]

Lesson for project owners from CZ
1. Never use a token you created as collateral
2. Don't borrow if you run a crypto business.
3. Don't use capital "efficiently". Have a large reserve

Binance has never used BNB for collateral, and we have never taken on debt. .

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[DapanasFruit]

One thing for sure with this recent debacle involving the founders of FTX and Binance, CZ is emerging not just a big winner but also becoming a very recognized powerful monolith in the crypto industry. I am sure that there will be some people who can be cringing to the idea where only a very few are controlling the market and this is is where CZ is thrown right now...whether intentionally or otherwise. Certainly, there are many things leaders of the crypto industry can learn from this development and I am hoping they really do...so they don't have to come to CZ for some relief package.

[examplens]

Lesson for project owners from CZ
1. Never use a token you created as collateral
2. Don't borrow if you run a crypto business.
3. Don't use capital "efficiently". Have a large reserve

4. never let your direct competitor own a large share of your company's ownership

Binance has never used BNB for collateral, and we have never taken on debt. .

In this case, never say never. we don't know or can be sure about this statement.

[Davidvictorson]

~snip~

It's horrible when greed destroys friendships. This remind of the movie, Godfathers- mafias trying take each other out. SBF, who subtly tried to get legislation to ban peer-to-peer transactions and decentralized exchanges, is, in my opinion, deserving of all he receives. Personally, I'm sick of having to remove my assets from an exchange out of concern for exchange fraud.

[Esther C]

Lesson for project owners from CZ
1. Never use a token you created as collateral
2. Don't borrow if you run a crypto business.
3. Don't use capital "efficiently". Have a large reserve

Binance has never used BNB for collateral, and we have never taken on debt. .

Can someone please explain the no. 3 more in-depth please.

[hd49728]

Lesson for project owners from CZ
1. Never use a token you created as collateral

It is similar to collateral for your margin tradings. It should be in stable coins (a strong one that should be old enough. I don't trust new stable coins). If you use Bitcoin especially altcoins as collateral, you will be more easily liquidated.

2. Don't borrow if you run a crypto business.

You can make loan but it is similar to margin trading. Risk management should be done very well. Obviously the best is avoiding loan and too high leverage for your crypto business.

For stable coin, your business should have fiat currency as collateral, not Bitcoin or altcoins. UST from Terra is a good example for how such non-fiat collateral will cause collapse.

[Queentoshi]

2. Don't borrow if you run a crypto business.

What if there is a sudden need for money that the owners of a crypto business cannot afford, how do they raise money for it without borrowing or taking loans? It is not abnormal for a business to borrow; most businesses are not completely free from debts. What is important is how they are handling it, as a business don't take loans that you know will be difficult to pay in a short period, staying in debt for a long time in business can bring problems to the business.

[twiki]

It's important the market clean up bad projects from time to time. USDT i think it's too big to fail plus in a bear market, there will be an influx of cash into stable coins in general. If they have issues, this is not their time 

[jackg]

I think everyone needs to make the better distinction that your funds are safe with you (mostly bitcoin) anytbing else you store isn't "safer" because it's in binance or coinbase because they can still lose it or take loans against it.

CZ doesn't have to tell the truth either. If they took loans, you wouldn't know anyway. No one they're still paying a loan of too is going to come out and crash the exchange on purpose.

Can someone please explain the no. 3 more in-depth please.

He seems to be meaning "don't run a crypto exchange like a bank".

If you're running an exchange in crypto you're better off having 100% of your users funds segregated and covered (especially larger dormant accounts that might come back). Whether this is what he actually does and isn't something just put on a tweet remains something we'll probably find out one day.

Most large companies have between 60-100% debt to assets and get considered more efficient because of it (somehow - probably because the biggest people buying them are the people lending to them) this is likely an unsustainable model for a crypto exchange though in comparison. Don't know what binance is going to hold their profits in now though.

I'm wondering how futures and margin started without taking on debt though as the interest paying sections came years after them.

Binance has never used BNB for collateral, and we have never taken on debt. .

In this case, never say never. we don't know or can be sure about this statement.

Other exchanges that have collapsed in the past didn't take on debt or lose assets, they just "got hacked" .

[noorman0]

What if there is a sudden need for money that the owners of a crypto business cannot afford, how do they raise money for it without borrowing or taking loans? It is not abnormal for a business to borrow; most businesses are not completely free from debts. What is important is how they are handling it, as a business don't take loans that you know will be difficult to pay in a short period, staying in debt for a long time in business can bring problems to the business.

Yeah, and the biggest mistake is involving the finances that should be reserved to guarantee users or customers.
On the other hand, my mind is wondering what are the sudden things in the exchange business and are they supposed to do it? Sometimes people don't know what "must" or just "better" be done. But when talking about business competition, everything becomes a must.

[JeromeTash]

It is similar to collateral for your margin tradings. It should be in stable coins (a strong one that should be old enough. I don't trust new stable coins). If you use Bitcoin especially altcoins as collateral, you will be more easily liquidated.

I don't think one trading inverse contracts gives them a more likelihood of their position getting liquidated as compared to a position of a linear contract. It has more to do with the rise and fall in the value of the underlying crypto asset, which translates to more or less profits in USD quoted from the base currency.

Using people's money as collateral even with stablecoins can still fuck things up if the market goes against the opened positions. Stablecoins do make the positions bulletproof from liquidation. The problem is too much greed by the so-called exchanges.

[Plaguedeath]

4. never let your direct competitor own a large share of your company's ownership

How you can know the person who bought your coins? even though you're know Binance bought most of your coins, how you can force them to not buy in large share? obviously you can't since everyone has a right to buy the coins that they like.

I think the best way is any centralized exchange shouldn't create their own coin just to get more profit, actually exchange coin is a shitcoin and doesn't have any use case. They're just greedy enough and doesn't only focus to upgrade their exchange.

[The Sceptical Chymist]

Other exchanges that have collapsed in the past didn't take on debt or lose assets, they just "got hacked" .

True, very true--but aside from Mt. Gox's relative dominance, has there been a bigger collapse of an exchange?

As far as the "don't use a token you created as collateral" statement goes, I don't know whether to agree or disagree with that, because I don't think it matters so much who created a token used as collateral as it does the token's volatility and/or potential to drop like a stone if put under enough pressure.  And frankly, using anything other than a stablecoin as collateral is extremely risky.  Even bitcoin is notoriously volatile, and just look at what would have happened had you used it to secure a loan last month or even last week.  Yikes.

[hd49728]

I don't think one trading inverse contracts gives them a more likelihood of their position getting liquidated as compared to a position of a linear contract. It has more to do with the rise and fall in the value of the underlying crypto asset, which translates to more or less profits in USD quoted from the base currency.

Yes, I meant it. At least people must choose an asset that can give them a most stable collateral value. Nothing is perfect if they choose one cryptocurrency as a collateral even it is Bitcoin. Even stable coins can lose their values like $UST.

But if I choose between Bitcoin / altcoins and stable coins for my collateral, I will choose a stable coin but that one should be a good one.

Using people's money as collateral even with stablecoins can still fuck things up if the market goes against the opened positions. Stablecoins do make the positions bulletproof from liquidation. The problem is too much greed by the so-called exchanges.

It is right. Having your position against the market movement, market trend will kill you. Whatever collateral type won't be able to save you if you get such positions.

I implied about the risk of liquidation because of your collateral gets serious loss in its value that will put your position in liquidation risk even it is not too bad.

[tabas]

Lesson for project owners from CZ
1. Never use a token you created as collateral
2. Don't borrow if you run a crypto business.
3. Don't use capital "efficiently". Have a large reserve

Binance has never used BNB for collateral, and we have never taken on debt. .

There's one thing that's wrong with FTX and its FTX token. They've been holding a lot of it and the total market cap of it, is more than from what they're having from their reserve. It means that they've been holding it more than what its market has so if they dump, the entire market cap will be gone from so quick. While in having related to finance and crypto business like exchanges, it's essential for them to start asking money for their operations if they see that they can pay the debt well. This is endangering most of the other services that we may be enticed with and that's why the usage for exchanges is just to trade and exchange there and making us to trust them more like with those % APY offerings.

[Findingnemo]

Lesson for project owners from CZ
1. Never use a token you created as collateral
2. Don't borrow if you run a crypto business.
3. Don't use capital "efficiently". Have a large reserve

Binance has never used BNB for collateral, and we have never taken on debt. .

Binance provided their services almost for every country which is also one of the reason for his success, I don't want to make comments of BNB because it evolved as per the coin growth and CZ got the idea if how to reach the people by giving discounts in the trading fee even when there is no BNB involved in a trade is a big move.

[jackg]

True, very true--but aside from Mt. Gox's relative dominance, has there been a bigger collapse of an exchange?

Bitfinex? Can't remember if there was anyone else doing the same thing but I cna imagine some in the background have faced bigger funding and liquidity problems than they've reported (including Binance).

[quote author=The Pharmacist link=topic=5420084.msg61267463#msg61267463 date=1668049400
As far as the "don't use a token you created as collateral" statement goes, I don't know whether to agree or disagree with that, because I don't think it matters so much who created a token used as collateral as it does the token's volatility and/or potential to drop like a stone if put under enough pressure.  And frankly, using anything other than a stablecoin as collateral is extremely risky.  Even bitcoin is notoriously volatile, and just look at what would have happened had you used it to secure a loan last month or even last week.  Yikes.
[/quote]

I thought binance had a buyback system in place with their token too so this might have lead to a similar problem anyway (not sure if this is just rumours though or if they've changed their mind on propping up their own token - a lot of people used to see that token as a direct investment in binance too).

Edit: looks like they were just randomly buying back tokens.