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. Cointelegraph 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.
Cointelegraph: 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…
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