Binance bought CoinMarketCap. It's enough of a headline on its own, yet it represents the latest piece of an increasingly worrying puzzle: just how much influence does founder Changpeng "CZ" Zhao have over the ostensibly-decentralized cryptocurrency ecosystem? As it turns out, it's a whole lot, and the cryptoverse may not be nearly as decentralized as we had previously hoped. An extremely small group of people can act as kingmakers in the entire space, possibly even compromising Bitcoin itself.
The network CZ controls or influences is pretty staggering
Rather than go into a lengthy and conspiratorial breakdown, let's quickly summarize the Binance network by taking a look at a single event: the Justin Sun takeover of Steem, which I've written about before. During this episode, three exchanges (Binance, Huobi, and Poloniex) acted together to take over the Steem network using customer funds. This was in the interest of Sun, who owns Poloniex, accounting for one actor. The other two, Binance and Huobi, acted swiftly on this ethically-dubious (and later shown to be deeply unpopular) act which did not even concern their direct financial interests, but those of a friend's side-project. This shows that, in practice, all three operate together as one entity without the need for extreme circumstances. Just the valuations of all three cryptotokens, Tron, Binance Coin, and Huobi Token, combined come to about $3.5 billion, just shy of a top-five crypto position. Binance and Poloniex occupy places #1 and #12, respectively, of the Blockchain Transparency Institute's list of verified exchanges, with Binance's trading volume exceeding that of the rest of the top ten combined (Huobi is not listed due to high levels of wash trading).
Combine this with the new acquisition of the most popular crypto market data aggregator, and CZ's propensity to bully journalists who pose problems for him (more on that next), and we can see that his heavy influence on the ecosystem is only going to grow stronger.
Pretty serious actions have been taken for minor reasons
The network of CZ and friends is not above wielding their relatively substantial power at will. CZ famously threatened to sue crypto publication The Block over reporting that Binance offices had been raided, while Binance delisted all of Bitcoin SV because of the dubious legal actions of one of its key figures, leading the charge of mass delistings which significantly impacted its market valuation in the short term (though it has since claimed a consistent place just outside of the top-five). Poloniex acted in an even more petty and vindictive manner when the exchange announced that DigiByte was delisted following critical comments from its founder. Not only this low threshold for extreme action, but the propensity for punishing speech is even more chilling.
Bitcoin is not safe from potential threat
But this threat mainly concerned less important projects out of the top few, right? Bitcoin is still safe, isn't it? Unfortunately not. Binance controls the single largest Bitcoin trading pair, BTC/USDT at almost $2 billion 24-hour trading volume, while Huobi's BTC/USDT claims #8 on the list of verified exchange trading pairs. While this is under 10% of the total trading volume, two of the top 10 verified pairs, including the single most dominant one by a wide margin, is nonetheless significant. CZ's ability to manipulate the Bitcoin price and markets should not be underestimated.
And, more importantly, let's not forget CZ's now-infamous Freudian slip where he spoke with confidence about his ability to roll back transactions on the Bitcoin network within a few days. Though he mentioned the risk to Bitcoin's credibility, and later took back the statement and said such was impossible, actions prior and since have shown he frequently has both the power and will to act in this manner. The now-infamous 2018 research paper The Looming Threat of China: An Analysis of Chinese Influence on Bitcoin indicated that a full 80% of the network's hashpower is located in China, controlled by just a few players. Depending on the extent of his influence, CZ may very well be able to make good on a network rollback threat.
What Can We Do to Improve Crypto's Decentralization?
I wouldn't paint such a bleak picture of the space without offering some slimmer of hope. It's largely an unregulated space, meaning that any temporary position of dominance is easily lost with a sharp swing of consumer sentiment. Here's a few ways of going about doing that now.
Control your keys
Most importantly, actually control the funds you pretend to own. Don't leave them on exchanges where they can be vulnerable to thefts, confiscation, or other manipulation. Keep them out of the direct area of control by the small circle of exchanges.
Use your crypto with as few third parties as possible
While decentralized cryptocurrencies are relatively difficult to disrupt or attack, their various supporting companies can be. The more often you use your coins in a direct, private key-to-private key manner, the less middlemen matter.
Diversify investments
Quite simply, don't have all your money in one potentially-compromised project. Find networks with coins and control distributed more evenly and in different geographic areas outside of those with the heaviest influence from CZ and company. Also consider spreading to other assets outside of blockchain.
Exercise both research and purchasing power
Finally, look into the projects, and businesses, you support. Look up the consensus model and distribution, as well as coin supply and how much is controlled by how few parties. Investigate the jurisdiction, and ethical behavior, of exchanges you use. And stay way from those of both which exhibit centralized tendencies.
Crypto is a big idea with a small group of users and influencers. CZ and friends may have significant control over the space, far more than we'd like to admit, but we can still decentralize the world of decentralized digital assets. And we should, before it's too late.
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I was a crypto skeptic (still am for the most part) before Steem(it) caught my eye on Youtube during the bull run. Once i joined Steem, I quickly became interested in buying Steem so I could not only increase my stake/growth, but rent stake so I could help those in my circle grow. I was excited as I saw the Amway circles without the buying overinflated products to help your group/peers. I was quickly disturbed by the many complaints on exchanges (Coinbase at first) about them letting you buy in but not letting you withdraw. Or worse, closing your account and giving a runaround or ignoring your tickets.
Nothing has changed from those days from what I can tell, and I do believe that I lost my coins on Binance. Lesson learned.
If there is ever going to be a decentralization, there will need to be a few things put into place.
1- Projects must grow some balls and allow direct buy in of their tokens.
2- There must be a new method for valuation that bypasses the authority of the exchanges. Who really knows how much wash trading goes on at these exchanges? I imagine if the real demand were known much of the controversy would be greatly deflated. I believe Steem was a great example of this. No way am I buying it didn't have a greater demand than many of the shit projects ahead of it. People pay to socialize and game online. Fakebook sells a shitload of their in-house game tokens for real cash every single day.
3- There needs to be a hybrid exchange that allows people to trade coins (or sell them for real cash) that bypasses those like BZ and Binance. That's another thing that can be coin specific addressed by each project for their token holder looking to sell, matching them up with those who want to buy in using methods like Paypal, Stripe etc. I now during my time at Steem I probably would have bought more had a system like this been set up by someone willing to put such a market in place.
Agreed. The decentralized exchange angle especially. Maybe someday soon we'll look back at centralized bank-like exchanges as a relic of the past.
You can add Bitcoin Mining Pool to the list now as well, announced in the last 24hrs.
I'm sorry I didn't understand, is there a link?
Binance announces BTC mining pool - not an April fools joke.
https://cryptobriefing.com/binance-announces-mining-pool-40-days-bitcoin-halving/
Wow. Well now it's not just calling up his buddies to roll back Bitcoin transactions. Now it's much easier to control everything. Incredible.
Great write up!
Thanks!
When block reward diminishes, it increases the risk of a reorg attack as it makes it cheaper. That's a serious flaw. A flat emission rate like GRIN's may be better long term.
I agree in projects that don't anticipate increasing miner revenue from fees. Bitcoin is relatively capped right now.
Revenues from fees are irrelevant, as transactions can be picked up by any evil fork and they are prone to bribery.
@tipu curate ;)
Upvoted 👌 (Mana: 32/40)
I note the critical matter regarding the industry is actual centralization. Dinosaurs consider actual benefits to them to be results in the legacy financial system: $profits. As $profits are actual centralization of financial resources, it is a goal contrary to decentralization of finance, which is the actual purpose of cryptocurrencies.
$profits are your goal if you are focused on the legacy financial system.
Decentralization is better measured by transactional ability diversification. Every increase in vendors that accept crypto, exchanges that are not subject to jurisdictions, and currencies that are not controlled by financial institutions are profitable decentralization, and these are the metrics that actually benefit cryptocurrency.
Subjecting cryptocurrency to the control of centralized financial mecchanisms is the loss of profit to people seeking financial freedom. Every imposition of regulation, of exchange to fiat, and subjection to corporations, companies, and institutions political and financial, is destruction of decentralization, and simply substituting new fiats for old.
Cryptocurrency presently isn't money at all. It can be exchanged for money, and only by submitting to legacy centralized financial mechanisms. When cryptocurrency can be exchanged for goods and services directly, outside centralized controls, it performs as money. To date, this remains a negligible factor in the industry. Mostly, crypto is just speculative means of gaining fiat, and a feature of evolution of the centralized financial system.
It isn't tokens valued in fiat that measure the success of cryptocurrency. That's a measure of the successful evolution of centralized financial control. It's the ability to transact for goods and services outside centralized financial mechanisms that measures the success of cryptocurrency, and presently that's a faint shadow of decentralized finance possible.
Personally, I await the actual arrival of currency as a feature of the industry. No such decentralized currency is presently available to me, and I don't see any real prospect of it's eventuation. Tokens priced in fiat are priced higher the more they are centralized, and BTC is the least decentralized of all cryptocurrencies.
When I can pay rent, buy food, power, and water without exchanging cryptocurrency for fiat, then crypto will actually be currency. It's just a form of derivative today.