Terra founder Do Kwon and his company Terraform Labs have relaunched the Terra 2.0 network and built a new blockchain and LUNA token to bring the Terra ecosystem back to life.
In response to the LUNA and UST crashes, Changpeng Zhao (CZ), CEO of cryptocurrency exchange leader Binance (CZ), is one of the few industry opinion leaders who publicly expressed disappointment with Terraform Labs. He said that even if Do Kwon and the Terraform Labs team No action is taken, and the primary task should also be to protect the interests of users. However, Binance will still support Terra 2.0, the new LUNA token, and support its airdrop. Meanwhile, investors took a “snapshot” of their legacy token (LUNC) holdings to determine how much Terra owed in the new system.
In response, many investors who lost their life savings expressed doubts and did not understand why Binance chose to trust Do Kwon. One Twitter user once lamented: “This is very irresponsible behavior, I thought CZ would be committed to safeguarding the interests of users.”
Other users have also asked if Binance profited from the collapse of the Terra ecosystem, or if CZ talked to Do Kwon when it came to light, and Do Kwon is said to have created a failed algorithm before launching UST Stablecoin project – Basis Cash.
To clarify these issues, CZ recently spoke to Fortune and discussed the Terra crash, Binance’s relationship with Terraform Labs and Do Kwon, and why Binance is supporting the new Terra block chain, and talked about where Binance could make some improvements. The specific content of the conversation is as follows:
Fortune: After the UST incident, many users believed that Binance’s support for the new Terra chain was “irresponsible” and would cause harm. What do you think?
CZ: I think overall, this incident was a disaster, costing a lot of users a lot and evaporating a lot of value. Arguably, UST and Terra still have a lot of design errors.
Not only that, but they also made mistakes in their operations, and the Terraform Labs team didn’t react fast enough. When signs of decoupling appeared, they didn’t deal with it, and they lost about $80 billion after it collapsed. At that time they tried to use the $3 billion reserves to barely save the field, but it was obviously too late.
In this incident, the founders of other trading platforms have been silent, which is understandable, but Terra’s project team should not be silent, and they did not communicate with users in a timely manner. So, I think there is something wrong with all these things, and I’ve been emphasizing that as well.
Regarding Do Kwon’s revival plan, I also expressed my concerns and denials on some issues. I think they took a snapshot very early on that affected a lot of transactions on the blockchain and after the crash. However, time cannot be reversed, so the interests of a few users can only be selectively taken care of. Starting a new blockchain and building a fork does not create value.
This is certainly not an ideal situation, but now that the community has passed the vote, it proves that this is the result that most people want to see, and there may be no more perfect solution.
As one of the largest exchanges, we have a lot of users who hold this token, so their interests definitely need to be taken care of. In a situation where new coins are about to replace old coins, the best way to do this is to provide liquidity for the new coins, while the old coins become worthless and no longer have any utility. For this reason, we still need to support its sale, although it is not a brand new token that we want to list. In this regard, we have made a risk warning and sent corresponding emails to new users, but there are still some users who want to buy this token, and I really hope they understand the risks.
On May 12th, we only suspended UST and legacy LUNA transactions for a few hours, and transactions on the Terra blockchain were also suspended. We were thinking: if the blockchain is no longer working, we can suspend transactions to ensure that we don’t get a lot of weird speculation.
Even so, we received a lot of complaints from users that if we stopped liquidity, the tokens they risked buying could no longer be traded. So in the end, we had to take a neutral stance, provide risk warnings to users and inform them of the risks.
Fortune: Do you have any concerns about this new Terra chain? Are you worried that Do Kwon will launch another stablecoin?
CZ: We can regard the new version of LUNA as a continuation of the old version. Although there are some problems in the middle, in order to ensure continuous liquidity for users, we will still support this new chain.
If they issue a new stablecoin, we will treat this new stablecoin as a completely new project. Our go-to-market team will conduct extensive professional assessments and consider every detail. The design loopholes and operational mistakes that the project team has ever made will be taken into consideration.
I can’t make hypothetical decisions, but we’re bound to be extremely strict.
Of course, it is also possible for them to reflect on their mistakes and create a better project. Many founders have failed, and we are very cautious about new projects from teams that have failed. Therefore, we will evaluate all aspects and treat this project strictly.
Fortune: There’s been a lot of speculation about whether Binance made money off of it or sold any tokens, I know you’ve covered that, but wanted to hear from you anyway.
CZ: These statements are not accurate, Binance has always been very transparent.
We invested $3 million in Terra in 2018 as part of our Binance Labs investment. We did receive some LUNA tokens on our public wallet address at the time, but we never actually cashed out the 50 million LUNA tokens.
This is very similar to most of our investments, which are long-term rather than short-term. We’ve invested in hundreds of projects, many of which have failed, but that’s where the risk of VC investing comes in. However, we can hold it for 10, 20 years, or we may miss some of the treasures in the ocean.
So we definitely didn’t sell these LUNA coins and we didn’t buy UST, all the decisions we made were for the community. We’re not trying to recoup our investment, it’s all our sunk costs. Also, some people accused us of charging for Terra UST transactions without my knowledge, and my team told me afterwards that we didn’t actually charge any.
When such an event occurs, my first reaction is not “How much did we make?” or “How much did we lose?”, but “How should we protect the interests of our users?” This is because, as a profit-making company Platform, we want to ensure our own sustainability, so we can manage our own losses. Compared with our own gains and losses, we care more about users. After all, we have hundreds of millions of users. As long as users are willing to trust us, we don’t have much concerns, and that’s my current thinking.
A lot of things I found out after the fact, and we really didn’t make any money. So far, we have theoretically lost $1.6 billion in head investments, but that doesn’t make much difference.
Fortune: Were you surprised to hear that Do Kwon may be involved in Basis Cash, another failed algorithmic stablecoin project?
CZ: I was really surprised, but what surprised me even more was that our team didn’t know about it before.
It’s worth mentioning that I never had a direct conversation with Do Kwon, not even until recently. During the investment phase, all communications are done by my investment team using an efficient internal review process. He had contacted some other friends and wanted to communicate directly with me, but because the project was handled by my investment team and I didn’t understand the specifics, he turned him down and didn’t even participate in the group call. Typically, such matters are handled by our team.
However, I also get updates from the team and have been following the project. I told my team to stay in communication with Terraform Labs and make specific requests. We are the largest liquidity provider for their project, but Do Kwon has been a bit slow to respond and not as positive as most other projects.
We do have a mutual friend who is also one of his investors, and the friend told me that Do Kwon wanted to talk to me alone, but I also turned him down. I believe my team can handle this and I don’t want to build a separate communication channel for me to communicate with him personally.
So, I was surprised by their previous failed projects, because we really didn’t have any communication and didn’t meet him in person.
Fortune: I know a lot of cryptocurrency projects are going anonymous or pseudonymous, and that’s not necessarily a bad thing, but in the case of Do Kwon, does Binance feel there should be more discipline in evaluating the project?
CZ: I think we should do a more thorough investigation. While we do some background checks, not all problems, such as people choosing to hide their identities, are not necessarily uncovered. The founders of some projects are indeed anonymous, like Bitcoin, but this anonymity is actually a good thing. However, we still need to do more research in this area.
We also have different background check procedures depending on the country and region, some of which are not as effective. For example, if someone didn’t disclose their identity, we might not be able to find out, but I do ask our team to do a thorough investigation.
I don’t think it’s helpful to have me personally involved in the process, and even if I spoke to him on the phone, I wouldn’t have known he was the founder of Basis Cash. I don’t know everyone in this industry, but most people think I know everyone.
We’ve invested in a hundred different projects over the past few years, and if I talked to all of them, it would be 100 meetings, and I still have our own business to run. We have relatively strong teams and generally pick good projects, but occasionally one such project goes wrong.
I do think that the process should be improved and we need to learn a lot of lessons. But fundamentally, not every type of situation can be avoided.
We need to step up our efforts to educate retail investors and remind them not to put all their money in one basket, which is critical.
Fortune: The Terra ecosystem has recently faced multiple user allegations, especially from a Twitter user with the account “FatManTerra”. While most of the allegations have not been proven, South Korean authorities are said to be investigating Do Kwon and Terraform Labs. What are Binance’s forward-looking plans for future products launched by the team?
CZ: I did see FatMan’s Twitter feed, it was very interesting, but I’m not sure if it’s true or not.
That post mentioned a lot of exchanges, names, and projects, but fortunately, Binance was not among them. Even so, I asked our team to investigate. Inside Binance, we have an investigative team, not law enforcement, but we have a lot of data. We also work closely with law enforcement in nearly every country, and in many cases, they ask us for help, and when we ask for help, they usually help us as well. We also employ many former law enforcement officers on our team to facilitate communication with law enforcement.
I ask our team to look into each of these FatMan allegations and remind them to share information with law enforcement if they reach any conclusions. So far, we have not been able to confirm or deny any allegations.
But we should help the community track bad behavior and stop it. Therefore, we also do this type of analysis.
We will closely monitor all developments and respond promptly to them. At the same time, I also hope that other participants, especially trading platforms, can also participate. There are many different types of users on our platform, and we need to balance their interests, so we must maintain absolute neutrality and transparency.
(On Tuesday, a day after Fortune spoke with CZ, FatManTerra posted a post on Binance.US (Binance.com’s U.S. partner), calling the team’s investigative procedures and security measures “weak. , and made other allegations, which Binance declined to comment on.)
Fortune: Binance also has its own stablecoins. I know that algorithmic stablecoins are very different from stablecoins backed by official currencies, but after the UST crash, investors are bound to be hesitant to invest in stablecoins. Do you think investment confidence in this area will return?
CZ: I think it’s a mixed bag. On the one hand, there are definitely many people who have suffered losses; but on the other hand, more people will definitely start to understand after this event that there is a huge difference between algorithmic stablecoins and stablecoins backed by official currencies. So far, more questions have been raised about fiat-backed stablecoins, such as the location of fiat reserves, and audit-related issues.
I think it’s actually a good thing in some senses that more people now understand this and understand the difference. At the same time, I would also like to stress that all stablecoins have risks – in fact, all currencies, even fiat currencies, have risks. What we should do is make people aware of these risks, after all, there is no risk-free investment in the world.
We have to make sure that people understand the assets they hold so they can make the right decisions like: how to diversify, how much to invest, how much to hold, etc. In my opinion, financial literacy is the last line of defense for consumers. As an industry participant, especially as a trading platform, we do need to carefully manage the currencies that can be traded on the platform. Although in this industry, innovation is very much encouraged, sometimes things like this are bad.