Binance CEO Changpeng Zhao (CZ) recently shared his thoughts on the six things to do to ensure a healthy centralized exchange. Binance is, without a doubt, the most successful centralized crypto exchange. It hardly ever surfaces in any scandal and has waxed strong for years.
Recent happenings in the crypto space prompted CZ to publish some of the principles he employs at Binance. Last week, Binance launched an industry recovery fund to assist exchanges affected by the FTX crisis.
In light of what happened last week, I felt compelled to define the six most important requirements that #Binance and every other centralized exchange should adopt in order to ensure trust with our users.https://t.co/BmZsNraNs5
— CZ 🔶 Binance (@cz_binance) November 15, 2022
The Binance Six Principles by Changpeng Zhao “CZ”
- The first commitment is a disciplined approach to users’ funds. It must not be traded or invested. Cryptocurrencies are volatile and proper risk warnings should be given to their users.
- The second commitment is that an exchange should never use its native token as collateral. Native tokens are responsible for the proper functioning of the ecosystem. An unhealthy native token is leading to the downfall of the exchange. Creating utility for the token increases the value of the token. BNB chain is an example of a robust, utilized, and community-driven blockchain.
- The third principle is publishing live proof of assets. Transparency and trust are needed for users to trust the firm. Sharing proof of reserve is one way to do that. Binance began to share details of their reserve holdings and is also working on a Merkle proof of funds. CZ, CEO of Binance said:
“Other industry players have been providing this transparency already and we commend them for that effort and now we call on the whole industry to do the same to ensure that we can demonstrate that a few bad apples do not represent this industry.”
- The fourth principle says to maintain a strong reserve. This is to protect users in case of any problems in the near future. Binance disclosed they have about $1 billion in a SAFU fund. He advised other exchanges to do so.
- The fifth principle is avoiding excessive leverage. Highly leveraged products in a volatile market lead to loss of funds. Centralized exchanges need to do better and avoid excessive leverage to avoid debt.
- As the final principle, Strengthening and Enforcement of security protocols. Quality of security measures should be considered before it is put out. New projects in the blockchain space need to be equipped with the necessary security knowledge before operations. Strict KYC and AML measures should also be put in place.
CZ encourages other centralized exchanges to follow these principles and ensure the safety and security of their users.
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