Income DropThe non-fraudulent way for a cryptocurrency exchange to make money is by charging transaction fees. The more transactions, the more fee income. Last November 1st, one week before FTX suspended withdrawals, I wrote in Greater Fool Supply-Chain Crisis:
Why would retail investors buy? They are facing high inflation and a looming recession, their stock and bond portfolios are evaporating, and their cryptocurrency HODL-ings have evaporated even faster. It isn't just retail:
Meanwhile, institutional digital-asset products this month saw their lowest-ever volume in data going back to June 2020, with average daily trading volume dropping 34% to $61 million, according to CryptoCompare.
In 2022, trading volume on centralized exchanges such as Coinbase, Kraken and Binance plunged more than 46%, according to data compiled by CryptoCompare. On Binance, which remains the leader in terms of market share, spot trading fell 45% to $5.4 trillion. And Bitcoin, the most-traded digital asset, saw trading volumes decline 31% year-on-year, the researcher said in a report.Eyeballing the graph one can estimate that centralized exchange volume is currently about 90% down from the peak around May 2021, and decentralized exchange volume is down around 90% from its peak around November 2021. This must leave exchanges desperate for non-fee income streams and thus, as Matt Levine suggested in How Not to Play the Game, tempted to
Magic Beans and Bogus BlockchainsTwo recent readable summaries of investigations by @cryptohippo65 and DataFinnovation are Dirty Bubble Media's The Binance Scam Chain and Patrick Tan's Binance Built a Blockchain, Except it Didn’t. Dirty Bubble Media summarizes the results of the investigations thus:
The Binance Smart Chain and BNB are cornerstones of the Binance empire. However, recent analyses have called almost every aspect of this blockchain into question. It turns out that, like many things with Binance, a closer look reveals cracks within the façade. The vast majority of BNB tokens appear to be owned directly by Binance, and market analysis suggests that the price has been artifically inflated. Billions of dollars in purported stablecoins pegged to the U.S. dollar on the BSC were not backed with real assets for weeks at a time. The code base for BSC is not open source and appears to be controlled directly by Binance employees. And most importantly, a deep dive into the Binance Smart Chain suggests that it might not function like a blockchain at all…
Magic BeansFTX imploded in part because much of their reserves consisted on FTT, a token they created. FTX held the vast majority of FTT, and controlled much of the trading in it. This allowed them to manipulate the "price" of FTT and thus the "value" of their reserves of these magic beans. All appeared well, but the "price" of FTT didn't reflect what it could be sold for once it was pointed out that it was a magic bean.
Similarly, Dirty Bubble Media writes:
BNB is the fifth-largest cryptocurrency with a market cap of $42 billion. Based on Binance’s own public records, they directly own between 70-80% of the total BNB. The blockchain analyst @cryptohippo65 examined Binance’s proof of reserves information to determine the allocation of BNB across both Ethereum and Binance blockchains. Cryptohippo65 discovered that the vast majority of BNB on Ethereum and the BSC were likely attributable to customer holdings. This accounted for around 15% of the circulating supplyHow liquid is BNB?:
However, nearly all of the BNB on the “governance” chain for the Binance blockchain, called the Beacon chain, appears to be owned directly by Binance. This can be determined by a simple process of elimination: Binance does not include these addresses in their customer proof of reserves address list, yet they clearly control these addresses.
This means that Binance is holding somewhere between $28-32 billion worth of BNB on its balance sheet. Yet BNB’s price is not determined independently of Binance itself, as Binance (unsurprisingly) hosts the largest trading pairs for BNB.
Based on data from the last 30 days, the ratio of daily spot trading volume to market cap for BNB was roughly 1%. This is significantly lower than the average ratio for Bitcoin (5.4%) or Ether (3.0%), indicating that BNB liquidity is markedly lower than other major cryptocurrencies. The true BNB volume is likely much lower since a large fraction of this alleged volume is reported by highly questionable microexchanges.Is there any sign that BNB was pumped the way FTT was? This is where Binance's allegedly "fully backed" metastablecoin BUSD comes in. It is deliberately confusing, because it exists on multiple blockchains. The basis for BUSD is BUSD-on-Ethereum, credibly backed 1-for-1 because it is run by Paxos, not Binance, and Ethereum is a credible blockchain. Binance runs a bridge from BUSD-on-Ethereum to BUSD on multiple Binance operated blockchains. The claim is that a peg-BUSD on these blockchains is matched exactly by a BUSD locked on the Ethereum blockchain.
DataFinnovation went back in history to examine these peg-BUSD tokens. When he tried to match the number of pegged tokens to the Ethereum BUSD held in reserve, DataFinnovation discovered that the Binance backing wallet frequently ran at a large deficit for weeks at a timeDataFinnovation writes:
In other words, Binance had printed dollar equivalents from thin air. As DF notes, at a minimum this suggests incredible disorganization at Binance. DF also noted something interesting: the periods where pegged BUSD was unbacked correlated neatly with periods of time when BNB prices skyrocketed. It is almost as if Binance needed the money to raise the price of BNB…
The run up in price begins exactly when the dramatic unbacked printing starts. Similarly the price stops rising, and then retraces a bit, when the printing stops.
This does not prove anything of course. Doubly so as the BUSD are eventually backed by ERC20 tokens in the peg wallet. But it is suspicious and indicates that pumping of BNB with unbacked BUSD might have occured. At best — at absolute best — Binance was careless during this time as the tick marks on the horizontal axis are almost 7ish weeks apart.
Further this activity occurred nearly 2 years ago in a major stablecoin, branded by the largest exchange, on a major chain. There is surely a lot still to be discovered.
Bogus BlockchainsMaybe I'm naive, but I would think that if the two blockchains and the bridge were correctly implemented it would not be possible to mint unbacked peg-BUSD.
We can assume that Ethereum is correctly implemented, and as far as I know no-one has claimed that the part of the bridge that runs on Ethereum isn't. We don't know about the other part of the bridge. But thanks to research by DataFinnovation acting on a tip from @cryptohippo65 we do know that the Binance Smart Chain is not what anyone should call a blockchain. DataFinnovation documented the research in this Twitter thread and explained it in BNB Beacon Chain: Not A Blockchain?. Patrick Tan provides a summary:
DataFinnovation went ahead to try and sync [the blockchain] from the genesis block, and generated the following error:There are a lot more suspicious aspects to the Binance Chain. Among DataFinnovation's discoveries were not just that the hashes verifying the "blockchain" are routinely rewritten to alter history, but also that:
panic: Failed to process committed block (285075852:2BDC391C402FF452B83AD484D5C40DA615133C25E60C07352CBC6E45435EA873): Wrong Block.Header.AppHash. Expected 3E60F1573122DC7FAD2C5E4779A21BFEEB578422C915A16DEA70A1A617314720, got 1EDDADB1DC0B8E67A3F10FCE05201A4A59A7C380EC54F3CA83D400317CC49685...
DataFinnovation goes further to identify where the exact failure to sync can be found, and it’s here and after several attempts, found that the Binance Chain regularly breaks at these timestamps.
Nonetheless, what DataFinnovation has discovered is that the Binance Chain breaks every 24 hours, without fail, yet somehow the blockchain still runs and validators somehow push past the previous breaks
- Balances in wallets change with no corresponding transactions on the chain.
- The two blockchain implentations were forked from the originals (geth and Cosmos) in ways that make identifying differences difficult.
- Important parts of the implementations are not open-source.
- Parts of the systems are distributed as byte-code.
- Non-Binance nodes have to run from binary distributions, not source.
- The binaries for the test nets and the production nets are different.
- When questioned via Twitter, the "Binance Chain Chief Scientist" stopped responding.
While there have been no allegations against Binance for any form of wrongdoing with respect to its blockchains, that it was potentially issuing an unbacked dollar stablecoin and possibly engaging in pump and dump activities may raise the ire of law enforcement agencies in the U.S. who have had their targets set on the cryptocurrency exchange since 2018 for alleged money laundering and evasion of sanctions.And so does Dirty Bubble Media:
The value of BNB is, in theory, derived from its use case as the “stock” of the Binance blockchain. We showed above that, like FTT or CEL, BNB ownership is highly concentrated in the hands of Binance itself. In yet another flywheel scheme, Binance appears to have spun up tens of billions of dollars in free assets on paper. We don’t know if Binance has leveraged these tokens; their CEO insists that Binance has no loans. Regardless, it’s clear that the BNB held on Binance’s books are worth far less than what current market prices suggest.My assessment is that the risk level of Binance is rapidly increasing, and that there are more revelations to come.
As we have demonstrated, there is substantial evidence that there are major problems with the Binance Smart Chains as well. These include hypercentralization of chain governance in the hands of Binance, periodically unbacked stablecoins, and a closed-end project under the control of a shadow group tied to Binance. Most importantly, DataFinnovation’s analyses suggest that the BSC does not operate like a proper blockchain.