CoinGecko Podcast - Bitcoin & Cryptocurrency Insights

Running a Regulated Crypto Exchange in Japan with Seth Melamed, COO at Liquid - Ep. 13

June 26, 2020 Bobby Ong Season 1 Episode 13
CoinGecko Podcast - Bitcoin & Cryptocurrency Insights
Running a Regulated Crypto Exchange in Japan with Seth Melamed, COO at Liquid - Ep. 13
Show Notes Transcript

In this episode, Bobby Ong, co-founder of CoinGecko is joined by Seth Melamed, COO at Liquid Exchange. Bobby interviewed Seth on Liquid exchange, blockchain industry and crypto exchange landscape in Japan, their token QASH, as well as Liquid’s plan in 2020 and beyond.

[00:00:02] Intro
[00:03:44] Background on Liquid Exchange
[00:06:31] Thoughts on operating in a regulated blockchain space in Japan
[00:04:50] What is Liquid’s focus?
[00:16:42] Utility and plans for QASH
[00:21:04] Thoughts on exchanges doing wash trading
[00:24:34] Differences between Bitcoin CFD and Bitcoin Perpetual Swaps
[00:27:39] Leverage trading offered by Liquid
[00:31:23] Liquid’s plan in 2020 and beyond
[00:35:30] Where to follow Liquid

Quotes from Episode:

“We think that we have a very special situation here at Liquid that we're really the only exchange in Japan serving both the global markets, as well as the Japanese market.” [00:15:13]

“Today when you use QASH as a method of paying the trade fees, you get 50% off the trade fees from trading on Liquid.” [00:17:03]

“We basically have a zero tolerance policy for wash trading. When it happens, we find out about it. We warn people. And if we see the behavior, we make it very difficult for them to continue the behavior, and that can include banning their accounts up to seizing assets if we see it happening.” [00:21:44]


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Bobby Ong (00:02):
Welcome to the CoinGecko podcast. I'm your host Bobby Ong. Each week we will be interviewing someone from the blockchain industry to learn more about this fast moving crypto currency economy. If this is your first time listening, then thanks for coming. The CoinGecko podcast is produced each week to help you stay ahead of the curve. Show notes can be found at I highly encourage you to join our newsletter where we send out top news in the crypto industry every Monday to Friday. Come back often and feel free to add the podcast to your favorite RSS feed or iTunes. You can also follow us on Twitter and Telegram at CoinGecko.

Bobby Ong (00:35):
Welcome to the CoinGecko Podcast. For today’s episode, we would love to welcome Seth Melamed, COO at Liquid Exchange. Liquid is one of the earliest regulated crypto exchanges having received its license from the Japanese Financial Sector Agency in 2017. It also conducted one of the largest ICOs in Asia, raising over $100m for the QASH token. It would be great to hear the insights from Seth on the challenges in growing Liquid. So Seth has a very vast experience in finance and operation. He has over 20 years experience in banking including 11 years of operation at Goldman Sachs as Senior VP of Operations. He's been working with Liquid for the past three years and has intimate knowledge operations payment and custody of cryptographic assets. Welcome to the show Seth.

Seth Melamed (00:35):
Thanks very much for having me, Bobby. I'm a big fan of CoinGecko and really glad we can have this opportunity to discuss the industry, and what's going on in Japan and at Liquid.

Bobby Ong (00:35):
Yeah, looking forward to conversing with you. So for the first question right, maybe can you tell us a little bit about yourself? How did you get into the blockchain industry and how did you end up as the COO for Liquid?

Seth Melamed (00:36):
So my journey I think kind of interesting. I first started getting into bitcoin and blockchain around 2014. What happened was I was working at a very large international bank, Goldman Sachs. At the time and I had been working in our Moscow office managing our Treasury. And around 2014, there was a global international incident where there was invasion of premier and scrimmage between Ukraine and Russia. And as a result there was sanctions on the West placed on Russia. And what happened was our business, in terms of how much activity was going on with our clients, are really slowed down, so I find myself with a lot more free time on my hands and believe it or not, I actually used that time to stumble across the Satoshi Nakamoto white paper. And I started learning about bitcoin. So, you know, I read the white paper. I was really interested, especially someone who had spent my entire career working in banking.

Seth Melamed (02:43):
I was really interested in decentralization, lack of intermediaries, immutable transactions, peer to peer payments, of course. And I then started attending conferences at this time, 2014, 2015. And at the time I think the industry was in a very different state. The conferences would generally be about 15 to 20 people. People would get their chairs and their desks, and they put them together in a ring and some people would actually make presentations about their projects. And at that time, people actually would sit, listen, take notes, or at least I was and go back and think about what was going on with innovation in blockchain at the time. So that's how I got started. I bought my first Bitcoin back then, I think I paid around $250 and I thought it was a lot of money, but in hindsight we're all much smarter than we are today. And I started getting involved with Ethereum. I sent my first transaction of bitcoin around 2014 and I was hooked pretty early on.

Bobby Ong (03:44):
That's good. That's good to hear. And tell us more about Liquid and like, how did it get started? I don't think you were with Liquid from the start, I guess. And then like how big is the Liquid team these days?

Seth Melamed (03:54):
Sure. So I joined Liquid in 2017. It's been about three years now, but I've known one of the co-founders of Liquid since the late 1990s. You have an idea how old I actually am. We were working together and here in Tokyo actually. I actually moved back to New York and changed my jobs a few times but we stayed close. And in 2015 I went to visit what was then the main Liquid office in Vietnam, which was actually a one bedroom apartment in district two consisting of about four engineers at the time. And I spent my actually the winter vacation over New Year's there and really started learning a lot about the team Liquid, blockchain and you know, so when I went back to work, I gradually got more and more involved where I spending more of my time learning about the technology and starting to help out Liquid here and there. But then I finally decided in 2017 with my wife seven months pregnant to quit my job at the big bank and move here to Tokyo, Japan. And I started heading up the operations team.

Bobby Ong (05:04):
That was a big move, quitting a job when your wife was seven months pregnant. She must give you a hearing I suppose.

Seth Melamed (05:11):
It was tough. It was also tough to explain it to my parents because they still don't really understand what cryptocurrency is, despite of my best efforts to explain it. But today Liquid is about 150 people. Our headquarters are here in Japan, in Tokyo. Our main development center is in Saigon, in Vietnam. And we also have a team in Singapore that's working on a couple of our key strategic projects as well as helping to focus on our licensing efforts in Singapore. So we've seen a roller coaster since I joined. I think when I joined, I was probably employee number 40 give or take, or in the 50s around that. We then at some point I think at our height got up to over 300 employees and now we've gone back to around 150, which is probably, probably roughly around the right size. Of course, we think we're really excited about where we are in terms of our growth path. And yeah, it's been really interesting from the ICO time. So I think Liquid, or at the time we were called Quoine, we were one of those big ICOs in the 2017 era. I joined the company right before the ICO and it was pretty amazing period of time. But you know, I think a lot of that era has worn off and now it's much more focused about building products that people actually need and use. And that's where we are today.

Bobby Ong (06:31):
Yeah. That's, that's the important thing, right? We want people to build things that is needed in industry, not a speculation with ICO and how much money they can make. It was crazy times back in 2017, 2018. So you guys are based in Japan, you guys have a license with the Japanese financial sector agency. How is it like operating in a regulated blockchain space in Japan? Will you say it is tough, there's a lot of rules and regulations put in place by the Japanese FSA? Will you say they are [inaudible]? Yeah. I just wanna hear your thoughts.

Seth Melamed (06:59):
Yeah, it's a great question. So, you know, it's a mixed story, right? So regulations comes with it, a lot of responsibilities. The licenses, of course it's a big effort to get a license, but it's not just getting license, it's maintaining it. So if I look at some of my peers and other exchanges that are not dealing with the licensing regime, it may be hard for them to understand that we have, you know, at least five different compliance officers, senior compliance officers, and then several junior officers. We have a team of lawyers. I think we're at about four or five lawyers at this point. And we have constant dialogue with our regulator here in Japan. I, myself I'll visit with the JFSA from time to time. We definitely have a lot of interaction with the industry working group. So there's definitely burdens in terms of reporting, but I also look at it as helping to provide good governance and a good framework for growing blockchain as a viable means of storing and transferring value.

Seth Melamed (08:00):
So one good example of why I think the regulations are important is cryptocurrency exchanges in Japan have to maintain a segregation of client assets. And we actually, at this stage are reporting to the regulators pretty much on a daily basis and demonstrating that client assets are segregated wallets on the crypto side and the segregated bank accounts on the Fiat side. And this is the type of investor protections that you know, are really standard in traditional Fiat or banking world. And you can start to see that this sort of investor protections are starting to emerge in the crypto space. And I think that's overall a healthy thing. It will bring more confidence to institutions and corporates who might not otherwise feel comfortable leaving their assets with unregulated entities, where they don't know if there is a good protection of the institution that they left their assets with.

Bobby Ong (08:59):
What do you think about the crypto exchange landscape in Japan? Last time I count there was about 21 crypto exchanges in Japan. Some of them are operated by some of the largest companies such as Yahoo, Japan.

Seth Melamed (09:10):
It's incredibly competitive. I think a lot of the larger companies here, internet based companies like Rakuten, DNN, GMO, where they're looking for ways to grow their existing businesses. And obviously crypto has definitely been one of them. So they've invested significant amount of resources to create their own cryptocurrency exchanges. When the licensing first came out, we were the, you know, one of the first handful of seven licensees. And like you mentioned today, there's 21. And what's interesting is even at 21, there's still a waiting list of applicants to receive their exchange license in Japan. And it's really tough, right? These are, we're often facing very well capitalized exchanges that are usually part of a much larger group with securities divisions or large internet division. But, you know, in some ways we turn that as an inspiration for ourselves to really work even harder. You know, despite this large competition that we face liquid has done a great job of maintaining our market leading position.

Seth Melamed (10:12):
So if you look at the trade data published today, you'll see that Liquid is representing between 60% to 70% of all BTC cheap JPY trading activity. And we've been able to maintain that market leading position for several years now. So we're still basically larger than the rest of the entire market combined, at least in BTC JPY. And that comes about through a lot of hard work and collaboration. Listening to our clients. The management team, myself included, we set some KPIs to meet with at least three clients per week to get their feedback about the platform. And I sit through quite a bit of market analysis of where we need to improve Liquid. And those are the things we've been doing to keep our position and hopefully will help us to grow the new products that we think will help us get to the next stage of our growth.

Bobby Ong (11:02):
I think want you said is very interesting. The senior management at Liquid have a KPI of meeting three clients per week. It shows that you guys take things seriously and you want to know what the clients want and really meet them and get feedback on what needs to be improved. So quite rare to hear that senior management having KPI meeting three clients a week. So kudos on you guys for that.

Bobby Ong (11:22):
One of the common complaints that I always hear from Japanese traders that is really hard to trade altcoins because each altcoin needs to be approved by the Japanese FSA, before it can be added by a Japanese exchange. Do think that's true, like the Japanese FSA makes it hard to trade altcoin and that's kind of bad in general? Or do you think that's a good move because you kind of filter off all the shit coins and you only get the top coins that a lot of big traded by the Japanese traders?

Seth Melamed (11:51):
So I think the way to think about this problem is really understand what the mandate is of the JFSA. They have two main mandates. One is to make sure that consumers are not hurt by the financial institutions that are providing services to them. And they do have a white listing process here in Japan. And there's actually several layers of due diligence. I think we would call it from an exchange standpoint, due diligence, but they call it a questionnaire and a survey where essentially it's the same thing where they're trying to understand the rationale for the token, trying to of course, filter out the scams and sort of tokens that don't really have a utility and ask questions about the soundness of the technical architecture. They go into the backgrounds of the team. They look at things like the number of actual utility for the tokens, the amount of development resources that are used, the way the funds were raised for the project.

Seth Melamed (12:52):
And so these are all the factors that go into the FSAs decision, whether the token can be white listed in Japan. Now a little bit into the Japan exchange history, it's had a big problem with hack, right? So at a certain point, if we go way back into 2014, of course we had one of the biggest hacks of all time in Japan with Mt. Gox. The regulators actually turned that into a positive by deciding, well, we're going to regulate this industry to help bring control so consumers are not hurt by this sort of hack and lack of controls and security for consumers. The second sort of mandate for the FSA is that they have visibility about what's going on among the licensed institutions. So part of that is understanding the nature of the assets that the exchanges are listing. In some ways it's very similar to a new share that's being listed on a stock exchange. The regulators require the exchange does a certain level of due diligence.

Seth Melamed (13:55):
The bankers underwriting it have done their due diligence. And they're basically applying those principles of transparency and investor protections to a cryptocurrency setting. So under that vein, I definitely understand it. I think we can take issue with maybe the rate of approval for new tokens. It's been very slow. So your, the comment that the trader that it's hard to trade altcoins is a 100% correct. I think this year 2020 year to date, there might've been two or three new altcoins that were listed in Japan. And so it is not easy. It takes a lot of back and forth with both the self regulatory organization and the regulator, the JFSA in order to get approval, to list a new token. Here at liquid, we hope to do that as well, but there are, we have a lot of challenges. And integrate and really dialogue with the JSFA that needs to happen before we can start listing these tokens.

Bobby Ong (14:50):
Can I understand like for Liquid's focus, I mean, I went on the, there's so many coins that are listed for trading there. I believe most of these coins are not allowed to be traded in Japan. So I believe there's probably two interface, one for the Japanese users and then one for the international users. What's Liquid's focus? Is it the growth in the regulated Japanese marketplace or growth in the more non-regulated international market?

Seth Melamed (15:12):
Yeah, it's a great, great question. We think that we have a very special situation here at Liquid that we're really the only exchange in Japan serving both global markets, as well as the Japanese market. Where I spend my time it's really almost half and half, right? In terms of segregation of assets, we've developed our infrastructure, such that based on your country of residence, the assets that you have access to, the order books that you have access to, are different. So for our clients on our Liquid Japan platform, they're only able to see the white listed tokens, there's five cryptos and Fiat of course, versus our global platform. They can trade a broad range of digital assets. I think we're somewhere over a hundred different cryptocurrencies listed on Liquid global.

Bobby Ong (16:02):
Let's get to your exchange token, QASH. So QASH was one of the earliest exchange tokens launched back in 2017, you guys raised a big round, a hundred million dollars in your ICO during the bull time. However from my point of view, it seems that development of QASH seems to have been slow relative to the other exchange tokens. What are some of the utility of QASH these days? Is it discounted trading from your Liquid? Are there any token burns based on exchange revenue or profits? And then also what's the plan for increasing utility for QASH in the future?

Seth Melamed (16:35):
Sure. It's a fair point. I think the first thing is we need to be completely honest and transparent that we haven't delivered on a lot of the promises and goals that we had set out when we had done our QASH ICO in 2017. I don't think we're alone in that, in that vein, but certainly we have to recognize that we have not developed the QASH utility to the extent that we, that we need to. In terms of what you can do with it today, there is utility. Today when you use QASH as a method of paying the trade fees, you get 50% off the trade fees from trading on Liquid. So we've seen that that's been helpful and we see that a fairly healthy percentage of the users on Liquid are actually using QASH to pay for the trade fees that reduce their costs, which is great, but it's certainly not enough.

Seth Melamed (17:23):
And the price from the ICO reflects that there's more work to do. Rather than getting all the specifics of what we're going to do. And I think what I'll leave it as, the way, we really think about this in two ways. Number one, we've appointed a member of our management team, Kai Kono to become the chief token development officer, where he has a clear mandate to develop the QASH utility and create scarcity and create demand for the token by various new products that we're rolling out with new partnerships that we're developing. And the second main point is that the management team still is compensated with QASH as part of our compensation, so that what people need to know is that we're equally aligned and motivated to improve the performance of QASH and increase utility of QASH, such that we ourselves will benefit from that as well as our community.

Bobby Ong (18:19):
That's good to hear. That's good to hear. And then I was reading a white paper a few days back and one of the initiatives, at least in white paper was to launch a QASH blockchain by Q2 2019. I'm just curious, is that still in the works? And what do you think would be the use of a QASH blockchain? We have seen several exchanges taking this route, the most obvious one being Binance with their Binance chain and then now they have EVM compatible chain as well. Huobi talked a lot about their Huobi chain that they plan to launch this year. OK is in the test net already with OKChain. But I'm not really convinced if an exchange should really have its own chain. I don't see the point of exchange running and own a blockchain. And if all exchanges run their own chain, we come back to a situation where things don't talk to each other again. Yeah. I just want to hear your thoughts like do you think exchanges should own a chain?

Seth Melamed (19:08):
So I'm an old school banker, right? I was in banking 20 something years before I joined Liquid. And my point of reference here is the Swift network. So Swift certainly has its problems, but it's actually been around since the mid seventies. So 45 something years give or take, and it's worked right? Despite its flaws, it's actually worked to really enable a massive expansion of cross border payments. And the thing that if you look at it, the key attributes of Swift is there's a standardization that all of the members or the nodes, if you will, have agreed upon to use. And obviously it had very good security. I think, I don't think it's ever really been a break through that [inaudible] Swift network. So if you think about, if we apply that to exchanges, developing their own blockchains, all of a sudden the first issue that comes up is interoperability.

Seth Melamed (20:01):
And if you don't have real interoperability, what you end up having is sort of the silos of different change of blockchains. And it may really limit the effectiveness because you're missing out on the network effect, right? And you kind of have the opposite of what happened with Swift. So I'm not sure that change blockchains are necessarily going to really develop and serve the growth of finance on blockchain. We'll see, I think at Liquid we're taking a different approach where we're really focusing on developing tools for people to develop their own applications on the blockchain and making it very easy for them using common programming languages. We polished some information about the test net and some of the tool sets that we're making available for people, but I really want to not go too far into that. And I think there's going to be a lot more announcements about our own LiquidChain coming up. And so I kind of want to refer to Kai in our blockchain development team for those announcements.

Bobby Ong (21:04):
Yeah. As you say, it's going to be hard trying to grow a chain. Like we've seen, like a lot of people that come out and try to launch an Ethereum competitor, but everyone is finding it really hard to bootstrap another smart contract network to go against Ethereum. So I would like to get your thoughts on exchanges conducting wash trading. You know, a lot of exchanges they do wash trading, especially those that are non-regulated. So they have no obvious downside. No one's out there to regulate. Liquid at least in a Japanese site being the regulated exchange can't do wash trading because it's regulated by the FSA. But what do you think exchanges do wash trading and what do you think the industry should do to solve this issue?

Seth Melamed (21:43):
So let me speak for Liquid first. We basically have a zero tolerance policy for wash trading. I want to be clear. It's not to say that we don't have wash trading. What I'm saying is when it happens, we find out about it. We warn people. And if we see the behavior, we make it very difficult for them to continue the behavior, and that can include banning their accounts up to seizing assets if we see it happen. So I think we've made it pretty clear and we don't really have a wash trading as an issue at our exchange. Like you mentioned, as a regulated entity, we can't do wash trading because we have to give reports to the regulators about the trading activity. So we do trade surveillance, transaction monitoring, and wash trading just simply would flag too many things. So it's just not something that we can do.

Seth Melamed (22:33):
It's not something we're really interested in doing. I think it's a, I understand exchanges that do it. You know, it's a very competitive landscape and people want to sort of get attention. But I think at the end of the day, real knows real. Um, there's lots of analytics out there. Lots of great research done by like Alameda research, for example, and many others digital asset research I do on that the people can look through these things and people can understand pretty quickly where volumes are not real. I do feel, you know, I do think there's an issue. I really like what you guys are doing with your liquidity measures and your trust scorings. I think it's a great value to the ecosystem and really appreciate what you've done, Bobby, to help the whole industry, because that helps everybody, especially players like us, where we don't have wash trading.

Seth Melamed (23:21):
It's very much appreciated, but I do think it's, um, it's unfortunate, but I also think it's not a permanent condition that as, let's talk about Singapore, for example, because that's something where I'm spending a lot of my time on now, we're applying for the Singapore payment services act, digital payment token license. And what you're starting to see is a world is getting divided, especially if the exchange space of, you know, regulated, licensed exchanges versus non-regulated. And at the same time, you're starting to see more institutions more and more when they're onboarding. And they're looking for a venue they're much more likely to send out, for instance, an RFP and they ask questions about, well, do you monitor wash trading? Do you do monitor transactions in and out of the exchange in search for blacklisted wallet addresses? And so I think naturally these problems around wash trading and cross signaling will sort of a trade away at time. And we'll look back on it almost with a smile that it's just kind of a blip in time. We don't rely on it. We don't think it's important. I don't have the time to do it even if I wanted to. There's many other legitimate products and services and ways to serve our clients that we want to focus on.

Bobby Ong (24:34):
Yeah, I believe so. I mean, I think the landscape, if you start from many years ago, every exchange is non-regulated and then Japanese FSA started by regulating exchanges. And then we start seeing many jurisdictions having, putting in place a regulation regime, and then things just slowly turn into a white listed regulated entity. And then there'll be some who try to jump from one country to another country and areas that they can operate will slowly decrease. And then eventually every action is pretty going to be regulated, maybe one or two countries will keep it unregulated. And then that's when things going to be pretty obvious which are the regulated and non-regulated one, but we should see in a few years from now, but as you said in a longterm, like everything's going to be regulated. Let's talk about derivatives, right? So you guys have 2 bitcoin derivatives products, the Bitcoin CFD and the Bitcoin Perpetuals, which you guys launched recently. What's the difference between these two products and when should a trader trade the CFD and when should the trader trade the Perpetual?

Seth Melamed (25:28):
Yeah, sure. It's a great question. So I think the main difference is around the funding and the swap rates. So a CFD is paying a fee every eight hours and it's got a fixed interest rate where people, when you open the position, you know, what the funding rates going to be, whether you're paying or not. And with the perpetual swap product, the difference is the funding rate is variable and it can switch over time and it's accruing, you know, every second and you could be paying or receiving, and then we calculate total financing fee at the end of the period. So it really depends on what your trading strategy is. It also may depend on if the perpertual swap is trading at a premium or a discount to spot, you can either pick up the funding fees or you might be paying. So it depends on, you know, what kind of strategy you're implementing. I would say for a trader that willing to just take a position, a leverage position for a period of time, probably something like the CFD or the individual product is a better way to go. For traders that are looking for basis trades, where maybe they're going long, a spot trade, and they see that there's a big funding available for Schwartz and they want to get the carry that's the option that they might get. So it really depends on trade strategy, which product suits you better.

Bobby Ong (26:53):
In the perpetual like, the trader has a chance of receiving the funding, but in CFD does the funding all goes through Liquid, right? If I [inaudible].

Seth Melamed (26:59):
That's. Right. That's right. Thank you for mentioning it. That's another key point is that on the Perpetual swap, Liquid is not receiving or paying the swap. It's always one-to-one between the payer and the receiver, the two market participants. So versus the CFD, we are the counter party.

Bobby Ong (27:20):
Yeah. I was reading up a lot on the differences between the CFD and the Perpetual. I come to the conclusion that the Perpetual is a peer to peer marketplace where Liquid offers a marketplace and the CFD is one where Liquid is a counter party. And as a buyer, you have a long or short position, you pay Liquid a funding rate. So yeah, that was my understanding of the differences.

Seth Melamed (27:39):

Bobby Ong (27:39):
And in Japan recently, right? So the maximum leverage that can be offered by regulated exchanges, I'm not so sure if you guys are doing it is, at this point in time, I remember it's 4X, but the Japanese FSA has stated that they want to reduce this to 2X, which is half. And I saw that on Liquid both CFD and Perpetual offers 100X leverage. I think this is for the non-Japanese users. What about in Japan? Do you guys offer any leverage there?

Seth Melamed (28:03):
Yeah, that's right. So just a little back in history, let's go just a little bit of back in time. I think it might be interesting to understand a lot of the initial industry in crypto was really derived from the FX industry, but Japan has traditionally have one of the largest FX margin marketplaces in the world. And so that was sort of the genesis of the initial crypto trading business in Japan. And so when I first joined Liquid in 2017, I actually think leverage at that time could go up to 25X, and the FSA is following a playbook that we've already seen in the FX markets here in the crypto markets by over time, reducing the amount of leverage that is available for people. And again, the main idea here is to basically protect consumers, sometimes protecting them from themselves. And we think that's a good thing, right? In fact, we'll maybe be talking about it a little bit later, one of the key metrics or KPIs that we've set ourselves up is, you know, how many liquidations or margin calls do we have on our clients and the lower amount of liquidations and margin calls and the better we feel like we're performing for our clients. So I think the reduction of leverage is actually a very healthy thing. It removes some of the casino type of element from the industry and focuses more on real utility for people.

Bobby Ong (29:28):
It's interesting that you brought up casino because one of the observations that I've seen the past couple of years is that it feels that a lot of these exchanges are treating the crypto market as one massive casino for everyone to kind of bet and lose their money and then exchange makes money from that sense. I personally feel a 100X leverage is too much for any trader because it's very easy to get margin called and you have positions close, but some people tell me that in FX industry, people can go up to 500X leverage as well and 100X is just a start and then people will start offering higher and higher and that's no problem. If someone wants to create a 300X leverage, we should allow them to trade 300X leverage. What's the thoughts on that for bitcoin leverage trading?

Seth Melamed (30:07):
You know, I think about sustainability, right? And I think we think about two things. Number one, sustainability. And as a business and as a, you know, serving our clients, if we are in a sense blowing up our clients, we're not serving our clients, we're not even serving ourselves. So we want to create tools and a venue that sustainable where clients can continue to use us for various services relating to crypto, without them all burning themselves out. Right. So one of the things that we focused on in a recent release is including better risk management tools and calculators, where they can see real time, what their margin capacity is. We tell them, you know, we give them a risk calculator in lesson, sort of do a scenario analysis about what different prices would mean in terms of their margin availability. We give them warnings if they're putting in an order and they don't really have much margin available that they might be liquidated and you know within say one standard deviation of the price. So we've tried to do a lot around investor protection to mitigate the risk of them basically blowing themselves up. Right. And we think that's an important part of our job as a venue.

Bobby Ong (31:23):
What are Liquid plans for 2020 and beyond. Right? Sure you guys have a lot of plans that you can disclose some of the interesting things that's happening like. That would be good to hear.

Seth Melamed (31:31):
So I think the first part is I just want to talk about what we've done the first half of 2020. So I became a COO in November of last year. And after the winter break I came back and I really started thinking about KPIs. And that's been a big focus for our teams not only our product teams, but our operations teams, our client support teams. And we think that that's been really successful for us to improve our overall ability to serve our clients and improve the service levels, that liquid. So the things that, the types of measurements that we look at that we've been constantly improving upon are things like our liquidity levels, [that's] the order book, the amount of balance breaks that might be available that are interfering with client's activities and the amount of time it takes for them to say, open up an account.

Seth Melamed (32:25):
And so that's been really successful. It's put us on sort of a mindset of constant improvement. In Japanese, there's the word Kaizen, you know, very happily see floating around all of our internal presentation decks. And so to look into the second half of 2020, I think we're starting to focus more externally on how we're better able to serve our clients. And one big initiative, before I get into the product side, just more about our mindset internally, we're developing a metric called social trust scoring and what this is is five key metrics that most impact our clients. And we bundle these five metrics into an index, and we can track that index over time to see how we're doing as basically as an institution, serving our clients. And the five indicators that go into our social trust score are number one, the number of liquidations.

Seth Melamed (33:19):
So we take 2019 for all these metrics we take 2019 is our benchmark. And then we judge our success is say, it's a scoring of a one to 10. We would take 2019 and make that our baseline as a five. And then as we reduce the number of, let's say, a liquidation, which we would say was an adverse outcome, our score would start going up from a five to six and onwards up to, so the key indicators like I said, one is liquidations. Number two is what we call our service level for asset transfers. And that's an index about the time it takes for people to make a deposit, to make a withdraw. And we look at all of the times in our rich data depository, and we can come up with a metric and really see what we're doing over time. If it's improving, how we're serving our clients.

Seth Melamed (34:12):
Third factors goes into the social trust score is the amount of slippage on limit orders. So we've certainly developed a lot around stop loss orders and limit orders, but it's also important for us to understand that how many of those orders get executed exactly at their limit price. Another key indicator that we look at a lot for the big traders is the amount of latency we have for each edge execution. So we know what our baseline is for 2019. And now we're trying to bring those number of milliseconds down, and that's important part of how we establish trust with our user base. And then finally, an interesting one, that's kind of more aligned to the new products we're rolling out is how many new people are we bringing into the crypto ecosystem? And we're really focused on businesses. And what I mean by businesses is businesses that are accepting crypto as a payment, businesses that are using point of sale systems where Liquid is providing some backend infrastructure and wallets and how much growth those wallets can provide in terms of liquidity, whether again, they're using liquid as a backend infrastructure provider. So that's kind of part of how we think we can contribute to building out the ecosystem and also developing trust among our users in the broader community.

Bobby Ong (35:30):
I think this is a very interesting metrics that you guys have, and it's quite rare to hear that liquidation is one of the core metrics for you guys, because obviously when clients get liquidated you guys get more money, but you guys think long term, and that's obviously good for the consumer. So the other five metrics, the other four metrics are also very interesting to see how you guys think about the direction of Liquid in the future. So it's been a good time talking to you, but one last question before we wrap up. If someone's interested to learn more how to trade on Liquid, where's the best place to follow and learn more?

Seth Melamed (36:01):
Oh gosh, I would probably say that one of the best places to look is at, we have a blog site where we're publishing a lot of information about new products and features that we're rolling out and new token listings that we're doing. Today I published a blog post about what we're doing to improve our wallet infrastructure and our security, based on some recent attacks that we've seen where data loss happened at some other exchanges. So we've published some information about that, both in English and Japanese. I would go there. The other thing that we're trying to do again, sort of a secondary metric around our social trust scoring is around, we're trying to get our management team much more involved in Twitter. I myself am on Twitter. I've again, I've tried to set a KPI of about three tweets a week where we're talking about different things we're doing at Liquid. And some of my colleagues on the product side and on the business development side are also tweeting out about what we're doing as well as. We'll be tweeting out about what we're doing in the cash development side as well. So I would say in the blog posts and Twitter are probably the easiest places to consume information.

Bobby Ong (37:10):
Yeah, it's right. I mean, I'm going to start following you on Twitter right now. It takes time and is hard to spend time on Twitter. Like when you guys are busy working or something on the computer, like it's just hard to spend time on Twitter, but it's something that you guys have to do because crypto community as you all know, is on Twitter. So yeah. Seth, thank you very much for taking the time to have this podcast with us at CoinGecko. We really enjoy and learn a lot from this conversation. Yeah. I just want to say thanks for your time.

Seth Melamed (37:37):
Thank you, Bobby. And if you don't mind, I just have one question for you. What do you think CoinGecko can do to best help develop of blockchain ecosystem?

Bobby Ong (37:53):
Yeah, so I think for us like the way we look at things is that the blockchain ecosystem is, it's highly complex. I have trouble explaining to my parents and the basics is hard enough. And the pace of development is moving so fast that if you don't have the basic, it just gets harder and harder to know all the things that's going around. So when we, when I got started in Bitcoin, like 2013, I just have to understand Bitcoin as a base layer. But if someone were to come into Bitcoin today, they have to understand Bitcoin, the Lightning network and the scalability issue and all the forks of Bitcoin, Bitcoin cash, Bitcoin SV, and then the list that goes on behind it. So just understanding Bitcoin as a whole is just complex. And I see how it's hard like every time we onboard someone new over here, we have to train them and guide them on some of the reading materials.

Bobby Ong (38:39):
So for us over here, I think our role is to really try to help educate the market. And for us, emphasis will be on crypto education, how can we take all these things and digest them into an easy manner for people to really understand things? I think back when we started, there was no Ethereum. Now Ethereum is the whole ecosystem by itself and has grown on to many different ways. And then there's DeFi, decentralized finance. And then DeFi has grown into whole different things as well. So one of the first initiatives that we've done was in publishing a book on decentralized finance. So we publish a book called "How to DeFi". We wanted a guide but the guide turn out, as we write more, turned into a 200 page book, 25,000 words. Now we put it out and that's been well received by the cryptocurrency community, at least. And I think for us, it would be something like the DeFi book, but for many other sectors in the crypto space and like Bitcoin, for the others, like for example, you can imagine the "How to Bitcoin" book for example that explains Bitcoin, Lightning network, Liquid network in a nontechnical manner that is easy for someone who doesn't know much to read up and to know how to get started, like for example, setting up a wallet and so on.

Bobby Ong (39:44):
So those are the things that we do. Education on like, books. Maybe we start doing some other things. At the end of the day, like there's only so much that we can do with the community we have. To really make crypto goals to its next level. We have to get people who are not in crypto at this point in time to really understand, just start using otherwise. We will never be able to grow this industry.

Seth Melamed (40:06):
Absolutely. Where I see you guys really helping the industry is I'm wondering if you have some metrics to align this, where exchanges have better scoring, you see that there's more people visiting their page on CoinGecko. And you start to see a correlation where their trust scores go higher, that they have more clicks and really be interested to see if you guys have been able to track that over time. But I, for one, certainly appreciate what you guys are doing to help promote good behavior, transparency, money changes. And I'm looking forward to working with you on helping to build this.

Bobby Ong (40:43):
Yeah, we do our best. It's a cat and mouse game. I think we were the first in the space to say that this can't go on anymore. Like this wash trading getting too ridiculous, all this exchanges just appearing at the top. We came to a point where we state that trading volume is no longer a good indicator for exchanges liquidity. I know it's not a case for regulated exchanges, but back then most, I mean, even now most exchanges are non-regulated, so it's no longer a good indicator. So we have to look into the order book metrics and see which one has like, I'm interested when you said slippage was a key criteria in your social trust score. Not many people look at slippage as the metric and for us, that's quite a good indicator. If I want to sell a hundred thousand dollars or $1 million of Bitcoin or some other altcoins, if it slips like 20, 30%, right, that's obviously not a good trade for any trader. So that's something that we want to look at more closely to see how we can measure it in a more accurate manner.

Seth Melamed (41:33):

Bobby Ong (41:34):
Okay, great. Great talking to you. Thank you very much to come on the CoinGecko podcast.

Seth Melamed (41:38):
Thank you, Bobby.

Bobby Ong (41:40):
All right, that wraps up the show. Thank you for listening to the CoinGecko podcast with Bobby. If you like our show and want to know more, check out or please leave us a review on iTunes. Do you have any feedback? Do drop us an email at Join us for more next week. See ya.

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