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Pictures Speak Volumes: the Whole Truth behind the Competitive Fracas between Digital Currency Exchanges

(July 09, 2018)

Having come online for not more than half a month, the digital currency exchange FCoin made a public announcement on June 13 that its average daily trading volume (ADTV) had ascended to claim the top global spot, exceeding that of the top 6 exchanges combined, in what proved to be the most sensational piece of news in a bearish market. The FCoin modus operandi, namely, “trading equals mining with returns offered as dividends,” created quite a stir and ushered in a commotion of competition between exchanges.

Encirclement and counter-encirclement

Uninhibited vicious competition

The model of “trading equals mining” was not invented by FCoin. Instead, it was first inaugurated by DragonEX as early as November last year but failed to catch on. After this model was introduced by FCoin, however, copycats quickly cropped up and within no time it became a must-have in digital currency exchanges, old and new alike, who all jumped on the bandwagon for what is now an essential feature of exchanges. Some even went a step further by introducing a 100% return mechanism.

Mixed responses toward FCoin’s catapult to popularity was seen from the three leading exchanges, that is, Binance, OKEX, and Huobi, the “BAT” of digital currency exchanges, among which the first two have already opted in. While Huobi is not directly engaged, CoinBig, a New Zealand exchange that it has investments in, has made forays as well, and a former Huobi executive was responsible for the current boom round.

On June 19, OKEX announced the launch of a “Mutually Beneficial Plan for the Opening-up of Digital Assets Exchange,” granting a total of 100 quotas to teams which have locked in 500,000 OKB. In other words, big accounts could now begin to directly participate in the awarding of returns from OKEX.

On June 21, Binance announced a “Digital Asset Exchange Alliance Plan,” one that was virtually the same as that of OKEX, under which the number of quotas was raised to 1,000 with 200% return of service charges.

Exchanges which have adopted the model of “trading equals mining with returns offered as dividends”

The proliferation of this operational model has posed a serious threat to market order. By 23, the three exchanges involved (86Bex, DragonEX, and CATTLLEX) had either declared bankruptcy or suspended their products, among which DragonEX merits special attention, as it was the first exchange to dip its toe into the water and adopt the model in November 2017.

Comments from industry gurus

The whirlwind of such an operational model has drawn conflicted views from industry pundits as well, with radical innovators claiming it to be a “Bloody Revolution” of exchanges and trumpeting the horns of attack against traditional digital currency exchanges. Guo Hongcai, nicknamed Bao Er Ye, even took it as far as voicing support for this model during a live video streaming episode, dubbing it “the future of exchanges.” On the other hand, other experts have been negative, or even disapproving toward this new boom, believing it to be ultimately a transient affair and that it would be better to expedite its decline.

On June 19, Zhao Changpeng, the founder of Binance, publicly voiced his disapproval of FCoin, calling this model a scheme with no technological barrier that siphons off funding which would only serve to precipitate the trapping of investors. Zhao Changpeng and He Yi consider their response as a righteous act to “disrupt the duplicitous market, expedite the demise of this model, and purge the industry.”

Views from industry gurus on the model of “trading equals mining with returns offered as dividends.”

“Exchanges’ practice of offering benefits to traders is important, but not essential. This is a short-term behavior rather than a long-term plan. To whom should the benefits be directed? I think funding should be plowed into projects with good prospects and advanced trading technologies. With regard to decentralized exchanges, for example, supervision of the responsibilities thereof should be enhanced and the efficiency of transactions should be improved. The ultimate aim of such a practice should be to safeguard users’ interests,” said Bai Shuo, Director of the Technology Committee of ChinaLedger and Chief Scientist of the World Blockchain Organization, of exchanges’ race to offer benefits at the Summit on Blockchain Application and Legal Research, held at Xi'an Jiaotong University on June 22.

An Exhaustive Expose of FCoin

FCoin commenced trading on May 24, 2018. The model of return distribution was launched on June 6. On June 13, FCoin became the biggest dark horse in the history of exchanges when its 24-hour trading volume exceeded the combined total of OKEX, Binance, and Huobi, to claim the top spot.

An analysis of the fundamentals of FCoin and an investment relations diagram thereof are given as follows.

Investment relations diagram of FCoin

As is shown in the diagram, FCoin has received investments from Danhua Capital, Node Capital, Singer Capital, Shichuo Capital, 8 Decimal Capital, and Zipper Foundation.

Zooming in on the diagram would give a better clue of the entire picture:

• Reflexive investment

Zhang Jian is the founder of FCoin and a founding partner of Singer Capital; the latter has invested in FCoin. Moreover, Singer Capital also has investments in Yiben Caijing, which in turn has also invested in FCoin;
Put simply, the same group of people doubles up as FCoin’s investors and project stakeholders; and the investment made by Zhang Jian was unto none other than himself.

• Helping investors offer coins online

By June 22, FCoin has offered currencies online in a total of 13 programs, including 5 mainstream coins and 8 altcoins. An in-depth analysis of the altcoins is given as follows.

Coin offering at FCoin

An analysis of FCoin’s coin offering and capital relations diagrams reveals that nearly all coins offered at FCoin are in one way or another related to the exchange, and this practice could constitute an act of “nepotism” in coin offering, and also come under suspicion as tunneling.

In brief, a large number of identical investors have been spotted in such coin offerings as Zilliqa (ZIL), Zipper (ZIP), OmiseGo (OMG), ICON (ICX), Bytom (BTM), and Aeternity (AE), etc.

Specifically, Relations with Zipper (ZIP): Zhang Jian is both a technological advisor of Zipper China and a member of the Zipper Foundation, which is a project stakeholder in ZIP, and has direct investments in FCoin. Danhua Capital and Node Capital are both investors in ZIP; and Danhua Capital is also an investor of FCoin.

Relations with Zilliqa (ZIL): Danhua Capital, Node Capital, and 8 Decimal Capital are investors of ZIL, among which Danhua Capital and 8 Decimal Capital also have investments in FCoin.

Relations with Bytom (BTM): FCoin and BTM share the same investor — Shichuo Capital.

Relations with Aeternity (AE): FBG, whose founder Zhou Shuoji serves as an advisor to the AE project, has invested in Zipper and Zilliqa. Therefore, a certain sort of nepotism exists between AE and FCoin.

Cross-relations between ZIP, ICX, ZIL, and OMG: Zipper (ZIP), ICON (ICX), and OmiseGo (OMG) share a common investor, the Hashed Fund. Kenetic Capital is an investor in both, ICON (ICX) and Zilliqa (ZIL).

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