Bybit injects 1 billion US dollars into DAO every year to build a DeFi kingdom or transfer assets?

Wu said author | Colin Wu

Editor of this issue | Colin Wu

On June 6, Bybit, the world's largest professional derivatives exchange, announced that BitDAO, a decentralized autonomous organization aimed at promoting the development of open finance, has completed a $230 million financing round led by Peter Thiel, Founders Fund, Pantera Capital and Dragonfly Capital.

Bybit has pledged to contribute 0.025% of its futures contract trading volume to the BitDAO treasury, which is expected to exceed $1 billion per year based on revenue from January to May this year.

Bybit's donations have already begun, with an announcement of about $19.3 million on July 26 and about $47.2 million on August 9. On the BitDAO website, actual donations occur every day, mainly in ETH, followed by USDC and USDT. Bybit's fee rate is 0.075%, but it generally gives rebates to users or order-leaders, so it can be said that Bybit has injected nearly half of its profits into this so-called "decentralized" organization.

On August 10, BitDAO finally launched the first step of the DeFi ecosystem. It announced that it would cooperate with Sushi MISO to release the platform token BIT, and auctioned 200 million of them in the Dutch auction method. This can be regarded as Bybit's platform token to a certain extent.

What is Bybit’s goal?

Bybit CEO explained somewhat mysteriously in an interview with Decrypt: "If we want to grow our business from billions to trillions, we cannot exist as a company, but as a 'social phenomenon'." He also admitted that (in the face of regulation) we really can't do anything, but this also shows the importance of decentralized trading. "

Paul Veradittakit, founding partner of Pantera Capital, wrote that DAO uses smart contracts on public blockchains to automatically execute key organizational rules. Today, some of the most popular crypto protocols in the crypto world (such as Maker, Uniswap, and Dash) have begun to use the DAO governance model.

BitDAO’s work includes: collaboration with crypto projects: BitDAO plans to launch token swaps with existing and emerging DeFi projects; building various DeFi products: BitDAO also intends to launch various DeFi products on its own, including a crypto futures exchange (aimed at becoming a decentralized version of Bybit), a community portal (where token swaps can be proposed with promising early projects), and programmatic implementations for governance and treasury management.

BitDAO’s governance is based on its native token, BIT, and is completely decentralized. The total supply of BIT tokens is fixed at 10 billion tokens, with the following distribution ratios:

• 30% will be held in a treasury to facilitate ecosystem swaps

• 5% will be allocated through private sales

• 5% will be provided as a reward to the initial partners at the launch of the project

• 60% will be allocated to Bybit to build a research and development center to support BitDAO and support Bybit's growth (which in turn will help the BitDAO treasury grow). Of these, 15% of the token supply is immediately available for use, and the remaining 45% of the token supply will be locked for 1 year and gradually released within 2 years after the lock-up period ends.

It can be seen from this that more than 80% of BitDAO’s tokens will be controlled by Bybit, and the so-called “complete decentralization” is naturally impossible.

Beneath the fancy words, Bybit’s purpose is very simple. The first one is to build a “decentralized version of Bybit”, which will be similar to BSC’s decentralized exchange Pancake. As we all know, Pancake is Binance’s internal product.

Another mainstream speculation is that Bybit may avoid many future tax, financial, and legal disputes by releasing huge profits to a self-controlled, non-corporate entity DAO. If the local area imposes heavy taxes on derivatives exchanges, this form of donation can avoid taxes or evade supervision to a certain extent financially.

Can Bybit evade regulation?

Bybit was founded by a foreign exchange team in Shanghai in the early days. It relied on pixel-level imitation of BitMEX, coupled with high rebates, and was led by overseas KOLs, focusing on the overseas retail market. As BitMEX failed to cope with supervision, it was hit hard by the US regulatory authorities. Bybit also took advantage of the situation to rise. At present, the derivatives trading volume ranks among the top five, and the annual profit reaches billions of US dollars.

However, the huge profits of derivatives are not a long-term solution. Its "casino" nature targeting retail investors has been severely cracked down by regulatory authorities in various countries. So far, Japan, the United Kingdom, and Canada have issued warnings to Bybit. Although Binance has a high profile and bears more pressure, its advantages in the spot field allow it to still take the compliance route, while the compliance route of Bybit derivatives is almost impossible to achieve, so it tries to find another new path through comprehensive DeFi.

But the question is, can the transformation to so-called DeFi really evade regulation? Industry insiders are generally pessimistic about this. The regulation of DeFi in the United States and other countries is intensifying.

On August 6, the U.S. SEC issued charges against a DeFi project for the first time, accusing two Florida men and their Cayman Islands company of using smart contracts and so-called "decentralized finance" (DeFi) technology to sell more than $30 million in securities without registration, and misleading investors about the operation and profitability of their business DeFi currency market.

According to the official website of the U.S. SEC, Gregory Keough, Derek Acree and their company Blockchain Credit Partners issued and sold securities in an unregistered manner through the DeFi Money Market between February 2020 and February 2021. They were found to use smart contracts to sell two types of tokens: mTokens, which can be purchased with specified cryptocurrencies and pay 6.25% interest, and DMG governance tokens, which allegedly give holders certain voting rights, shares of excess profits, and the ability to profit from the resale of DMG governance tokens.

The words of Berkowitz, a commissioner of the U.S. Commodity Futures Trading Commission, were even more sharp: Not only do I think unlicensed DeFi derivatives markets are a 'bad idea', I even think they are illegal under the (Commodity Exchange Act).

Uniswap's delisting of some tokens caused huge controversy, which may mean the beginning of "DeFi regulation"

It is reported that Bybit is currently recruiting a large number of employees at home and abroad to enter DeFi. In the future, BitDAO will have more actions. The first step of issuing platform tokens has begun, and it is reasonable to make the next Pancake or BSC. However, rationally speaking, the DeFi and DEX of centralized exchanges "after makeup" do not seem to be outside the law. Moreover, Bybit's public transfer of huge amounts of funds also makes this BitDAO seem to be no different from centralized exchanges in the eyes of regulators.

Another problem is the contradiction between centralization and decentralization. Can the legal relationship between Bybit and its platform tokens be clarified? Will it attract the attention of regulators? Will the transfer of such a huge amount of funds for tax avoidance pose tax and legal risks? How can BitDAO prove that it is still a decentralized organization under Bybit's control? Even going back to the starting point of the problem, is the decentralization in disguise really decentralized? If it is not really decentralized, then what is the difference between it and a centralized exchange?

The latest draft of the Financial Action Task Force on Money Laundering points out that if a service provides virtual asset services, then even if the service can be run independently from the organization in the future, the organization is still a virtual asset service provider and needs to be regulated. This means that even if an organization only creates the code of the smart contract, it should be regulated as a virtual asset service provider. Specifically for Defi, KYC needs to be performed on every user participating in Defi transactions. Of course, this draft is also very controversial.

In any case, Bybit did not repeat its early conservative and imitative route this time, but chose a radical direction. Although it is currently just like an extracorporeal vault and the direction is still very vague, the launch of the platform coin has taken the first step.

Due to its experience in the foreign exchange industry, the Bybit team often responds to regulations in advance, and announcing its full withdrawal from China in 2020 is one example. Whether transferring assets or investing in DeFi at this time, it seems to be preparing for the coming "storm".