Bobby：Welcome to the CoinGecko Podcast. For today’s episode, we have the honour of welcoming Aaron Gong, Director of Binance Futures. Binance Futures is one of the largest exchanges for Bitcoin futures trading volume and open interest. At this point in time, data on CoinGecko shows that Binance Futures has over $3 billion in daily trading volume and over $300m in daily open interest. It is the 2nd largest derivative exchange for BTC perpetual futures by trading volume on CoinGecko. Aaron, also known as AG, leads the development and growth of Binance’s futures arm, which has attracted billions of dollars of daily volume on average since its launch in September 2019. Prior to joining Binance, Aaron worked at CME Group, launching new products in the APAC region including Bitcoin futures and achieving significant revenue growth from proprietary trading clients during his time there. He also previously worked at a New York-based hedge fund and a Dutch market making firm. Welcome to the show, Aaron.
AG：Hi, everyone. Thank you for having me, Bobby.
Bobby：For the first question, we would like to know a little bit about your personal story, where do you first hear about Bitcoin and how do you get involved in the cryptocurrency industry?
AG：Well, sure. I heard about Bitcoin either from the media or friends when it started to get public attention in the early 2010s. However, I had held a skeptical view at the beginning and became a pretty late adopter when CME launched Bitcoin futures. I was deeply involved in the launch of Bitcoin futures on CME. So I started to get a better understanding of the product and the crypto industry.
Meanwhile, one of my friends was one of the founding members at Binance. He made a strong influence on me and eventually inspired me to join the industry.
Bobby：So if you don't mind, can you share a little bit of your experience working at CME group and how was it like launching the Bitcoin futures there? Was it a big thing in CME, what was the feedback that you received from institutional clients when you were doing the Bitcoin futures back in CME?
AG：Sure. Before CME actually decided to introduce Bitcoin futures, it had been kept to a few top executives at the firm and it was also a surprise to many colleagues when it was announced internally.It was certainly big news both in the traditional and crypto industry back then, as it was the first time crypto products were launched by the largest regulated exchange in the world. The market quickly reacted and the Bitcoin price broke $20,000 shortly after. Actually we were on a pretty tight schedule to prepare this product and the launch. And one of the key challenges to onboard institutional clients was the product size because it was designed as five Bitcoin per contract. With a price of $20,000, multiplied by five, plus the requirement of paying 50% or more margin, it created some barriers even for institutional clients to adopt it at the beginning.
Bobby：Cool man. Yeah, I remember the time when CME launched (Bitcoin futures). I was really surprised that a large exchange like CME was actually looking to Bitcoin, but I'm very glad that the CME guys did what it did and we see CME and CBOE launching Bitcoin futures was a big move to get institutional investors invested into Bitcoin or at least be aware of it. And I think there will be more for CME, like we can start to safely say that Bitcoin is now definitely an asset class that is large enough for institutions to look into it. So tell us a bit of a story like, I mean, how do you get from being a CME (member) to joining Binance as the Director of Binance Futures? You mentioned very briefly earlier that one of your friends was working in Binance, maybe tell us a little bit of how the Binance team courted you to join as the Director of Binance Futures?
AG：Right. So as I mentioned previously I knew one of the founding members at Binance and he made a strong influence on me and was the main reason I eventually ended up joining, not only Binance, but also got me into the crypto industry. Back then, when the opportunity was presented to build a huge platform together, I immediately realized that it's a chance for us to shape the entire industry. I was super, super excited to be part of the Binance team.
Bobby：And I read somewhere that when you joined Binance, CZ passed you the Blitzscaling book written by Reid Hoffman on your first day of work and told you to read it. I believe the entire Binance team is practicing Blitzscaling with this rapid launch of many products. Can you maybe share a little bit about how is this Blitzscaling culture personifying Binance and some of the strategies that you guys are using on Binance Futures?
AG：Yeah, I actually read Blitzscaling twice. And Binance is certainly one of the successful examples of Blitzscaling as well. And for Binance Futures, it is more like a Blitzscaling project within an established firm. And to get it right, we had to make sure that we built the right product with market fit and had the right strategies. That's why we devoted a lot of resources to launch the BTC contract first, and it was the only pair for a fairly long time. However, the strong growth on the BTC contract gave us a strong confidence in terms of product and market fit validation and also our business strategy. So that's why now we are adding more pairs at a much faster pace and apply all our successful experience from BTC contract to each of the new pairs.
Bobby：So you mentioned that you ran only Bitcoin trading pair on Binance Futures for a very long time. I remember you guys launched in September 2019 , how long before you started launching your second pair, which I believe would be the Ethereum trading pair?
AG：Uh, it was around two and a half months.
Bobby：So it was, I guess in late November or so you started launching Ethereum. And now you guys have 13 pairs, I believe?
AG：Actually 15 pairs by today.
Bobby：Wow, congratulations! And I guess the plan for 2020 will be adding more pairs onto Binance Futures, I suppose?
Bobby：What would be the criteria for adding any new coins or trading pairs onto Binance Futures?
AG：Well, basically we're looking to add the top 20 or 30 pairs to start with. So basically, whichever is the most liquid 20 to 30 pairs, then we will consider them first.
Bobby：Okay. So basically liquidity on a spot market will be a prerequisite before it gets added onto Binance Futures.
Bobby：Interesting. So here at CoinGecko, we observe a huge growth in derivative offerings offered by crypto exchanges in 2019. We started tracking derivatives last year and added a total of 25 new derivative exchanges including Binance Futures last year. At this point of time, we track over 370 different derivative contracts offered by various exchanges. For me, 2019 was a year which was defined by the growth of the crypto derivative markets. Why do you think there was a huge growth in crypto derivatives in 2019 all of a sudden? This is not exactly a new thing considering that BitMEX has been around since 2014, so why 2019 was the year that we saw huge growth in crypto derivatives?
AG：Well personally I think, the rise of derivative exchanges in 2019 was due to the year-long bearish market the year before, in 2018. And because futures contract is one of the most efficient tools to capture investment opportunities in either bearish or bullish markets, it was driven by demands of the community to either hedge positions or better manage their risk.
It was not a sudden growth though. As futures trading is slightly more risky, it takes time to design and build a good product in order to better protect the users. And to take Binance for example, we launched in September 2019 but we had been planning on building the product much earlier.
Bobby：I mean building a derivative exchange is a lot harder than just building a spot exchange, like some of the different tools that need to be worked on would be the risk engine and the insurance fund, as it's a lot more risky to build the derivative exchange. I mean maybe you can tell us a little bit more about how Binance Future operates its risk engine and how does the insurance fund work on Binance Futures to protect its traders against socialized losses?:
AG：Oh, well sure. So basically we have a very solid risk engine and take other strict measures to protect our users. We adopt the smart liquidation mechanism on Binance Futures. And when the margin level hits the liquidation level, the system will liquidate one open position at a time and check the margin level in real time. If the system detects the margin level is higher than the liquidation level, the liquidation process will stop so users can keep the remaining positions and margin.
So speaking about the insurance fund, it‘s not in the interest of users to grow the fund size uncontrollably, like the case with many other exchanges, as the exchange will be tempted to monetize the insurance fund and treat it as an additional source of income instead of a protection mechanism for users. And in such cases, those exchanges will be incentivized to adopt aggressive liquidation practice, which are often too punitive on bankrupt traders. On Binance, we use the insurance fund for what it is intended in the event of sizable liquidations. Our insurance fund accepts risk and the liquidated positions. And it has taken significant losses to ensure that clients do not receive ADLs. On several occasions, our insurance fund has seen net outflow of 1% to 2%.
Bobby：I mean when we look at insurance fund, we always compare it against BitMEX, which has this huge, gigantic insurance fund. I think the last time it was reported, I can't remember what it is now, but I think BitMEX has over 30,000 Bitcoins or more than $300 million in the insurance fund. I mean you rightly pointed out that this created inward, a bad incentive for BitMEX to always let traders go bankrupt because it adds to the insurance fund. Do you have any thoughts about BitMEX insurance fund and compare it against Binance, for example? Why do you think BitMEX even needs such huge insurance money? What do you think BitMEX should do with that insurance fund? It's huge.
AG：Well actually before we started to create our product we did a lot of research on our competitors, especially on BitMEX. We know our users actually had a frustrating experience on their platform largely due to overload problems, system overloads and also the risk management system, protection layer as well. So that's why we made improvements based on what we think can improve, I mean to improve clients' user experience. For example on BitMEX, they use fill and kill order to overtake positions from liquidation for insurance fund. We use fill or kill (order), which means there are a lot more chances for us to take liquidated positions instead of passing it to ADLs. So we put a lot of effort into preventing that. And the results have spoken louder and clearer. You will see that it really protects the users from many volatile periods. That's why our insurance fund has seen the net outflow of 1 or 2% on a daily basis (in some events). And more importantly, I would say our insurance fund works for what it’s intended, that is to take risk and take (liquidated) positions.
Bobby：Just out of curiosity, how big is your insurance fund these days?
AG：For us, right now we've got around 16 million USDT in insurance fund, as far as I remember.
Bobby：Alright, cool. How does margin work on Binance Futures? Is the margin for each trade isolated or is it cross margin on the entire portfolio including Binance Spot, or is it just against portfolio balances in Binance Futures?
AG：At this moment we offer both isolated and cross margin modes for Binance Futures, but not portfolio margining across the futures and spot. The cross collateral feature does provide users the option to use assets in their spot account as the collateral to borrow USDT at zero interest and trade on Binance Futures, and this feature was actually launched yesterday.
Bobby：Oh wow. That's very new. How does the fees trading on Binance Futures compare that, and we compare that against the fees on Binance Spot market?
AG：Well, so the fees are pretty competitive due to leveraged nature. So in general, our volume requirements for each VIP tier is slightly higher. But the fees are very competitive, especially for our taker fees. But conceptually speaking, we are offering fees as the one suit for products instead of two separate exchanges. Because for our spot market, our taker fees are very competitive and it applies to our futures exchange as well. So we also offer very competitive taker fees (on Binance Futures).
Bobby：And what would be the maker and taker fees on Binance Futures at this point of time.
AG：So for example, for VIP 9, the maker fee is 0 and the taker fee is 1.5 bps, with (additional) discount (if paid) with BNB.
Bobby：And if I'm not a VIP 9, I'm just an ordinary small shrimp trader on Binance Futures.
AG：You will not be a small shrimp, I would say lol. Any clients can grow from, any big clients grow from zero, right? So that's why we pay a lot of attention and care to our VIP 0 clients. And this is definitely a very important user base. For VIP 0, we charge 2 bps for maker and 4 bps for taker.
Bobby：All right. That's very interesting. That's very fair. So I'm just curious, I'm going to ask this question for the benefit of some listeners. So if I'm a retail trader, why should I trade the perpetual futures on Binance Futures versus trading on the spot market on Binance Spot? If someone's interested in leverage, one can always use margin on Binance Spot to trade it. I guess on Binance Futures you get to trade up to 125X leverage. Well, do you have some thoughts on why someone should trade on Binance Futures instead of Binance Spot?
AG：Yeah, sure. So basically, our perpetual futures has a pretty similar design to spot markets and so that's why it's easier for spot users to transfer from spot trading to perpetual futures and it has a higher leverage than margin. Compared to margin, it also has the benefits of no borrowing costs. So that's the key difference between futures and margin. And there are three key reasons why Binance Futures are more competitive and why the users should trade on Binance Futures. The first one is we offer the most stable and fastest matching engine. Secondly, we do have a very liquid spot market. And the third is, we are offering multiple choices of trading pairs. To date, we have 15 pairs, which probably has surpassed many other exchanges at this moment.
Bobby：So Binance recently shook up the crypto derivative markets by offering 125X leverage in trading. Do you think offering a very high leverage is sort of irresponsible from platform operators in encouraging bad behavior among traders as it will be very easy, especially among retail traders to get rekt.
AG： Well, we started with 20X if you still remember. Then our users started to complain, they said why you didn't offer higher leverage. That's why we introduced 125X leverage. We always listen closely to the voice of our community. And I also suggest users trade futures with caution and that conservative users can select as low as 1x leverage to trade futures. So having said that, we have established various mechanisms to protect the users and ensure the users do not suffer significant losses when trading highly leveraged products. It includes the position limit for 125X leverage and the smart liquidation model.
Bobby：Do you see Binance Futures increasing these leverages in the future, like from 125X and following the FX model offering 300, 400X leverage, for example?
AG： Who knows. As far as I know, the users are pretty happy with the leverage.If they are not satisfied (later), we would probably consider that as well.
Bobby：Who are the main users trading on Binance Futures? Are they mostly institutional, large scale traders or small time retail traders on Binance Futures?
AG：Well, honestly it's the mix of both. So from the very beginning, we have been striving to target both the retail and institutional clients. It was reflective from the design of our products as well. So we offered 125X and the referral program to attract retail users. And we also offer the cross collateral and market making program to attract institutional clients. So we have fairly good balance in terms of the presence of both retail and institutional clients.
Bobby：And I notice on Binance Futures, they are only perpetual swaps currently listed there. Do you have any plans to offer fixed timeline futures, for example, monthly or quarterly futures as well?
AG： Yeah, certainly. Actually, they are in our pipeline.
Bobby：Alright. And if you look at the traditional space, CME and Bakkt, I would say that this is probably the space where the traditional exchanges have been, I would say faster in moving in the derivative space compared to the crypto exchanges. So we look at CME and Bakkt, they have crypto futures and now they started offering Bitcoin options. If Binance plans to start offering options as well, do you have any plans? Will it be under your team or will it be a separate team?
AG： Yes, we’ve been working on options product and aim to launch by the end of this quarter.
Bobby：Oh, it's very interesting that you guys are planning to launch the options product by the end of this quarter. I'm actually very interested. I'm a big fan of options. I actually do trade some options and I think it's very interesting because it provides a very good hedging too, especially when it's USD settled. So let's see what you guys come up with. I'm looking forward to it.
AG：Oh, that's great. I hope you can be one of our early users.
Bobby： Yeah, I've been trading on Deribit and lately on FTX, on all these options platforms. I think it's very different between DeriBit and FTX. It is settled in Bitcoin on Deribbit and FTX is USD, which is pretty interesting. So I'm really looking forward to seeing what you guys are launching. Personally, my preference is USD settled Bitcoin option. So, I'm really looking forward to seeing what you guys are launching. I think Binance Bitcoin options would be a big thing. Let’s see how things will progress.
AG：I'm also pretty excited about that.
Bobby：Yeah. I mean if you look at the Bitcoin derivative space like, in a traditional market, the derivative market is significantly larger than the spot market. But if you look at crypto, the spot market is significantly larger than the derivative market. And I think that there'll be huge growth in the derivative space. So if you were to compare like volumes or growth between Binance Spot and Binance Futures, like what was it like in the past half a year since you guys launched?
AG：Yeah, so I think compared to the traditional derivative market, the entire derivative market is already around 10X of the total global GDP, or even 50 to 100 times of the spot market depending on the asset class. And looking at the crypto industry right now, the derivative market is slightly higher than spot. Probably, looking into the number, it's around 1.5 times. So I believe there's a lot of room for the entire derivative market to grow and eventually it will be similar to the traditional market with 50X or even 100X of the spot market.
Bobby：Yeah, I believe so. I think it's just a matter of time before derivatives start growing a lot bigger and it starts driving the price of the spot market and all.
Bobby：If you do extrapolate the next few years, like where do you see the cryptocurrency derivative market going?
AG：Well I certainly think the total market size will be a lot larger. It certainly will grow at least 10X, eventually 50X and 100X of the spot market.
Bobby：And do you see other sorts of innovations coming in the derivative space? I mean you guys have perpetual swaps and then you have fixed-term monthly futures coming onboard and then you have like futures and spot for multiple tokens, and then you guys have options. What's next after all these things? What sort of products do you see coming out in the crypto derivative space?
AG：Well, I would say, firstly whatever has been traded in the traditional market will be replicated in crypto market as well. And we will occupy that space and we'll see that happening in a very short time. Secondly, we do see the innovations as well because crypto is a very unique asset class. For Binance Futures, we pay a lot of attention to innovation. That's why we rolled out the 125X leverage and also cross collateral. And we are probably the only major exchange offering these two features. And we will come up with more innovative features down the road. And we will introduce more innovative products and features to onboard the community and bring more excitement to the community.
Bobby： I mean recently Binance made an investment into FTX. I recently have ran a webinar with Sam, CEO of FTX. And we had a good chat about the options product traded there and we talked a little bit about their MOVE contracts and their leverage tokens. If you look at the MOVE contract and leveraged tokens, what are your thoughts about it? Do you think it's a little bit too sophisticated and complicated for the current market, is it just traded by sophisticated traders in this market or do you think the market at this current state is already ready for such trading products?
AG：Well yeah, we also invested in FTX lately. So, they are good partners. I really admire FTX by the speed of launching new products and also they did pretty well in terms of innovations on new products. So in terms of the leverage tokens, personally I paid attention to this product and they are listed on Binance as well. But it's always decided by the community. (So for new products), if some community members love this product to some extent, we’ll see, probably cannot see it in the earlier days. It doesn't matter as long as we keep innovating and launching the right products. We will see it when the new products are welcomed.
Bobby：Yeah. I think the guys, Sam and the team at FTX, they launched so many different interesting products and they are doing it so quickly and I just don't know if people in the space, like the retail traders can catch up with them. But I know definitely the sophisticated traders are there and I think all these tokens that they have, it's very interesting that they are starting to get traded on different platforms, like Binance. So I definitely think there's a lot of potential there to start growing all sorts of interesting derivative products from there as well from Binance later on I would say.
Right. So Binance made an acquisition of this small derivative platform called JEX last year. Not so sure if you're qualified to speak about the post acquisition plans, maybe it's slightly different team, but how does Binance JEX fit into the overall Binance ecosystem? I've been observing JEX for some time since its acquisition and to me it seems like they are dying a slow death. At this point in time, their 24 hour daily trading volume is about 2.5 million US dollars. Compared that with Binance Futures, which is doing about 3 billion US dollars, which is significantly, it's just adding three extra zeros at the back. I also heard rumors, not so sure how true it is, that there is some sort of internal competition between the JEX team and the Binance Futures team to compete and win the derivative market. Maybe you can share some thoughts on the Binance JEX and what was the plan for the JEX team?
AG： Okay, sure. JEX is part of Binance ecosystem and they add the differentiations by their options offering. It's pretty normal to acquire and invest in other exchanges in the traditional exchange industry. For example, CME acquired COMEX and the NYMEX. So it also makes sense for us to acquire and invest in other crypto exchanges as well. As I just mentioned besides JEX, we also invested in FTX lately to provide the users with more investment opportunities.
Bobby：So what was the plan for Binance Futures in 2020? How do you plan to catch up against the established players like BitMEX? I mean the derivative market is very competitive. One of the things I observed is that you guys have definitely come a long way like, BitMEX is by far the market leader, and throughout the past few months, you have been slowly catching up and closing the gap between BitMEX. What's the plan for 2020 and beyond?
AG： Oh, well. So we have had very strong growth since we launched the product last September and we are now at around 80% of the current number one derivative exchange, narrowing down the gap very quickly.
There are three areas we are focusing on in 2020. Firstly is to enhance the UI experience. Compared to other exchanges, there are few features that we are still lacking. And we are working to build and optimize the product. And the second is more innovation. We’ve talked about innovations today. We are the first one among major exchanges to offer 125X and also cross collateral. And we will keep innovating to bring in more exciting functionalities to the industry. And thirdly, to regionalize our service. We just hosted a CIS trading competition for Europe and it was very well participated by the local users and the results were amazing. We will replicate this model to a wider range of countries and to introduce more regionalized campaigns and services.
Bobby：Yeah, I heard from your team that you guys had a trading competition. Was it the same competition that you are talking about that is specifically for Europe or was it the global competition? Maybe you can tell us a little bit about some of the competition that you guys had.
AG：So we had one in the beginning of this new year and that was the global one. Then we launched a more regionalized one, one or two weeks ago. So it was more for the European region. So going forward,we'll probably just narrow down the trading competition region and then provide more specific target competitions. It has better engagements with the local users and better coverage. That's the way we're going to run the trading competitions onwards.
Bobby：Do you have any questions that you think I should ask you that I've not already asked you yet by now?
AG：Well yeah. It's been a great pleasure speaking to you today. I think I'm glad we had this chance to talk about derivative business and personally I'm a big fan of CoinGecko. Yeah, so I think it's all good.
Bobby：Cool. I mean lastly before we close off, like if someone's interested in Binance Futures, where can they find more information and follow Binance Futures?
AG： Sure. So you can go to binance.com/futures or download the Binance app on App store or Google play to feel the vibes of our product. In the meanwhile you can either follow Binance Twitter or join our Telegram group to stay tuned.
Click here to listen to the podcast.