 a purely algorithmic stablecoin that doesn't rely on a centralized entity to keep some reserves. Based on the way you described it, I wouldn't invest in a coin like that. CZ, the CEO of Binance, has been among the harshest critics of Terra following this stablecoin's spectacular collapse. Binance is now supporting the revival of the Terra blockchain and its Luna token. We still have to protect the users. We have to support the revival plan, hoping that it makes the work. In this video, CZ explains why Binance is supporting the relaunch of Terra. He also shares his views on the future of algorithmic and fiat-back stablecoins. As always, don't forget to like the video and subscribe to our channel. If you haven't done it already, I'm Giovanni, your host, and this is a Cointelegraph interview. The Terra protocol collapsed a couple of weeks ago. You were pretty critical in the way the Terra team handled the crisis and also you were pretty critical of the Terra system. You pointed out the flaws that made this collapse possible. Can you explain me why Binance decided that, despite all that, was interested in participating in the revival of the Luna ecosystem? I think the project team definitely met some not-so-good decisions and their response was kind of slow, but regardless, we still have to protect the users. We still have a decent number of users who hold the Luna coin. We still need to ensure continuity of people's access to liquidity. When the project team do issue a new coin, we actually have to support it, just given the number of users involved. There is a lot of skepticism about this attempt to revitalize the ecosystem. Do you think that Luna has the chance to gain the trust of investors after what happened? On that one, I try not to predict what the community will do. I think there's a large number of people, some many are skeptical. I'm one of those guys, but there's also many that are wishing, hoping for the project to recover. I'm also hoping that too. I can't really predict, but we have to go by users. We do the best thing to protect, to give our users liquidity. Cutting off access doesn't help, so we have to support whatever the project team does. We have to support the revival plan, hoping that it may work. Can I ask you why are you skeptical? The same reasons for everybody. I think I voiced my concerns already. There were some design flaws at the beginning of the project, the way they handle the crisis, the responses were a little bit slow. I hope they learned from those lessons, but of course, I'm always skeptical to some extent as well. Besides the airdrop, Binance is also involved in migrating a lot of projects that were on the Terra blockchain into the Binance blockchain. That's also another way Binance is involved in reviving this ecosystem. What is the rationale behind that? Why do you think it was important for Binance to get involved with that? To be very frank, without Luna's incident, we always try to help people to build a Binance BNB chain. That's always there. Any developer that wants to build a BNB chain, if they're doing a good project, they need assistance, please talk to our team. In this case, in the case of Luna, Terra, there are quite a number of projects that are looking for new places. It's just a very natural thing to do. We want to help them if they're welcome to build a BNB chain. It's very simple. This accident actually brought about a lot of criticism and skepticism towards the stablecoin technology in general, in particular, algorithmic stablecoins. What do you think is the future for algorithmic stablecoins after this collapse? Do you think this technology has still a chance to survive? I think stablecoins should work in theory. It has risks. Nothing has zero risk. Even the currency, even euros that we use today have risks. Euros are only 50 years old or less. Everything we use has risks. I think with this incident, it just teaches us to view the risks more clearly. I think many people didn't understand what elbow stablecoins are. They just went for the higher yield, not understanding that the high yield comes with high risks. I think this teaches us that. This reminds us again of that. I do think that if properly managed, if well managed, I think algorithmic stablecoins in theory should work. Can you get a bit deeper into this? I know that you were explaining some characteristics that this algorithmic stablecoin should have in order to prevent situations like the one that we saw with Tara from happening. Ideally, you always want to be over-collateralized. It's just a matter of making sure that you're properly over-collateralized using the algorithm. I think there were some design flaws. The one key design flaw, which I mentioned in the blog post, is the fact that they think minting more lunas will create more value, and then that can be used to save, to restore the peg. That doesn't work. Minting new coins does not work. But let's say you feel a basket of 50% BTC, 50% Ethereum, 25% Ethereum, 25% BNB plus some other coins. If you manage the ratios correctly, in theory, it actually should work, but nothing is risk-free. All of those other assets use as collateral assets drop significantly more than the collateral percentage, and you can still have a deep-hacky situation. Nothing's 100% risk-free. Now you're mentioning collateral, so you're not talking about purely algorithmic stablecoins. You are talking more about crypto-collateralized stablecoins. What about just purely algorithmic stablecoins? It means stablecoins that work just because of this arbitrage opportunity, and they don't have anything backing them up on the background. Do you think that can still work? Based on the way you describe it, I wouldn't invest in a coin like that. If you write down your thoughts, just in those paragraphs, no one will invest in your coin. When you have a slightly more details, we can actually see the smart contracts, see the white paper, et cetera. There's a little bit more substance to it. I saw that you wrote a blog post where you described how feedback stablecoins should ideally inspire trust in investors. Can you maybe sum up what are these characteristics that, according to you, are the most important for a feedback stablecoin for being trusted? If a feedback coin is much simpler to understand, you just got to have that money in the bank, and then ideally it should be audited. In the case of BUSD, there's 96% in the bank, according to their report. It's very simple. Even that, you cannot say it's risk-free. I think BUSD has the highest cash-reserve ratio already of all the stablecoins in the industry. Even banks can go bankrupt. We've seen that happen many, many times in the past. Nothing's risk-free. BUSD's already, in terms of cash reserves, is the highest ratio. The rest of the 4%, I believe, is in treasury bonds and stuff like that, based on their report. Everybody needs to understand the risks involved in any coin, any financial instrument, anything, to be honest. When we saw the Terra Fiasco, we saw Tether, the USDT, de-pegging shortly from the value of the dollar. We saw a flight to safety towards Binance stablecoin. What did create this different reaction from investors that moved away from Tether and put their assets into Binance stablecoin? Sure. I think, again, there's many people involved, so everybody may have a different reason. But BUSD is one of the most transparent. They issue a report on how much cash reserves are there. It's fully audited. It's issued by NYDFS, New York Department of Financial Services, a regulated entity. That level of transparency, that level of reserves, I think, is probably one of the biggest factors. USDT, we don't really know how much is where. We don't know where the reserves are. If the lack of transparency probably increases risk or the perceived risk, USDT has less cash reserves as well. I think just high cash reserves, transparency for BUSD, many people went for that safety. You was in high demand, probably other users converting from other stablecoins into BUSD. Why do you think that Tether still remains the most used stablecoin all over the world? Again, I can only guess, Tether is one of the first ones. It's been around since 2014 or even earlier, and it's adopted by many exchanges around the world. BUSD is quite new. BUSD is only three years old. I think it was started in 2019. I think it has network effects. Most of the exchanges, the biggest liquidity trading pair is usually the native coin versus USDT. That has a network effect. More users that come in, they want to trade on that pair, and they use more of that. There's first mover advantages, and there's network effects, and there's also inheritance effects that still have to play. We came out from a very difficult situation in the crypto ecosystem. The market is also not in the best shape. I saw that you drew some fundamental lessons from the latest to market turmoil. Maybe do we want to share some of those lessons with us? Actually, one of the things that's happening in the industry, given this instance, we should very carefully review all the incentive to use crypto. So play to earn, read to earn, like high APY staking. We should really look at them in a fundamental way to measure more revenue, more income generated than just an incentive payout. I think those areas are very, very interesting. That's a good mechanism to attract new users, but you still have to have a sustainable model in the long run. I think the game file, play to earn, social file, all of those things, they're very interesting, but we need to learn from this instance and make stronger business models and be more skeptical about the incentives. You mean because if those incentives are above the actual income that the project bring in, then it turns into a Ponzi scheme, right? Yeah, basically. So basically, if you're paying out to get users always more than your income, if you do that forever, eventually you're going to run out of money. So that doesn't matter what else you do. At some point, you have to have your income overtake your expenses, otherwise you don't have a sustainable ecosystem. So yeah, it's as simple as that. So incentives should only be used as a boost track mechanism to attract users in to get to a growth trajectory, but you have to have income. So do you think that that's probably the biggest issue that is kind of affecting the crypto ecosystem right now? I think that problem does exist on a number of projects today, but it's very hard to tell, right? So Amazon wasn't profitable for like 10, 15 years, and then they eventually become profitable and they become very profitable. So but they were able to sustain that growth to that point. And then the Ponzi schemes, they use the new users' money to subsidize the previous users' money. Those are Ponzi schemes, they don't last. There is a middle ground, kind of a middle ground gray area where projects use incentives to attract users to come in, hoping that once they get enough users, they will somehow build a viable business model. And those guys, many of them will fail and they will look almost like Ponzi's. In this case, UST, LONA, it kind of fell into this case, where they have very aggressive incentives, but then their business model couldn't catch up. But it was clear based on the actions they took, they spent all three billion dollars trying to save the market, they didn't take the money and run it away. It was just like they didn't operate very well. So yeah, there's a lot of those things to learn. Interesting. Okay, thanks a lot, Sizi, that was very interesting to talk to you today. Thank you so much. Cheers.