This post was last updated on July 29th, 2019 at 08:58 pm

Subscribe: iTunes | Stitcher | Google Play | Overcast

[ez-toc]

Description

In this episode, I’m joined by Ivan Poon, co-founder and CEO of the Switcheo Exchange. Switcheo is the world’s first consumer-grade & multi-chain decentralized cryptocurrency exchange allowing users to trade across different blockchains.

We discuss Switcheo’s origin story, how to market a crypto exchange, and the future of decentralized exchanges.

This conversation is broken up into 7 chapters:

Chapter 1: What Switcheo is and how it’s positioned in the market

Chapter 2: Which parts of the Switcheo exchange are on-chain versus off-chain

Chapter 3: Switcheo’s core user demographics

Chapter 4: What it actually takes to grow an exchange

Chapter 5: The regulatory environment for exchanges

Chapter 6: Switcheo’s business operations

Chapter 7: The future of decentralized exchanges

Topics Discussed In This Episode

How Switcheo facilitates on-chain, Atomic swaps

Hash time-locked contracts (HTLCs)

Proxy token exchanges

The pros and cons of the EOS, NEO, and Ethereum blockchains

The blockchains that Switcheo plans on adding

Which components (custody, order books, matching engines, etc.) are on-chain vs. off-chain

The two parts of trade execution

How OTC Desks can use Switcheo

What types of users are attracted to the Switcheo platform

Institutional Switcheo users

What Ivan has learned about exchange growth

The strategy around the SWTH (i.e. the Switcheo token)

How to incentivize market makers

Switcheo’s affiliate program

Why Switcheo is looking at supporting BTC

Switcheo’s position on regulation

How Switcheo’s corporate entity is set up

The future of decentralized exchanges

Links Relevant To This Episode

Quotes

“I think the key thing is that we are also very friendly for beginners and new users of our dex. For decentralized exchanges, especially.”

“I think what Switcheo is doing is to be the first decentralization exchange to overcome all of the hurdles, be it UI, be it the feature set, the UX, and really become the iPhone of exchanges. We believe it’s possible.”

Transcript

Clay: Welcome to Flippening, the first and original podcast for full time, professional, and institutional crypto investors. I’m your host, Clay Collins. Each week, we discuss the cryptocurrency economy, new investment strategies for maximizing returns, and stories from the frontlines of financial disruption. Go to flippening.com to join our newsletter for cryptocurrency investors and find out just why this podcast is called Flippening.

Clay Collins is the CEO of Nomics. All opinions expressed by Clay and podcast guests are solely their own opinion and [00:00:30] do not reflect the opinion of Nomics or any other company. This podcast is for informational and entertainment purposes only and should not be relied upon as the basis for investment decisions.

Today, I’m joined by Ivan Poon, co-founder and CEO of the Switcheo Network. Switcheo is the world’s first consumer-grade and multi-chain decentralized cryptocurrency exchange allowing users to trade across different blockchains. [00:01:00]

I should note that Switcheo recently completed a “deep data integration” with nomics.com. With this integration, Switcheo receives an A+ exchange rating on Nomics and certifies them as among the most transparent exchanges in the crypto asset space.

In this episode, we discuss Switcheo’s origin story, how to market a crypto exchange, and the future of decentralized exchanges.

This conversation is broken up into 7 chapters. In Chapter 1, we discuss what Switcheo is [00:01:30]and how it’s positioned in the market. In Chapter 2, we explore which parts of the Switcheo exchange are on-chain versus off-chain. In Chapter 3, we talk about Switcheo’s core user demographics. In Chapter 4, we look at what it actually takes to grow an exchange from scratch. In Chapter 5, we cover the regulatory environment for exchanges. In Chapter 6, we dive into Switcheo’s business operations. Finally, in Chapter 7, we close our conversation [00:02:00] by considering the future of decentralized exchanges.

We’ll get right to this episode in just a second, but before we get started, I’d like to pause for a moment to tell you that this episode is brought to you by the Nomics API and CSV Data Export Service.

If you need an Enterprise-Grade Crypto Market Data API For Your Fund, Smart Contract, or App, or if you need historical CSV dumps of trading data from top exchanges or even obscure ones then consider trying out the Nomics API or our [00:02:30] historical data export service. Our API enables programmatic access to clean, normalized, and gapless primary source trade data across a number of cryptocurrency exchanges. Instead of having to integrate with multiple exchange APIs of varying quality, you can get everything through one screaming fast fire hose. If you found that you or your developer have to spend too much time cleaning up and maintaining datasets, instead of identifying opportunities, or if you’re tired of interpolated data and want raw [00:03:00] primary source trades delivered simply and consistently with top-notch support and SLAs, then check us out at nomicsapi.com. Finally, if you’d like to order historical cryptocurrency market data as CSV exports from top exchanges, email us at sales@nomics.com.

OK, back to our regularly scheduled program. Here’s my conversation with Ivan Poon from Switcheo. Enjoy.

[00:03:30] Let’s step backwards and hear a little bit about the origin story of Switcheo and also your background prior to Switcheo. Did you feel like you had a unique perspective on the space? Was there something that you wanted to see exist that didn’t exist already? What’s the founding narrative around Switcheo? [00:04:00]

Ivan: So, me and my co-founders, we came into the scene around the same time as when Instagram started their initial ICOs in 2015. So, that’s when we started getting invested in technology. We participated in one of the first few ICOs. But, at that time, we realized, as a lot of observers realize, that basically, all the tokens are so-called [00:04:30] decentralized. You own the private keys to your funds and stuff like that, even if you are more mobile than your desktop products. At the end of the day, most of the tokens didn’t end up on those decentralized components. They all went into the centralizing changes, BitMonk, […] and recently, Binance, CoinBase, et cetera.

So, around a year plus ago, we also started investing in new, and that’s [00:05:00] when we realized that hey, Instagram came out with the decentralized exchange […] but many other of the new blockchains didn’t have that, and that included new. So we, as engineers, decided that we should really just do one, because this is the future, and that’s why we built Switcheo.

Switcheo, the name came about because we wanted current, switch, new. But then we realized that if we are going to this, we are not only going to do this on new, [00:05:30] that the thing is that, if any of this other blockchains are to survive the added costs, all of them is going to need a decentralized exchange. If not new, you cannot defeat the point of having all these assets on the blockchain. That’s why we just dropped the N in Switcheo today.

So, over the past year, I think if we’ve really tried to stick to our region and we’ve accomplished what we really wanted to with new material in the US, at the end of the day, of course, we intend to transit [00:06:00] to our side chain model so that we can do our cross-chain training a lot more in a more traditional way, basically.

Clay: That’s interesting that Switcheo originally Switch Neo, dropped the N now you’re Switcheo. So, it’s probably a good thing that you did get rid of the N because now you are a multi-chain and you’re not tied to Neo. That’s really how I came to hear about. Switcheo is really through the Neo ecosystem, but it sounds like you’ve expanded [00:06:30] from there.

Let’s transition to chapter one, which is really an overview of what Switcheo is and how your product is positioned in the market. We talked about you guys being one of the first multi-chain, decentralized exchanges. Are you in fact the very first multi-chain, decentralized exchange?

Ivan: I would consider us to be, if you don’t consider any of the proxy to connect exchanges. Yeah. If you are talking [00:07:00] about, say BarterDEX or Komodo, which is basically Atomix from Dexus, maybe it’s around the same time. But, the all one disc, they recently launched. But I think we would be the first ones that actually smart contracts on multiple chains and switch by atomic swaps. I think that’s really, it was first.

Clay: So you guys are facilitating on-chain, atomic swaps presently. Is that correct? Those are being executed [00:07:30] on Switcheo?

Ivan: Correct. So, because each function that we have, it’s basically isolated, right. The ability connections only within their own so-called domain or whatever they know about. Basically, all of the tokens that they know about. So, when you want to basically switch, say, EOS to Ethereum or, say, EOS to Neo, you need a different mechanism, and the way we do that is through basically atomic swaps, or HTLCs. [00:08:00]

Clay: Hey, this is Clay cutting in from the editor’s booth to shed some light on what HTLCs are. HTLC stands for “hash time-locked contracts.” HTLCs are a type of smart contract often used in Atomic Swaps, which allows users to trade across two different blockchains, for example to trade between the Ethereum blockchain and Neo, without going through a trusted third-party.

Ok, back to the show.

Ivan: So, generally, the Dexus is on one or the other. If you [00:08:30] are coming from Dexus is basically slow. You need to understand a lot of things to use it. Or, if you are a smart contracts Dexus, you are basically Neo one exchange and you are isolated. Which, to me, doesn’t extends for an exchange. An exchange means you want to exchange tokens within a single blockchain. And that’s why it’s always been our goal, to basically be able to connect all of the blockchains and exchange them [00:09:00] without compromising on the decentralized or the non-custodial nature.

Clay: You mentioned proxy token exchanges. What are proxy token exchanges?

Ivan: So, that they are alone. Exchanges on various columns, they are decentralized. Part of them are only decentralized in the governance way, or maybe even the transaction or the machine aspect. What this means is that they run a blockchain that basically gets a bunch of people who are using, and the consensus mechanism [00:09:30] could be who first did or even who for authority. It doesn’t really matter.

Why it doesn’t matter is because of this note. All they do is do a set and a set trade transactions in each camp. The custody of the tokens, there’s no real way to transfer that into this other side chain or blockchain. So, basically, all Dexus is based on big shares or graphings, uses sort of the proxy token model. The ways Dexus also uses this [00:10:00] other model. All it actually does is move the custody of the funds from the exchange into the gateway that converts the tokens. So, in a true decentralized exchange, or a true non-custodial exchange like, Switcheo or Itigota, even if the exchange goes away, you can always still withdraw your tokens.

By the way, in a system that uses proxy tokens, [00:10:30] you are still relying on the fact that, once you are done the exchange, the gateway will honor the proxy tokens, the tokens that you’re trading, and then accommodate back into the mainstream tokens. So, you’re just moving the trust from the exchange and the poker to the gateway.

I don’t see it truly being then as non-custodian. I think, for exchange, that’s actually the most important thing. I would think that’s why people prefer decentralization just over [00:11:00] centralization because if they ever have their preferences, plus they’re afraid of the risk involved of basically leaving funds on the exchanges.

Clay: So, when you think of Switcheo, architecturally, is it three exchanges being united by one UI? Or is it really architecturally one exchange from your perspective?

Ivan: I think there are many components. So, some are current in the sense that there are three exchanges. [00:11:30] But I wouldn’t call them exchanges, I would call them more like vaults. So the vaults will still remain on the individual blockchains so that the custody of the funds or the bitcoins are still controlled by the private use of the traders or the users.

The other matching component is off-chain. Here, again, I’m generalizing a little because, for the EOS blockchain, actually, the auto-matching is on-chain, and the reason we can do that is because EOS has a really fast up time. Whereas for Neo and Ethereum, you need [00:12:00] at least fifteen seconds. Anything above a one second block time, if it’s too slow to execute trades.

So, the trades are executed off-chain on our basically auto-matching engine or our situated API, correct. Then, the whole thing, of course, is written behind our hopefully very sexy UI basically.

Clay: Your UI is really great. As some context for folks who might not have understood that question, I’m referring to the Neo blockchain, the Ethereum blockchain, and the Eos blockchain, [00:12:30] and it does strike me that the best way to execute what you guys have executed, is not to try and treat all of these blockchains as the same, but to take each blockchain on their own terms and implement your exchange in a way that’s sort of best adapted to those blockchains, which is exactly what you did.

It was really interesting to hear you say that, I believe you said the order book and [00:13:00] the matching engine for Eos is on chain because they can handle that throughput. So, in that instance, you did take the opportunity to do it on chain, but with the others you didn’t. So you are very much adapting your implementation to the strengths and weaknesses and perhaps peculiarities and idiosyncrasies of these various blockchains.

Ivan: Definitely. If you are engineers, you get to explore basically almost all of the blockchains, and [00:13:30] each one, they really have their own unique strengths and weaknesses. They have their cultures, so they have nice aspects about them. But each of them, they’re quite different, and we really need to and really try to design the underlying layer based on that.

For us, it would be nice if all of the blockchains are identical, but that’s not how it actually works. So, we spend quite a lot of engineering time understanding the blockchains, actually. To really get the best result that we want.

Clay: I once listened [00:14:00] to an interview with one of the product leaders at Evernote, and they were saying that they have an iOS team, they have an Android team, they have, you know, sort of a web-based team. And they don’t require consistency across the UIs of these different platforms because each of them have best practices for implementing UI and that they’d be constraining these teams in a way that makes for a worse product if they strive [00:14:30] for and force consistency across the board. Do you guys have separate teams for Neo, Eos, and Ethereum? Or do engineers work across the various blockchains as the need arises?

Ivan: Kind of. So, we have specialties in certain blockchains, but at the end of the day, we are quite a smart team. So, basically every engineer will know the differences between each of the blockchains. Neo uses UTXOs, Ethereum uses accounts. [00:15:00] EOS, it’s even more complicated, where you have CPO, RAM, and SHR. So, it’s really a yes and no kind of thing.

Clay: Yeah, and I’m sure when it comes to the smart contracts that execute these things are probably pretty critical, too. You probably need specialists in those areas. But when it comes to a lot of the other functions, it’s fine to have generalists or full stack or multi-stack engineers.

Ivan: Yup.

Clay: Are there any pros and cons of the various blockchains that [00:15:30] you think are notable in addition to your comment about being able to have the order books on EOS? Are there any other differences like that, where you found a given blockchain is particularly strong or weak when it comes to decentralized exchanges? Do you see any additional blockchains being added in the future? For example, maybe Tezos, or I don’t even know if Binance is going to allow other exchanges to facilitate [00:16:00] trades on Binance chain.

Ivan: That’s an excellent question. Basically, from my engineering or product perspective, Ethereum is definitely the leader in the sense that there’s a lot of resources you can use. There’s a lot of best practices they can use. It’s basically easy to find examples to know what to do and what not to do. However, because it’s the first and also the most decentralized […], it’s actually really expensive [00:16:30] if you want to do everything on chain. That’s something I’m looking at and working on, especially recently, when the Lithium blockchain is working at almost full capacity. It actually can cause a significant amount of network fees.

There are many ways to scale or to improve that. There are many various teams getting involved in Lithium trying to solve that as well. But it is a concern and a shock to meet them. Actually, that is one of the next things that we are going [00:17:00] to work on, even before we do our finance action scaling solution; that’s going to take a couple more months.

On the other hand, the most, let’s call centralized blockchains like EOS and Neo are pretty nice in the sense that it’s cheaper at a cost of the users having to trust that the blockchains actually will run. They will succeed and that basically there won’t be any [00:17:30] Byzantine behavior.

But they do have advantages besides cost as well. For example, in Neo, you can very easily pay the network fee for the user. Whereas, in Ethereum, it’s a lot harder. So what I mean is that, when you transfer a token from A to B, you can’t have, say B or even C took back to pay for the transfer, because the interior blockchain has given away that. It assumes that the message sender has to pay for it. And that’s one [00:18:00] of the things that’s hard to work around. It actually complicates a lot of our state channels or off-chain mechanisms by a lot. The way we do auto-matching off-chain and set them on-chain, it’s like a state channel architecture.

That’s one of the things that Neo and maybe even EOS is good at. Yeah. The thing on EOS, it’s nice in the sense that it’s one in the EOS and therefor it took a lot of good things, a lot of learning from [00:18:30] Ethereum and Neo. For example, it has a very robust permission structure. It allows different people to pay for different things, even in a single transaction.

One thing we realized at the end of the day, is that it may have been a bit too complicated for basically general users. So, for example, just to create an EOS account, you actually take EOS, and then you need to buy it off exchange or something to just create a wallet, which is a bit complicated for users.

There’s a lot of little mechanisms, [00:19:00] CPU, RAM, which is blockchain with us, which is confusing for users, and that’s why one feature is that we abstract a lot of it away, regardless if you use our Switcheo account feature or you use your wallet. That’s because we engineer the smart container, that we can pay for the fees and then we basically take whatever you’re spending from the original edit to the trading fees are transparently.

So, that’s good and bad. It’s good in the sense that [00:19:30] the apps are able to pay for the users and abstract context. But, if you just present it to the user without any of these abstractions, it’s actually quite challenging.

Clay: And what about additional blockchains that you are considering adding? I don’t even know yet. Can you facilitate trades with Binance coin or Binance chain? Have you considered Tezos? [00:20:00] I’m not asking for specific time frames, but what’s looking interesting in terms of additional blockchains to add?

Ivan: We have been looking Ontology. That’s one of the things we’ve been looking at. The reason for that is because of the similarities to Neo. They do have quite a few tokens, business-related to housekeeping with keeping the tokens, which we feel might have a market for. The bit of Tendermint/Cosmos, are built in a way that’s very specialized. That, basically, it’s a [00:20:30] smart contract. You can’t even do it in atomic swap type thing, which I feel is a huge mistake. Maybe they are later on, but until then, it’s really hard to basically extend or build upon it, because it’s a physically a closed-off chain. It’s almost completely centralized, basically. I think they expand on it. It’s not really the direction we are hitting towards.

Clay: What about [00:21:00] Stellar? Have you looked at Stellar and the possibility of facilitating trades on the Stellar network?

Ivan: Stellar is interesting and it’s definitely a possibility. I think the only issue for Stellar, it’s very customized for only trading. It’s a bit more open in the sense that anybody can be a so-called relay. But then, most of the tokens on stellar, I believe, are also proxy tokens. [00:21:30] There were some things we didn’t really like. So, Stellar, with it, it’s a set exchange where you basically have anybody, they can create a token, and then it’s backed by whatever, PVC, or even other assets.

However, that kind of boost to trust others to the gateway, which—in our opinion—maybe even worse, because now you don’t even know whose the gateway you are trusting, will basically send you back to mainstream tokens once you are done trading. It’s something [00:22:00] that we have been looking at as well.

Clay: Let’s move on to chapter two where we explore each aspect of your exchange and discuss whether or not that component is on-chain or off-chain. Let’s start off with custody. Is that on-chain or off-chain?

Ivan: Yeah. We have been talking about this. It’s completely on-chain, all of the three options so far, yeah.

Clay: Next, order books and matching engines. Are those on-chain or off-chain? I know you mentioned that for EOS, [00:22:30] it’s on-chain. I take it for Ethereum and Neo, it’s off-chain.

Ivan: Yes. Interestingly, at first, we built the Neo version on-chain as well. But we upgraded the contract and we moved it off-chain, because we really didn’t like the waiting aspect. We felt that if we wanted to compete with the centralization changes, we need to at least match the trading experience where, once you create and you confirm, and then you have the result. But mostly we get it. [00:23:00]

Clay: Obviously, settlement happens on-chain, but what about trade execution? Is that on-chain or off-chain?

Ivan: There’s two parts to this. The matching is done off-chain, but all of the trade executions, we keep on-chain for our blockchain options. It guarantees that every transaction made, every state transition, it’s basically signed off by the users and it’s validated by the smart contracts.

Clay: I see you offered [00:23:30] two order types, limit orders and market orders. Does the fact that trade, the matching engine is off-chain? Does that mean that you could potentially make available as many order types as you’d like? Is that correct?

Ivan: Because the trade settlements are still done on-chain, some of the odd types are more tricky to do. For example, if one of my trailings stop. A trailing stop requires specifically something where [00:24:00] your order only executes when the price reverses or increases by a certain ratio or by a certain amount. It’s additional proving, to prove that this trade can be executed, and this will all have to be on-chain.

But we do have a long-term solution for this. This is really true. Something that we are developing, which is a side chain which generates zero-knowledge proofs. [00:24:30] Basically, that would be, say end transactions that’s batched up, and then they would be put on-chain as a secret connection. So, it’s all supposed to scale up like this, and then scale with the issue in the long-term. It also solves the issue where complex order types are hard to basically prove or they are too long to compute up on chain.

Clay: Would you need three side chains, one for each of the block chains? Or could you do that with one [00:25:00] side chain?

Ivan: No. We are in the alpha-beta stage. At this point, we believe we can do it with a single side chain, and that actually allows a full other book, trading across chains. There’s a few tiny part aspects, but I won’t really go into it.

Right now, the main research is into how we can make sure that deposits on, say chain A, it can be trusted by say, chain B. Other than that, [00:25:30] a single side chain will be able to solve all these issues.

Clay: That’s incredible. I was convinced that I was going to get flack from my listeners for even asking that question. Just the second it left my mouth, I was like, that’s stupid. You can’t have one side chain that works across these three block chains. But, it sounds like that is possible.

Let’s see, identity. Is that on-chain, or off-chain, or sort of a non-existent, first class citizen within the system? [00:26:00]

Ivan: The only identity we talk most of, basically, is address, or its public key. We’re talking about like real life identity. We don’t do any KYC at the moment. But, if we need to, that would definitely be a decentralized solution as well, meaning that we will use DKYCs by then.

Clay: On your website, it looks like there’s an OTC option. How does OTC work at Switcheo? Is that essentially [00:26:30] a place for someone to post an order and someone to take the other side of that, or is someone calling up a desk with you guys and you guys are taking one side of the trade? How does that work?

Ivan: It’s both. We have the old TC platform that basically uses the same smart contract. This can be used as a big trust with the band, or I mean, a band that you definitely can trust, because it’s the same contract that you use for trading. From there, you can [00:27:00] basically swap the […] if you are a counterparty, without basically finding a human in the band. So, that’s the primary purpose of our user platform, to provide users to do this kind of, all of these swaps, in a very safe manner.

Clay: Hey! I wanted to pause for a second to let you know that this episode of the Flippening podcast is brought to you by the NomicsAPI and CSV Data Export Service. As a sponsor and producer of this podcast, I wanted to give you an announcement that I’m doing a webinar every week day, [00:27:30] on crypto data and how it works. You should join me. The webinar is called Crypto Market Data 101: Fake Volume, Exchange Spam, and How The Seedy Market Data Underworld Actually Works.

On the webinar we discuss (1) how exchanges use exchange volume spamming and ticker stuffing to spam CoinMarketCap and other aggregators, (2) what everyone is getting wrong about “transparency” and fake volume, (3) why most price aggregators are displaying bad data, (4) the three types of pricing data [00:28:00] and why everyone is using the wrong one, and finally the two transitions you must make in order to move from inaccurate crypto data to good crypto data, and much, much more.

To join me on a webinar, go to nomicswebinar.com. Okay, back to the show.

Ivan: The other part of it, the OTC desk, it’s a separate thing, where we basically help match users to each other because [00:28:30] basically of the exchange that we basically have a lot of connections, a lot of contacts with both buyers and sellers. So, we basically just make them up and we just get them to use the OTC platform to conduct their trades.

Clay: Do you charge an additional fee for that, or is that covered by your standard trading fees?

Ivan: It’s covered by the standard trading fees. We don’t have additional account or broker fee or whatever.

Clay: And so, in all of those trades, [00:29:00] you aren’t party to the trade, right? You’re just facilitating, match making between counter-parties?

Ivan: Right.

Clay: Let’s transition to chapter 3, which is about your core demographic. What kind of users are attracted to your platform? Are you able to reveal the percentage of users that place market orders versus limit orders? I’m super curious.

Ivan: We don’t have a lot of people placing market orders. In fact, as a trader, [00:29:30] I don’t really like that option. I think it’s a bit lazy and it also encourages debt and unsafe behavior, because there’s never any guarantee that you’ll actually get a price that you are comfortable with, because of what you’re seeing with other book at that point in time. You can always just use a living order with a larger margin, a lower or higher limit to simulate a market order. But, those are a different type of sale from sudden movements [00:30:00] in the order book.

I think most of our traders are experienced, and that’s why not many people use market orders. I think the key thing is that we are also very friendly for basically beginners and new users for our decks. For decentralized exchange, especially. There is definitely also a large proportion of traders that are not so familiar with trading, specifically. So we do have funny questions, like, “Why is my order not active?” When, basically, their order [00:30:30] is sitting in the order book. So they show us they are people, there are users that manage to use us even though they haven’t used exchanges before.

Clay: Do you have a sense of the percentage of your users that come from an institutional background? More and more, I’ve heard of institutions or at least hedge funds using decentralized exchanges. Do you have a healthy institutional user base? Or are they primarily alt-coin speculators? [00:31:00]

Ivan: I’m not too sure about institutional traders currently, but we do see traders with larger and larger capital coming in to exchange, to trade. So, that’s definitely a good sign. At the end of the day, we need this sort of curious to be able to provide us with the exchange with the liquidity that attracts more users. So, it’s basically a cyclical kind of thing.

Clay: Let’s kick off chapter 4 [00:31:30] which is around exchange marketing and growth hacking. I don’t think very much is spoken about what it actually takes to grow an exchange. I think some of us are familiar with affiliate programs and make or taker schemes, where the strategy of just listing as many coins as you possible can without having to necessarily worry about regulation or what is versus isn’t security, and on and on and on.

You’ve been doing this [00:32:00] for a bit now, and you’ve got one of the top and most innovative decentralized exchanges. What have you learned about exchange growth? What do you think are really the core drivers of exchange growth other than things like good UI and good user experience, and liquidity? Is there anything above and beyond that, that you believe is notable?

Ivan: So, at the end of the day, of course, liquidity, it’s king for traders. [00:32:30] But, to actually build the liquidity, besides being a […] ton of money to market makers. Firstly, you would be the first mover, and you absolve all of the liquidity, but only 1% can be the first mover.

So, what we have observed that actually works, that people actually build liquidity from its probably pending perception. So for example, let’s talk about Binance. [00:33:00] It wasn’t the biggest, but they managed to pull away the liquidity […] to become the top. Not really because they are the best exchange, but because they have a certain perception that tokens of this exchange is still basically good and they will increase in value as they travel.

Say, for our competitor, IDEX, I guess they have the perception of the exchange which just lists every single token. That’s why, say, if you need to get rid of certain tokens, [00:33:30] that’s a default choice for a lot of people. So, that’s something we are sort of working on, to have a vending that actually is attractive to traders or physically sticks on traders’ minds.

Exchange liquidity, or really, the user base of exchanges is it follows the power law, meaning that the top 10% has 90% of the volume thing. So, it is an uphill battle to basically go in volume in the user base, but I definitely [00:34:00] feel like it’s not impossible. Of course, the way to go about this, is to leveraging on the features and the unique selling points that you have to create that branding and that perception, rather than what a lot of basically popular exchanges are doing, which is to channel fake data to try to get the involvements on educators’ side, such as […]. It’s something that we obviously don’t do, and we think it’s really bad for the industry, because it [00:34:30] doesn’t set a good mean for cryptocurrency in general.

Clay: I remember for a while there and it might still be this way. There was a Brazilian exchange called Negocie Coins that was at the top of the exchange rankings on Coin Market Cap. You could call up everyone you know, they could call up everyone they know, and no one’s ever heard of Negocie Coins. I had a friend in Brazil, and he was like, “I live in Brazil, [00:35:00] and this is the worst crypto exchange in Brazil. No one uses this exchange.” So, there was just a lot of ticker stuffing. If you have a candle and it’s open, closed, high, low in volume, you just inflate that volume number. You just change one number, send it on through, and you’re at the top.

It’s great to just see what you guys are doing in terms of transparency and such. We’re huge fans of that. I think, from the branding perspective, that what I keep on hearing about [00:35:30] you guys is just, you’re innovative, customer support is solid, really great reputation, and also the fact that you are this multi-chain decks. I think you guys are sort of the first to have that brand and to come into the public consciousness as someone who’s doing that, which is really cool.

Ivan: Definitely. This is something I really want to lavish on and to share with the world. In terms of branding and marketing, over the next few months, we are really going to push [00:36:00] hard on this. We have really cool things in store to share with basically the wider audience.

Clay: I think branding is a factor. It’s possible to develop a loyal base around an exchange token, and you guys have one. Could you share a little bit about the Switcheo token? The strategy around it? What blockchain it actually [00:36:30] exists on? Because you have a bunch of markets for it. So, it wasn’t immediately obvious to me which blockchain you issued it on. Could you share a little bit about that?

Ivan: We took on this issue on Neo, simply because it was the first blockchain that we worked on. Neo is, I would say, it’s a really distant blockchain. It works as advertised, now. I think it started with some teething issues. It’s only on Neo, [00:37:00] currently, but once we have an outside chain, it’s possible that we will have a single, native token on the side chain. That will be used for specking for the validators, basically.

To expand on it, right now, this Neo token, it’s used very similar to, let’s say, Binance coin, where you can use it as a fee token [00:37:30] and you get a small discount on the trading fee. This is all bent on chain automatically. But, obviously it’s not so easy to do it cross-chain for the private trader or Ethereum. It’s annoying to also need to connect your Neo wallet to pay fees on Neo. So, that’s something a side chain can solve very nicely. That’s something that I’m looking at moving towards.

In the meantime, all of the exchange [00:38:00] tokens are basically spent manually, if it’s not a new. Making it in a similar way to Binance chain. So, hopefully we will be able to move to the side chain within the next year or so, and then it won’t be so incongruent for traders, basically.

Clay: I see we have listed on NOMIX, I hope this is right, but we show a SWTH to Ethereum market. [00:38:30] How are you able to make those trades happen?

Ivan: I think we mentioned earlier, although we have three different blockchains, we can actually breach liquidity between the different blockchains using the atomic swap protocol. We have a few chosen pairs that have the highest usage, which includes our token, BEE, SWTH token. The other tokens that have high usage [00:39:00] would be the blockage native tokens, like Ethereum, Neo, et cetera. So, we have a couple of these atomic swap markets, and they allow traders to actually move between the blockchains. This is done, trustlessly using the Hash Time Locked Contracts.

Clay: Is there anything else that you found to be particularly useful around exchange growth? Have you done anything with maybe incentives for market makers? [00:39:30] What else has worked?

Ivan: We do have incentives for market makers. Basically, they take us on our exchange pay about 0.2%, 20 bits for, that would be, the trade commission. Whereas the maker is 0 to -0.1. That would be negative ten bits. So, basically means some of the commissions go from the ticket directly to the maker, instead of to us or thing. [00:40:00]

I think it works somewhat, in the sense that it attracts people to basically leave orders on the book. That allows new users who are coming in, who basically just want to exploit the trade and move on. It attracts them and makes it more useful for them.

On the other hand, I think fees like this, they are just a complimentary thing. It works especially well when you already have a large liquidity pool. It is something that we intend to keep for [00:40:30] a long period of time, because it’s still something that we are looking to, basically that we feel that encourages a better […].

Clay Does Switcheo have an affiliate program?

Ivan: We do actually have an affiliate program or a referral program coming up. We do think it works across all industries. It’s very popular for exchanges in general. From a marketing perspective, I think it’s a tried and proven method. [00:41:00]

I think within the next month, we’ll be launching our first phase of the referral program. We’re doing this in multiple phases for two reasons. One, it’s we want to be able to adjust and adapt to the results. Secondly, also, because we don’t verify individual identities. We want to make sure that the program is robust and yet it’s resistant against abuse, basically, where people just create accounts and refer themselves and stuff like that. [00:41:30]

Clay: How would you do that? That’s really interesting. I’ve definitely seen, with affiliate programs, people signing up to be an affiliate and then they refer themselves maybe through another IP address, or there’s all kinds of ways to do it. They’ll fire up a VPN. How do you prevent against that?

Ivan: There are a few things we are considering, including doing a partial TOIC to make sure they are a single person. It’s a very unintrusive [00:42:00] kind of thing, where we don’t actually want to store your data. On the other hand, I also don’t want to go too in-depth to it, because I think we have a few tricks up our sleeves to detect such behavior and we don’t want people to work around it based on what we’re going to say.

Clay: Absolutely. Would payments in the affiliate program be made in SWTH or in a token of your choice? How would payment work? [00:42:30]

Ivan: Both. I think we have something interesting where we might actually do bitcoin of BTC rewards.

Clay: Oh. Interesting. That’s interesting.

Ivan: Yeah. And this will work in hand with our Switcheo account, which we are looking at introducing something quite exciting.

Clay: I think that’s a nice segue into the next line of questioning, which is around [00:43:00] bitcoin. Bitcoin dominance is surging right now. There really is no natural way to buy yourself bitcoin on Ethereum, Neo, EOS, et cetera, unless you want to use, I believe they’re called—I don’t know if it’s proper to refer to those—wrapped bitcoin. Is that a proxy token? Is that correct?

Ivan: Wrapped bitcoin is basically a proxy token that’s patented by, I think, Dilco. [00:43:30] We do support that bitcoin on our exchange. We are even thinking of expanding it to its own tech, where it is a stable coin in BTC, because we have stable coins in USD. So, there’s something we’re looking at. But the question of how to acquire this BTC in the first place. What […] actually does is that a lot of traders trade against BTC, not so much because [00:44:00] they think that BTC is particularly a good coin that they want to keep. It’s more that, because BTC is the core standard cryptocurrency, so that’s why you trade against it, in the same way you would trade most other things against USD. So, BTC has a quote token. It’s mainly useful because of that. At the same time, I feel that a lot of these traders don’t actually have BTC wallets, they don’t actually even know how to transfer BTC out. [00:44:30] I hope that changes. Ethereum actually has a lot more HO user wallets. So, that’s some interesting things that we have discovered.

I think that the major impact of not having BTCis not that great for exchange. At the same time, it’s something that we are actually looking into to support. Shut off revealing something that we may or may not launch. That’s all I can [00:45:00] really say at this point.

Clay: It does seem like, when it comes to atomic swaps, there’s been just a ton of work with BTC, like on the BTC blockchain. Do you think that’s something that you guys will facilitate at some point? Like, maybe a E to BTC swap, or some way to exit back to BTC in a way that’s native to that blockchain?

Ivan: Yeah. So, that’s actually why we are looking at supporting [00:45:30] BTC on the Switcheo account. The Switcheo account is basically this non-custodial wallet that you can actually create from the Switcheo exchange interface. We are looking at supporting BTC tech, because we do see a possibility for swapping, say, BTC to cap APAC or BTC for US to general BTC. That’s definitely a possibility.

Now, the main concern is again, proxy tokens. We want to make sure that it makes sense [00:46:00] to us and to the users. We would want to reduce the insecurity or the trustlessness of basically BTC itself. That’s something we try to effort in part of.

Clay: How would that happen, though? When you evaluate atomic swaps versus proxy tokens, which one feels more appealing to you?

Ivan: Definitely, we will use atomic swaps. The problem is that, when you swap bitcoin, [00:46:30] you can do an atomic swap with bitcoin, but the upcosts that bitcoin supports are not really enough to lock them in a robust fashion. Yeah. So if you want to do BTC to Ethereum, that’s definitely possible to do trustlessly. But say, if you wanted to do BTC to REPBTC, then you need to trust that BTC can be chopped back to BTC later on. [00:47:00]

Clay: Is the plan to do both? Or do you think, at some point, you’re going to side with sort of native tokens versus wrapped or proxy tokens?

Ivan: We always favor not using proxy tokens. It’s also not our call to say that, “No, you can’t use proxy tokens.” We want to give the choice to not use proxy tokens, which right now, there isn’t such a choice, basically. [00:47:30]

Clay: When it comes to exchange growth and exchange operations in general, do you have relationships with other exchange owners? Are there conferences that exchange operators go to? Is there an association? Or is most of this stuff just trial and error, observing what other companies are doing?

Or is there a mastermind, or a group of power players that get together and swap notes about how to run this very new business, new business model. [00:48:00] Maybe not when it comes to the fundamentals of exchanges that have been around for a long time. Still, there’s a lot around regulation, jurisdiction, the technical aspects, the scaling. Do you have a group of peers that you interact with?

Ivan: Yeah. So there’s no like secret counsel.

Clay: A cabal.

Ivan: An association. But, I guess we do know quite a few exchanges. We know our competitors, we have conversations with each other. [00:48:30] In general, we share our industry. That is bound to happen. I do know that some exchanges have a closer relation to other exchanges and some are more competitive. I would say it’s typical of businesses in general, of industries in general. You have friends and enemies.

In terms of learning and picking up stuff, I think basically, we all just are very honored, [00:49:00] at least the survivors now, of people who end up […] and I got to catch onto trends, I got to understand why things work and why things don’t work. Of course, the best exchanges have traders or traders in the traditional market to give the experience of how things should and shouldn’t be.

Clay: Let’s move on to chapter 5 which is on the regulatory environment. We’ve seen almost everyone now [00:49:30] become affected by this. I remember when ShapeShift announced that they would be implementing KYC/AML. Of course, layoffs followed. I don’t know if they’re correlated. They claim that they’re not. IDEX has started implement KYC/AML. Binance is now geo fencing out the United States.

So, this regulatory train seems to continue rolling. It strikes me that you guys do have a pretty fierce, when I think [00:50:00] about branding again, it does feel like you are very dedicated to trustlessness, to decentralization, and that part of that, just historically has been lack of KYC/AML privacy, stuff like that. Do you have an official statement or posture vis-a-vis regulation, identity checks, surveillance, things like that?

Ivan: So I think that’s quite a few concepts here, which [00:50:30] I should explain. For anonymity, it’s really the same as decentralization. That’s one thing, I believe in decentralization. One of the possible outcomes of full decentralization is that it’s hard to stop in the sense that it’s correct. But, that’s not really my goal, and because I don’t partake in activities that will require that in particular. In Singapore, we don’t face such financial censorship [00:51:00] as other countries might have. So, that’s not something that I typically focus on. At the same time, for me, decentralization, the important aspect is that we don’t have to trust people just because that’s the only option. So, that’s my main goal. Yeah. So, that’s the decentralization I expect from me.

On the other hand, regarding regulations and KYC, I think it’s a bit onerous to require [00:51:30] businesses to collect data, basically very personal data, of their customers. At the same time, as the regulators are sometimes correct, there are certain aspects of cryptocurrency or blockchain technology that can be used to facilitate high data, sort of financial transactions. In fact, I think as I mentioned at the start of my interview, see to itself and the model, the architecture that we use, doesn’t actually allow that. You can’t actually [00:52:00] hide your transaction. You can’t actually hide your trace anymore from just sending basically Ethereum about change […] barely to different wallets. So, I don’t see an expect kindly where we would facilitate basically such. We’re not such money laundering operations.

I do see why certain so-called exchanges like ShapeShift or Binance can possibly constrict to obscure transactions, [00:52:30] simply because the support privacy coins like Monero, Zcash, et cetera. The moment you do that, you are basically at an exit point if, say, the regulators want to check, they are unable to. I think it makes sense for that, in a way, to try to protect themselves. At the same time, I only say this because I am experienced with the field, and I actually understand what [00:53:00] somebody trying to hide the trace will do. Whereas the regulators don’t actually understand these sort of things. I guess that’s why whatever they say is always very broad and as a result, a lot of people react in a very broad fashion as well.

Clay: Let’s transition to chapter 6 which is on Switcheo’s business operations. Let’s dig into that. Would love to hear a little bit about where your corporate entity is domiciled, size of the team. [00:53:30] Are you distributed or are you in one office together? Could you tell us a little bit about how just how you’re set up, team size, and daily operations.

Ivan: Basically, almost the entire team is located in Singapore. A lot of us are Singaporeans, so we are local to Singapore, which is different from a lot of chains, which from China and they’re simply registered in Singapore because of regulations or whatever.

So, we are in Singapore. [00:54:00] We have a size about 15 right now, 15 going to 20. The people that are not in Singapore, they are remote and mostly our support. Our support staff in our team, and that’s how we provide around the clock support. Basically, we make sure that every time zone is covered.

Clay: What are your day-to-day activities? It sounds like you’re clearly a technologist. Do you spend most of your time working with the engineering team and the product team? [00:54:30]

Ivan: Yeah. At the start, obviously, a lot of things are done by the co-founders. A lot of the original exchange code, a lot of original smart contracts were written by the AMA co-founders. But, nowadays, I do more high level strategy positions, like what’s the current direction to build up with that, what’s the engineering architecture that we should go for. Then, my team [00:55:00] executes on that.

Clay: Let’s move on to chapter 7 which is about the future. You’ve mentioned a side chain that can unite the three chains that you work with. You’ve mentioned some additional block chains that you support. Is there anything else that you think is noteworthy or should be mentioned about either the future of Switcheo, the future of decentralized exchange in general? Where do you see this ship heading?

Ivan: I feel that the reason decentralized exchanges are more popular, [00:55:30] primarily is the idea that they cannot support the same feature set as easy and as quickly as centralized materials. But I think it’s a matter of time before that actually it’s possible. I think what Switcheo is doing is really to be the first decentralization exchange to overcome all of the hurdles, be it UI, be it the feature set, the UX, and really become the iPhone of exchanges. We believe it’s possible. There’s many things that traders want. [00:56:00] A lot of this […] on the exchanges.

At the end of the day, we have our side chain and whatever we are building. The vision that we are moving towards is really this whole package that, at least at first, seems very simple. But, believe it, it has all of the learning, all of the technology, and basically has accumulated over these past few years. [00:56:30]

Clay: Well, that concludes our conversation with Ivan Poon from Switcheo. I hope you enjoyed it. Before you go, I want to mention that since we’ve started producing episodes at a much higher rate, and a much faster […], we now have room for a few more sponsors. If you like the work we do and would like to support this show, then a [00:57:00] sponsorship might be a good fit for you.

I can say from our own experience that Flippening sponsorships work. Each and every time we put out an episode of this podcast, we mention our own API. And to date, every single one of those advertisements has resulted in at least one new customer. In fact, we would do these shows even if nobody else sponsored because of the business it brings to us. And over 80% of paying customers mention that they heard of us through our podcast. If you’re interested in sponsoring the show, please hit us up at support@nomics.com. [00:57:30]

All right. That wraps up things for this week. Stay tuned for next week’s episode. Until then, take care.

That’s it for this week. To sign-up for our free crypto investing newsletter, listen to other episodes, or get the show notes from this episode, please visit flippening.com. I also invite you to check out the startup that funds this podcast, Nomics at nomics.com. Finally, if you get value from the show, the biggest thing you can do to help us out is to leave a five-star review [00:58:00] with some comments and feedback on iTunes, Stitcher, or wherever you listen to podcast. Thanks for listening, and see you next week.