"It is Doubtless That DEXs Are More Vulnerable to Illicit Activities" - Johnny Lyu, CEO at KuCoin

Ishan Pandey: Hi Johnny, welcome to our series “Behind the Startup.” Please tell us about yourself and the story behind KuCoin Exchange?

Johnny Lyu: KuCoin was founded in 2017 and I joined KuCoin as a co-founder. Before joining KuCoin, I used to work in the auto and luxury industries for many years.

Though officially launched in 2017, actually the infrastructure of KuCoin was first developed in 2013, while back then most of us had a full-time job and didn’t have enough courage to resign and jump into crypto. In 2017, impressed by the industry’s fast-growing, we finally decided to go all-in on crypto. In the summer of 2017, I still remember Michael and I sat in a Starbucks talking about the potential of emerging public chains like NEO.

As the key person driving the establishment of KuCoin, Michael is an early Bitcoin miner and believer who started mining in 2011. He told me that he used to have over 1000 Bitcoins at Mt.Gox, which was the biggest crypto exchange at the time and executed over 70% of the global transactions. But the user experience was a disaster, low speed, poor support, and lots of overloads. That is when Michael had the idea that we can definitely make an exchange that is much more user friendly than this, which leads to KuCoin today.

Ishan Pandey: With the federal reserve printing massive amounts of US dollars and Bitcoin breaching $40,000 this year. According to you, what trends are we going to witness this year?

Johnny Lyu: Bitcoin will not stop at $40,000 for the continuous global inflation will further push up the price of Bitcoin to break a new record. But personally, I think ETH will perform better in 2021 thanks to the booming of DeFi. The total value locked of DeFi is over 30 billion and many top DeFi projects like UNI, AAVE has entered the CMC top 20.

Driven by the rise of DeFi, some believe that the total market cap of ETH may overtake Bitcoin. I think that’s very unlikely to happen, but it may be very close to that of Bitcoin in this bull run. Besides, another rising star in 2021 can be Polkadot and its ecosystem. After the Polkadot para chain slots auction, more promising DeFi projects may emerge on Polkadot.

Ishan Pandey: The KuCoin cyber breach shocked many in the industry as most investors have used KuCoin. How has the KuCoin exchange recovered from the cyber breach and what has the team learned?

Johnny Lyu: Many security experts have identified the KuCoin security incident as one of the toughest cases in the industry, whether it’s regarding the total amount of affected funds, or the number of affected projects, it’s rare in the industry. The good thing is that we have received tremendous support from the whole industry - from exchanges projects to security agents.

With the efforts of all parties in the industry, we cooperated with exchange and project partners to recover $222 million (78%) and collaborated with law enforcement and security institutions to recover $17.45 million (6%). At the same time, KuCoin and our insurance fund covered the remaining part, about $45.55 million (16%). In the end, we ensured that no users sustained any loss in this incident.

A few vulnerabilities of our system have been exposed in this incident, all of which have been fixed soon after the incident. Also, the incident reminds us again that security should also be our main priority. So a number of security measures have been implemented by our wallet team and security team to prevent a recurrence, including but not limited to all hot wallets being redeployed, a full security system upgrade, network security and architecture system upgrade. We have also reached close cooperation with top security and anti-APT agencies to improve the overall security level, and the results will be reviewed by one of the Big Four accounting firms later this year with a security standard certification.

It is fortunate that as the incident broke out, we could respond before it developed to be too difficult to solve. The saying, “what does not kill you makes you stronger” resonates with us. I believe that KuCoin today is more robust than we have ever been.

Ishan Pandey: Please explain Pool-X and how the protocol provides liquidity?

Johnny Lyu: Supported by KuCoin and the TRON Foundation, Pool-X is both a staking platform and an exchange that provides liquidity with staked crypto assets.

The staking service is relatively straightforward. Pool-X currently supports over 50 tokens such as DOT, ZIL, ETH and it has distributed over $7 million passive income to users. What makes Pool-X unique is the world’s first liquidity trading market, where liquidity can be traded.

Previously, once you stake a token on-chain, you have to wait a few days to unstake it. While with the Pool-X liquidity market, you can sell your staked tokens and get their unstaked counterparts anytime. The amount of tokens you get will be the same, but you have to pay POL tokens (the native token of the Pool-X platform) to the other party since you get immediate liquidity. The service significantly reduces users’ liquidity concern for staking and contributes to the rise of assets staked on-chain.

Ishan Pandey: What are your views on Security tokens? According to you, how can the STO industry attract investors and increase trading volume?

Johnny Lyu: The emergence of the Security token is quite natural in the progress of crypto regulation. KuCoin has supported two STO projects - STX and PROPS - These projects are highly attractive to institutional investors and conservative retail investors as they are fully regulated. In general, most STO projects also have an excellent background with plenty of use scenarios, allowing traditional investors to have a more positive attitude towards the crypto and blockchain industry, benefiting the mass adoption of crypto in the long run.

Ishan Pandey: What are your views on Decentralised Exchange (DEXs)? Do you think that DEXs are susceptible to illicit activities?

Johnny Lyu: As a believer in blockchain, I favour decentralisation and our team members in KuCoin share the same values. KuCoin is also working on our decentralised trading solutions.

Though DEXs can’t completely replace CEXs, they satisfy users’ needs who are highly concerned about security. However, it is doubtless that DEXs are more vulnerable to illicit activities. Many people have noticed that more and more hackers are prone to trading the stolen funds through DEXs and it’s harder to trace such behaviours due to the lack of KYC. No regulator worldwide has introduced any clear guidelines on the compliance of DEXs, which from my point of view will be one of the biggest challenges DEXs will face.

Ishan Pandey: What are your views on the FATF travel rule? Are cryptocurrency exchanges implementing VASPs solutions to comply with the regulation?

Johnny Lyu: The combination of KYC and the Travel Rule is a major tool to help financial institutions comply with regulations worldwide. An example is a progress that the Japanese exchange platform SBI VC has made in 2019 to ensure that its KYC and Travel Rule measures meet regulators approval.

The Travel Rule will not be the final difficult hoop that regulators will force the crypto industry to jump through. It will be one of the most important and set the stage for a more mature regulation of crypto assets. Depending on how you look at it, each new AML/CFT measure such as KYC, the Travel Rule and other measures like Know-Your-Transaction (KYT) plays a vital part in helping to illuminate the blockchain gradually.

While they are different in many ways, the Travel Rule and AML/KYC have a united goal: they aim to clean up and fortify cryptocurrency transacting to ensure their survival for the long haul.

Ishan Pandey: According to you, which public blockchain can compete with Ethereum in the coming years?

Johnny Lyu: Many projects once claimed to be terminators of Ethereum, but so far, there has not been a successful case. EOS used to be considered as a strong competitor of ETH because of its ability to provide millions of TPS, but it turns out that a high TPS is not enough to prosper an ecosystem.

I believe the most strong challenger in 2021 will be Polkadot. On the one hand, the founder of Polkadot, Gavin Wood, was the former CTO of Ethereum. As one of the people who knows Ethereum best, Gavin knows very well where the weaknesses of Ethereum are. On the other hand, the current ecosystem of Ethereum is very mature. It is obviously not wise to compete with Ethereum head-on. So Polkadot chose a cross-chain bridge, preferring to coexist rather than replacing it.

Ishan Pandey: With the GameStop mania and Robinhood limiting investors ability to buy shares on the market due to the SEC’s fear. How can DeFi position itself and cater to retail investors who are fed up with Wall Street?

Johnny Lyu: Robinhood’s suspension of users trading in GME stocks exposed the problem of traditional financial institutions. Alternatively, many decentralised counterparts are emerging, building a more fair and transparent financial service ecosystem.

Take Mirror Protocol, a DeFi protocol that is newly listed on KuCoin, for instance. The protocol allows users to issue and trade US stock assets, and many people see Mirror as the decentralised counterpart of Robinhood. As Robinhood stopped users from buying GME and AMC stocks, Mirror decided to launch GME and AMC. If it is approved, GME and AMC stocks can be issued and traded on this platform.

These initiatives help Mirror attract lots of attention and users. According to the latest data, 30K of transactions were completed on the platform in 24 hours with a fee of 100,000 UST (a stablecoin that pegged to US dollar), the locked value over $322 million and the price of MIR tokens reached an all-time high on KuCoin.