I found the passage about the Chalcedonians being blind--it's in Herodotus, not surprisingly. It was said by the Persian commander Megabazus (4.144):
This Megabazus left an immortal memorial of himself among the Hellespontines by an expression he used. When he was in Byzantium, he learned that the Chalcedonians had founded their city seventeen years before the Byzantines had founded theirs. "The Chalcedonians must have been blind at the time," he said, "for they certainly would not have chosen a worse site than a better when they had the option--unless they were blind." (Trans. David Grene)
Or it is actually also Greek - it means to suckle or get nourishment. Since Byzas is a legendary character who was raised by the spring nymph/naiad Byzia aka "ample breasts". So there must have been a spring there and the colonists suckled at it and thus the name and legend?