Author: Jam, CloudY
Editor: Vincero, YL
Review: Yasmine
As the CEX market continues to develop, the impact of regulation on its competitive landscape has become increasingly significant.
Preface
Regulation has two sides. The intervention of regulatory agencies will increase the hidden costs of transactions, but it may also attract more funds to flow into the market by enhancing compliance. In addition, the strictness of the regulatory environment will also have an impact on the free development of the Crypto Market. A weak regulatory environment is more conducive to the free development of the Crypto Market.
CEX+CeFi= Traditional Commercial Bank. The essential model of CEX is still the traditional commercial bank model, that is, earning interest spreads by absorbing deposits and lending. However, CEX currently lacks "The last buyer", so this may be another important reason why CEX is currently subject to strong supervision. At the same time, some smart CEXs are trying to make some advanced business hedging strategies to meet the stronger supervision that may be encountered in the future.
CEX is moving towards DEX. Although DEX is considered a possible replacement for CEX in the long term, there is still discussion as to whether it can eventually replace CEX. We have observed that CEX is continuously innovating to adapt to market demand and competitive pressure. At the same time, we cannot ignore that DEX is more in line with the long-term principles of Crypto fundamentalism.
The impact of regulation on CEX development
Regulation will increase the hidden costs of transactions
Implicit costs are costs that an economic organization (enterprise is a form of economic organization) often faces during its operation, as opposed to explicit costs. Implicit costs refer to future costs and transfer costs that are hidden in the total cost of an enterprise and outside the financial audit supervision caused by the behavior of an enterprise or employees.
Explicit costs can be directly linked to transaction quantities and records, but implicit costs tend to be hidden in the total cost, difficult to measure accurately and often overlooked. The characteristic of implicit costs is that they are not subject to financial supervision. These costs may involve time costs, information asymmetry, errors and incomplete compliance, thereby increasing the costs hidden in the total.
In the case of CEX regulation, the hidden costs of regulation on trading are particularly significant. Regulators may require exchanges to adopt stricter identification and anti-money laundering and misappropriation (KYC), which not only increases the exchange's additional human resources and technical investment to ensure transaction compliance, but may also affect the speed of transactions. and convenience, bringing external time costs and uncertainty to traders. In addition, regulatory compliance disclosures may also cause asymmetry issues, exposing users to more transaction risks and operational restrictions, further increasing hidden costs. In the end, these hidden costs will be passed on to CEX users, which may be reflected in increased transaction rates, withdrawal fees, and reduced financial return rates.
Compliance may drive incremental fund inflows
However, compliance may prompt incremental funds to flow into the crypto market. With the optimization of the regulatory environment and the improvement of transparency, investors' confidence in the security of funds and investment expectations in the crypto market will increase, attracting more funds into the crypto territory. When CEX meets regulatory requirements and takes compliance measures, investors will be more confident to invest their funds and increase their investment positions in crypto assets.
These investors tend to have higher expectations for the security and legitimacy of their funds and believe that regulation can provide good protection. This increase in confidence may prompt more funds to flow into the crypto market, providing it with a more stable investment environment. This incremental inflow of funds may provide the Crypto Market with more stable investment funds and a longer holding period, thereby further reducing the volatility of crypto asset prices.
At the macro level, compliance has two main impacts on the cryptocurrency market. First, the entry of traditional institutional funds means that traditional financial institutions are beginning to participate in the cryptocurrency market, which will bring more capital inflows and increase the liquidity and scale of the market. Second, the introduction of the traditional financial system means that cryptocurrencies are more widely recognized and accepted, further increasing the scale and participants of the market.
At the micro level, the compliance framework involves transparency of funds, reasonable leverage trading and liquidation feasibility, and controllable market making behavior. Transparency of funds means that the flow of funds and trading behavior of exchanges and participants can be tracked and monitored, which helps prevent money laundering and other illegal activities. Reasonable leverage trading and liquidation feasibility means that exchanges need to ensure appropriate margin rules and liquidation mechanisms to protect the interests of trading participants and market stability. Controllable market making means that exchanges need to manage and monitor market making activities in the market to avoid manipulation and misconduct while ensuring market liquidity and stability.
A weak regulatory environment will allow the Crypto Market to develop more freely
From our perspective, a strong regulatory environment has the following characteristics: franchise licenses or permits, securities definitions and asset classes.
Regulators can require CEX to obtain specific licenses or permits before they can operate. These licenses and permits need to comply with local regulations and compliance requirements, including but not limited to KYC and AML regulations. By issuing licenses and permits, regulators are able to more strictly regulate CEX. Secondly, some cryptocurrencies may be identified as securities. If a cryptocurrency meets the definition of a security, it will need to comply with securities regulations and be regulated by securities regulators (according to CoinMarketCap data, there are currently as many as 67 cryptocurrencies identified as securities by the SEC). In addition, in a strong regulatory environment, cryptocurrencies may be defined as specific asset types. For example, different countries view cryptocurrencies as financial assets, virtual assets, or digital assets. This classification may lead to specific regulatory rules and tax requirements.
In the early stages of cryptocurrency, especially after the emergence of Bitcoin, since the field was a brand new Internet innovation, regulators had not yet formed a clear regulatory framework and regulatory standards for the cryptocurrency industry, especially important institutions such as CEX. However, with the popularity of cryptocurrency and the expansion of the market size, "regulatory escape" has gradually become a focus, leading to a series of regulatory measures and rule-making.
In the early days, regulators only monitored and warned the cryptocurrency market, reminding participants of the risks and challenges they might face, but did not formulate specific regulatory measures. Later, regulators began to pay attention to illegal activities related to cryptocurrencies, including money laundering (but according to CZ in an interview, a report forwarded to CZ by an ambassador somewhere mentioned that only 3% of Bitcoin transactions were related to illegal or problematic activities. This proportion is very small, in fact, lower than the proportion of legal currency) and illegal financing. Now, regulators have formulated a more complete regulatory framework and more transparent regulatory standards, including but not limited to: information disclosure requirements, KYC and AML, licensing and registration requirements, framework and rule establishment, and regulatory cooperation.
According to the laws of economic development and historical cases, industries that are at the forefront of regulation may indeed have better arbitrage space or development prospects.
Early participants in the industry are often able to establish a strong brand influence and user base. When supervision gradually strengthens, these companies may have established a good compliance framework and reputation, making them more likely to gain recognition and support from regulators. Such first-mover advantage can bring these companies a better market position and competitive advantage, and use external supervision to build a deeper moat.
Stricter regulatory requirements may result in some competitors being unable to meet compliance standards or unable to bear the costs of regulation. As regulation is strengthened, investors’ confidence in compliant industry participants and projects may increase. They are more willing to invest in companies and projects that meet regulatory requirements and reduce investment risks.
Overall, a weak regulatory environment may bring greater freedom and flexibility to the Crypto Market.
Regulation is an important trigger for changes in the CEX competition landscape
In the early days of the cryptocurrency market, especially when BTC first appeared, there were only a limited number of CEXs, and the main focus of competition was to provide secure, highly liquid, and rich trading pairs. Early competitors included MT.GOX, BTC China (established in June 2011), Kraken (established in July 2011), Bitstamp (established in August 2011), Coinbase (but Coinbase was a payment processor in the early days), etc. As the market grew and user needs changed, CEX began to expand its platform functions and services. This included adding derivatives trading, OTC trading, fiat currency trading pairs, lending, and insurance. A milestone event was the launch of the perpetual contract by Bitmex in 2016, which increased the contract leverage by up to 100 times.
As the global cryptocurrency market develops, CEXs begin to compete in different segments. Some CEXs focus on local markets, providing local fiat currency trading pairs and language support to meet the needs of local users. This has led to the rise of some regional exchanges, such as Huobi (formerly known as Huobi.com) and OKEx (formerly known as OKCoin) that focus on the Greater China market, and Upbit and Bithumb that focus on the Korean market. In addition, CEXs focusing on derivatives trading also emerged at this stage, such as the early FTX and Bybit.
FTX and Binance are the stories that happened later. In the early days, FTX focused on the derivatives track and occupied the leading position in the track in a relatively short period of time. As an early investor in FTX, Binance also seemed to participate in the competition in the derivatives track in disguise. It was not until November 2022 that FTX was exposed. The latest story is well known to everyone, so we will not elaborate on it. (Source: YM Crypto)
If the regulatory target is the one the gun is pointing at, then FTX pulled the trigger to kill itself. The FTX incident undoubtedly accelerated the regulatory authorities’ regulatory actions against Binance, the world’s largest CEX, and then Coinbase, a CEX known for its high compliance, was also caught up in it.
Judging from specific events, every change in regulatory policy has a huge impact on the entire CEX industry:
On September 4, 2017, the Chinese government expressed its strong regulatory attitude. Seven ministries and commissions jointly issued the "Notice on Preventing the Risks of Token Issuance and Financing", announcing that "ICO is an illegal public financing behavior and should be stopped immediately." The announcement led to a dramatic change in the market structure: ICO was identified as illegal fundraising, the project was cleared, and the exchange was forced to withdraw or go overseas. Bitcoin China and Yunbi.com stopped virtual currency trading business, while OKCoin and Huobi closed RMB business and moved overseas.
On November 9, 2022, FTX's collapse caused the SEC to increase its supervision: "In the six months after FTX's bankruptcy on November 11, 2022, the SEC had at least 17 enforcement actions related to cryptocurrencies, an increase of 183% from the previous period." After FTX's embrace of compliance collapsed, the first to be affected by the SEC's stricter supervision was Kraken. Its pledge business was sued by the SEC for not registering securities. In the end, Kraken immediately stopped providing on-chain pledge services to US customers and paid a fine of US$30 million to reach a settlement with the SEC. Naturally, the market share of Kraken's pledge business was taken by Coinbase.
Subsequently, on June 5 and 6, 2023, the SEC sued Binance US and Coinbase. The SEC believes that both provide unregistered securities transactions, and claims that the profit and pledge services provided by the two exchanges also violate securities laws. The allegations against Binance are more serious, claiming that Binance engaged in clearing transactions and mixed customer funds between its domestic and overseas entities. The two lawsuits resulted in a large amount of funds being withdrawn from the two exchanges and flowing into the chain and other exchanges.
The Financial Services and the Treasury Bureau of the Hong Kong Special Administrative Region Government issued the "Policy Declaration on the Development of Virtual Assets in Hong Kong" on October 31, 2022, indicating that Hong Kong is committed to promoting the development of NFT, Web3.0 and the Metaverse market. The "Guidelines for Virtual Asset Trading Platform Operators" came into effect on June 1, and virtual asset trading platform operators will be able to apply for licenses and allow retail investors to use licensed virtual asset trading platforms. This has led to a series of new and old exchanges announcing their entry into Hong Kong, including New Fire Technology, Tiger Brokers, DBS Bank, OKX, Bitget, etc.
This shows that the release of a policy can lead to the demise or rise of CEX, and every major policy change is a reshuffle of the CEX industry landscape.
Hedging strategies for CEXs operating risks
CEX+Cefi=Traditional Commercial Bank
Abstract understanding: Although CEX does the work of an exchange, its essential model is still the traditional commercial banking model.
The essence of commercial banks (hereinafter referred to as banks) is to create credit money, and their operation forms are to absorb deposits and make loans. By absorbing deposits, banks can obtain funds to support their subsequent business activities. Then, based on the deposits absorbed, banks create profits by providing loans to individuals, families and businesses. When a bank provides a loan to a borrower, the borrower deposits the loan into his bank account. In this way, new deposits are created, allowing banks to have more available funds for lending and investment.
CEX initially only provided the most basic Spot trading (such as the earliest Spot exchange established specifically for BTC), and later developed derivative trading - perpetual contracts. However, the current CEX is still in the "black box operation" stage, and the exchange has not clarified the fund operation method for providing contract leverage. The leverage funds for perpetual contracts usually come from two parts: own funds and user funds.
In this way, it is reasonable to infer that:
1) Spot becomes the entry point for CEX to absorb funds, and the contract develops into a direct application scenario for issuing loans. The ultimate result is the creation of credit currency, but this form of credit currency can only be used in the CEX it created.
2) The use of user funds takes precedence over own funds. After all, the ultimate goal of CEX is to maximize the benefits brought by transaction fees while ensuring the safety of its own funds.
However, traditional commercial banks are generally required to separate their business operations, that is, to separate businesses such as securities investment. CEX "part-time" plays the role of an investment bank. In name, CEXs only issue platform coins; in fact, some projects do rely on CEX transfusions. By issuing platform coins, exchanges can increase their control over the platform ecosystem. Users holding platform coins may benefit from different offers, discounts or rewards. In addition, platform coins can bring additional benefits and profit opportunities to exchanges. Platform coins are usually designed to have a certain scarcity, and their supply may be fixed or have a destruction mechanism, so there is long-term deflation. As the platform develops and the number of holders increases, platform coins are likely to rise, allowing CEX to gain more benefits.
However, traditional commercial banks have reserve systems and capital requirements, so their risk exposure is open and transparent. Moreover, even if a single bank encounters a liquidity crisis or financial crisis, the central bank can act as the last buyer of the commercial bank under certain conditions. Therefore, in the traditional financial paradigm, commercial banks are often "too big to fail."
Unfortunately, CEX, the giant in the crypto world, currently has no transparent funding system and lacks “The last buyer”. This may be an important reason why CEX is currently subject to strict supervision.
Bright line: Mainstream CEXs are preparing for a strong regulatory environment
Exchanges with large capital scale must comply with regulations and cooperate with legal deposits.
Smart CEXs are moving towards a more decentralized path to adapt to the future strong regulatory environment. Coinbase already not only provides custodial wallet services, but also plans to launch a Layer 2 solution based on OP Stack, while Binance has successfully launched the OP BNB testnet, and Bybit has also announced the launch of its Layer 2 solution. In addition, Bitget has also launched MegaSwap, providing users with convenient token aggregation Swap services, and its model is more inclined to DEX. OKX is relatively radical, directly combining its Web3 wallet with CEX App to achieve the conversion of on-chain and offline assets.
• Binance
Although Binance is frequently sued by US regulators, it is still the largest CEX recognized by the market. Its Listing, IEO and Launchpad still have great influence and wealth effect. As supervision gradually strengthens, Binance's CEX business is a bit trapped. In order to comply with regulations, Binance has made a lot of efforts, but the effect is not obvious. This will inevitably push Binance to further promote the development of on-chain business. The BAS application chain and BNB Greenfield storage chain are the manifestations of empowering BNB and building the BNB on-chain ecosystem.
• OK
Unlike Binance, OKX chose to use Web3 Wallet and OKBChain to hedge regulatory risks. The user experience of Web3 Wallet itself is among the best among similar wallets. The most important thing is that OKX's Web3 Wallet is embedded in the OKX App, which can achieve barrier-free conversion between on-chain and off-chain. This will help OKX to convert CEX users into OKB Chain while avoiding regulation, empowering OKB. OKB Chain was launched along with the Hong Kong policy, and with the support of users from OKX Web Wallet, it has occupied the right time and place. It can be said that OKX has achieved phased success in its strategy to deal with strong regulation.
• Bitget
As a second-tier CEX, Bitget is still focusing on using hot spots and IEO to build its brand and empower its platform currency BGB to attract more users. Therefore, its product and marketing capabilities are still somewhat behind those of the big exchanges. However, outside of CEX, it has continued to absorb other second-tier CEX users and potential incremental users with the help of the matrix established by Foresight News and Ventures, which has achieved certain results. It also announced that it would enter Hong Kong and establish a compliant exchange with a license. It can be seen that second-tier CEXs are still struggling with user volume and brand, and are still far from considering strong regulation, so they can only embrace crypto-friendly regulatory areas.
• Open Exchange OPNX
Unlike other CEXs, OPNX chooses to hedge regulatory risks in an on-chain manner. It plans to separate trading collateral from the matching engine: 1. User collateral, whether native assets or RWA, is transparent on the chain; 2. Customer positions need to be margined by the credit limit for the collateral, and the collateral-related parameters must be determined by the DAO to which these on-chain assets belong, and funds and liquidations are isolated from each other. OPNX focuses on RWA and debt transactions, which can largely avoid the impact of securitization, and debt transactions like Celsius and FTX can also open up a large incremental market for it. Regarding regulation, OPNX chose to be established in Hong Kong, which is also embracing Hong Kong's crypto-friendly environment.
Hidden line: The perpetual contract business will not be abandoned easily
For CEX, perpetual contracts are currently the largest source of revenue. The development of perpetual contracts can be traced back to 2016, when BitMEX launched this innovative derivative contract. Its leverage is up to 100 times, so BitMEX founder Hayes is called the "King of Leverage". Over time, other exchanges have also launched their own perpetual contract products, such as OKEx's perpetual contracts and Bitfinex's perpetual contracts.
Features of perpetual contracts include leveraged trading, margin mechanisms, and diverse underlying assets, allowing traders to adopt more diverse trading strategies and gain profits from market fluctuations.
For users, what really makes them addicted is not only the novelty of the 100x leverage, but also the dizziness of easily getting 100x net assets. High leverage ratios can make users feel the potential huge profits and stimulate their greed. Quick profits can bring excitement and satisfaction, which increases users' desire to speculate. The uncertainty of asset price changes brings stimulation and excitement to users, which further encourages them to try high-leverage transactions.
Therefore, a certain commercial tacit understanding has been formed between the supply and demand sides of perpetual contracts. “CEXs patted the shoulders of perpetual contracts and said: If the market likes it, we will provide it.”
In the previous part, we mentioned that "regulation will increase the hidden costs of transactions", and the transaction fee rate is unlikely to increase significantly, because the current total transaction fee rate (Maker fee + Taker fee) is mostly between 0.01% and 0.1% (transaction fee rate data source: CoinmarketCap.com). If the marginal transaction fee rate is increased, a considerable number of investors will be lost. Therefore, perpetual contracts, as the most profitable business of CEX, will become the object of marginal substitution. In other words, the perpetual contract business segment may have more innovations to make up for the loss of income caused by the increase in hidden costs.
summary
In summary, as a derivative model of the traditional commercial banking model, CEX will consider the explicit strategy of compliance and decentralized development in terms of operating risk hedging strategy, as well as the implicit strategy of continuous development of perpetual contract business innovation to ensure the stability of income and adapt to the challenges of a strong regulatory environment in the future.
Could DEX replace CEX?
CEX is under attack from all sides, DEX may have a good opportunity for development
The U.S. Securities and Exchange Commission (SEC) has sued Binance, the world’s largest cryptocurrency exchange (and its founder Zhao Changpeng, accusing them of illegally operating a stock exchange) and Coinbase Inc., the largest cryptocurrency exchange in the United States (filing a lawsuit for illegally operating a stock exchange). CEX is currently at the forefront of legal compliance risks.
In addition, the listing effect overdraws the future growth space of some tokens. The former is the main reason for the poor performance of newly listed tokens on top CEX, taking Binance as an example. According to research by @Loki, based on the Binance Listing announcement information, during the 13-month period from 2022.4.29 to 2023.6.4, Binance launched a total of 20 new tokens for spot trading and 14 old coins. Among them, the average return rate of 20 new coins from holding to the statistical time 20230604 was -22.3%, while the average return rate of BTC during the same period was 7.9%, and the price performance was significantly worse than that of BTC.
Regarding the listing effect, we believe that the reasons for the poor performance of newly launched tokens include: insufficient incremental funds in the market, and the diversion of existing funds caused by newly listed currencies. In a bad market environment, the probability of new coins breaking the issue price will increase accordingly.
1) Insufficient incremental funds: When the overall liquidity of the market is insufficient, newly launched tokens may not be able to attract enough incremental funds to support their price increases. In this case, investors may be more inclined to invest their limited funds in existing mainstream tokens or assets with more stable returns, and take a wait-and-see attitude towards newly launched tokens.
2) Diversion of existing funds: The introduction of new online tokens may cause investors to transfer part of their funds from other tokens or assets to participate in transactions of new tokens. This may cause the liquidity and price of some existing tokens to be affected, especially if the market weakens as a whole, this impact may be more significant.
Therefore, in an unstable market environment or when investor confidence is insufficient, the probability of a new token breaking its issue price may increase.
At present, CEX is under attack from all sides. Is it possible for DEX to usher in a golden period of development?
The AMM mechanism created by Uniswap removes market makers and implements spot transactions that conform to on-chain logic. However, the problem with AMM is also obvious. When there is not enough LP depth, the transaction slippage is huge. Even if the LP depth is average, compared with CEX transactions, the slippage is still large, especially for targets with large trading volumes and good liquidity. Therefore, we can see that many large investors transfer funds to CEX, buy and sell, and then transfer them back to the chain.
For a long time after DeFi Summer, there was no breakthrough in DEX.
However, there are some concerns about the resurgence of DeFi recently. When the patent of Uniswap v3 expired, an AMM mechanism of joint order book led by Trader Joe appeared. Trader Joe called it Liquidity Book. Liquidity Book borrowed the tick of Uniswap v3 and established Bins with a smaller price range. Transactions within each Bin can achieve no slippage. At the same time, different strategies can be established according to the changes in the number of Bins and the distribution of funds, which optimizes the user experience of both traders and liquidity providers. The scheme of centralized liquidity has also appeared in the ve(3,3) project to promote price depth and increase LP income. In addition, the custom LP incentive led by Camelot has also been welcomed by the market. Maverick and Uniswap v4 have launched similar schemes, allowing pool creators to freely add incentives for LP mining, thereby promoting the depth of LP. Such innovations have helped Trader Joe win the $ARB Liquidity War, and helped Maverick’s trading volume quietly reach the 5th place among DEXs on the ETH chain, while Camelot has become the largest native DEX of Arbitrum. It can be seen that the Liquidity Book mechanism has allowed DEXs to make some progress in spot trading. However, in terms of overall trading volume, DEXs’ trading volume is far from enough to compete with CEXs, but their market share is growing year by year, so DEXs are developing steadily relative to CEXs. Of course, this is also related to the fact that DEX trading volume is relatively stable, while CEX trading volume is declining.
In addition to spot trading, perpetual contracts are worth mentioning. A good perpetual contract trading experience is one of the reasons why CEX is difficult to replace, but as the largest source of income for exchanges, it is also a long-coveted cake for on-chain protocols. The characteristics of on-chain protocols are non-custodial assets and clear paths for margin and liquidation, which most CEXs currently do not have and cannot achieve.
Taking DYDX, the perpetual contract that is most like CEX, as an example, DYDX uses an order book model, and user assets use a non-custodial model to settle transactions and liquidations in a trustless manner. The oracle obtains prices for positions and liquidations, the off-chain engine matches orders, and the forced liquidation engine automatically closes positions. The oracle price is equal to the median of the prices reported by 15 independent Chainlink nodes. At liquidation, the position is closed at the closing price, and the profit or loss generated by the liquidation is borne by the insurance fund. DYDX v4 will be stationed in the Cosmos ecosystem to achieve lower latency and less wear and tear. However, one problem with DYDX replacing CEX is that the index prices serving rates and limit orders are all from CEX. As of June 21, DYDX's 24h trading volume was $2.08b, which is still a big gap from the head CEX.
Unlike the order book model of DYDX, GMX uses the LP model, allowing traders and LP to become counterparties, thereby achieving 0 slippage and getting rid of the depth provided by market makers. This is very similar to the advantages of the spot AMM model. In addition, its fee is 0.1%, the leverage is up to 50 times, and there are no KYC and geographical restrictions, which is more attractive than DYDX (the maximum leverage is 20 times, and US IPs can no longer trade on DYDX). But the disadvantages are similar to AMM. Its capital capacity is limited, and the theoretical order opening limit is related to the TVL of GLP, which is not friendly to super large funds. GMX v2 introduces a customized Chainlink price feed service to achieve lower latency prices, but the final price is the average of the oracle price and the mainstream CEX price. Therefore, GMX is more dependent on CEX prices, which shows that it is more difficult to get rid of CEX and operate independently in the short term. At its recent high point, on June 21, GMX’s 24-hour trading volume on Arbitrum was only $426.8m in total trading volume (including Swap, Mint GLP, Burn GLP, Liquidation, and Margin Trading), which is only about 20% of DYDX.
Long-termism: DEX is more in line with Crypto fundamentalism and blockchain justice principles
From the above DEX mechanism and data, we can see that the current share of DEX in the entire exchange market is still lower than that of CEX, and the perpetual contract DEX is even very dependent on CEX in terms of pricing. However, this is all due to the low threshold interaction of CEX, which leads to more users than DEX and the introduction of market makers. The security of DEX's non-custodial model and the transparency of the margin and liquidation mechanism are naturally in line with Crypto fundamentalism and blockchain justice. Therefore, with the development of technology, when on-chain interaction and Web3 wallets are no longer factors that hinder users from entering DEX, what may eventually appear before us may be on-chain DEX based on off-chain technology, and CEX will only be like most brokerages, fully compliant with regulations for large institutions to conduct large transactions and retail investors to deposit and withdraw funds. The exchange that is most like what we described is the Open Exchange we mentioned earlier, and it is decentralized from a perspective that is more inclined to CEX. Therefore, in the short term, what DEXs have to do may be to sacrifice decentralization to a certain extent in order to achieve a better user experience. To realize the widespread application of DEX, we still need to wait for the implementation and popularization of the following key technologies:
Account abstraction is an important step for blockchain to introduce incremental users. The current EOA address is not actually a user-friendly account form, but a primitive account form given to developers, but there is no better solution for the time being. Just as Web2 accounts can call various program functions at will after logging in, and establish complex instructions with one click, account abstraction can basically achieve the same interactive experience as Web2 accounts, without repeated signing and authorization, so that security and convenience coexist, which will greatly reduce the gap in the interaction threshold between DEX and CEX.
Ethereum login is the opposite path to account abstraction, which expands the application of blockchain accounts and makes Web3 compatible with Web2. Users can use Ethereum accounts to register and log in to the Web2 platform, which will change the situation where CEX leads to Web3 to on-chain accounts becoming the entrance to Web2.
Based on account abstraction and Ethereum login users, DEXs use AppChain and off-chain computing to achieve a low threshold, low wear and high performance trading experience comparable to the current CEX while ensuring fund security and operational transparency. At the same time, due to the composability of the chain, DeFi will no longer usher in a summer, but a sustainable development. The development of decentralized storage, computing power, oracles, indexes, etc. will bring back the sacrificed decentralization.
Conclusion: If the ultimate destination of CEX is decentralization, does DEX still have its advantages?
We are optimistic about the future of CEX and praise DEX's industry positioning. However, when CEX moves toward decentralization, the fate of DEX is still undecided. When CEX moves toward decentralization, it will inevitably threaten DEX's industry position and competitive advantage. As a decentralized trading paradigm, DEX has unique advantages. First, the core feature is decentralization. Second, DEX provides a wider range of asset choices.
However, as CEXs move toward decentralization, they also begin to adopt and integrate some decentralized features and technologies. This evolution may weaken the advantages of DEX to some extent. The decentralized transformation of CEX can provide higher transaction speed and liquidity, as well as interoperability with the traditional financial system, which may become challenges faced by DEX.
In the development of the cryptocurrency industry, CEX and DEX can complement each other and provide users with different trading options and experiences. With the advancement of technology and the development of the market, the competition and cooperation between CEX and DEX will continue to evolve in the future, and the final outcome remains to be seen.
To sum up, the CEX market is increasingly affected by regulation, but at the same time it is constantly innovating to adapt to market needs. DEX as a potential replacement for CEX is more consistent with the principles of Crypto fundamentalism. CEX and DEX each have their own advantages and limitations in the cryptocurrency field, and there are still uncertainties in their future development paths. In any case, both CEX and DEX are providing users with a better trading experience and development opportunities.
Reference
[1]https://www.techflowpost.com/article/detail_12078.html
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[3]https://foresightnews.pro/article/detail/35891
[4]https://dydxprotocol.github.io/v3-teacher/#/perpetual-guide
[5]https://docs.traderjoexyz.com/
[6]https://news.marsbit.co/20230114221554647070.html
[7]https://gmxio.gitbook.io/gmx/
[8]https://gmx-io.notion.site/gmx-io/GMX-Technical-Overview-47fc5ed832e243afb9e97e8a4a036353
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[10]https://foresightnews.pro/article/detail/21548
[11]https://academy.binance.com/zh/articles/what-is-erc-4337-or-account-abstraction-for-ethereum