can centralized exchanges push DEX adoption?
|Oct 4, 2018||Public post|| 2|
Decentralization for decentralization’s sake isn’t a killer app for crypto. But it can be a feature that enables a killer app like decentralized exchange (“DEX”), where the allure of less “hackable” crypto exchange architecture is obvious given the industry’s historical, high-profile losses. DEX hasn’t lived up to the hype so far, but we shed light on the metrics and trends we’re monitoring to track their penetration going forward. There’s a lot of work left to do.
DEX Appeal - Messari's Unqualified Opinion #6
Decentralization is the “killer app” for crypto only to the extent it improves performance in some way vs. centralized alternatives. We all should know that by now.
But the deep divide in usability between decentralization applications and their legacy alternatives has driven a reversion to centralized services recently - even amongst the industry’s biggest boosters. Nowhere is this more apparent than in the exchange space.
Crypto exchanges are not an ideal place to keep your money. There’s even a meme for holding on exchanges: not your keys, not your coins.
The problem is simple: crypto exchanges hold user tokens in pooled wallets. This makes it easier to use these platforms, increases liquidity, and allows traders to quickly settle trades. But pooled wallets are also prime targets for hackers, and make the spoils of a successful hack extremely lucrative. Imagine a thief cracking a single safety deposit box, and being able to steal all of a bank’s assets at once.
This happens semi-regularly in crypto.
Just this year Coincheck lost more than $500 million to hackers in the largest single theft in crypto history. Before that Mt. Gox had held the title after losing $350 million worth of BTC over a multi-year period culminating with it’s collapse in 2014. There have been dozens of smaller thefts in the years since, including at larger well-known exchanges like Bitstamp and Bitfinex.
Exchanges are also responsible for storing personal details related to KYC and AML requirements (TBI Note: this is true hypothetically…fodder for another post) meaning that you are not only risking your funds, but also your identity.
The thing is, we don’t seem to care.
The 2017 bull run saw exchanges reach eye-popping volumes and turned mere year-old startups like Binance into multi-billion dollar cash printing machines. The top five centralized exchanges by trading volume now control $2.8 billion in ERC20 tokens alone, some 26% of the total ERC20 market. (Although much of Binance’s custody is of its own $BNB token, the industry’s largest ERC20.)
As customers flow into these centralized exchanges, the ecosystem risks related to centralized exchange custody grows.
Which is why DEX is such a sexy sector to talk about in 2018.
Decentralized exchanges never hold user assets, and instead facilitate wallet-to-wallet transfers of tokens. Protocols like 0x allow anyone to plug in and build their own exchange using open-source smart contracts. While some “relayers” - the order book aggregators that sit on top of these smart contract-driven protocols - are starting to require user verification, many facilitate trading without revealing sensitive counter-party details.
Great in theory, but it’s hard to do well.
Managing keys through Metamask or a hardware wallet like Ledger isn’t something the broad population likes to do. And active traders already have accounts and infrastructure tied to the largest exchanges, where the liquidity is orders of magnitude higher. It’s all about liquidity.
And for larger tokens, DEX liquidity is still abysmally low.
DEXs may list a large number of tokens, but many are no-name coins that simply can’t make it through the onboarding process of a reputable centralized exchange.
IDEX, the largest DEX by trading volume, offers 436 trading pairs, but only three had more than $100,000 in trades during the past 24 hours according to CoinMarketCap. By contrast, Binance, the largest centralized exchange by volume, lists 385 trading pairs, with 229 that had more than $100,000 in trade volume.
We’re keeping an eye on DEX volumes relative to centralized volumes, but so far, there hasn’t been much progress.
During the month of September the top five decentralized exchanges saw average daily trading volume of $5.4 million. All five together managed to amass volume of $160.5 million for the month. Not bad for an emerging technology.
But compare that to the top five centralized exchanges, where we saw an average daily volume of $3.46 billion (with a ‘b’) for the same period. Total volume for the month was $103.91 billion. If you include OTC volume, centralized services facilitated some 1000x the volume of trades vs. DEX in the month of September.
Would it be beneficial to combine the benefits of the large order books and familiar infrastructure with the self-custody and privacy afforded by decentralized exchanges?
Many of the top exchanges are already working to win this market themselves. Bitfinex recently launched 0x-based “Ethfinex Trustless”, which requires no sign up and allows users to transact directly between their wallets (you still need Metamask or a hardware wallet) while plugging into the Bitfinex order book. Binance, OKEx, and Huobi are all working on their own designs as well, with Binance targeting a beta launch in 2019.
If existing exchanges can integrate the DEX model into their systems it could be a turning point in the industry.
Solving the custody and security issues without jeopardizing liquidity would be a game changer for crypto exchange in general. And on-chain settlements could help bring greater transparency to trading systems, an issue that was outlined in the recent NY Attorney General’s report on exchanges.
We’ll see how DEX does in October.
News & Analyses
Messari Compression Algorithm
Content and thoughts from around the web as summarized by the Messari team.
♽ [Analysis] The myth of the infrastructure phase – Dani Grant & Nick Grossman
We are not in an infrastructure-building phase of crypto, but rather another turn of the apps-infrastructure cycle. Platforms evolve through an iterative cycle of apps => infrastructure => apps => infrastructure. They aren’t built in a vacuum. Breakout apps inspire infrastructure. When those apps stretch the limits of current infrastructure, new foundational tools get built that enable new apps. Light bulbs, planes, the internet, mobile apps, and Web 3.0 all follow this pattern. The common theme in the development of each major platform is that we build what we can given the tools available to us at the moment, aka the “Adjacent Possible.” Each time the apps => infrastructure cycle repeats, new apps are made possible because of the infrastructure that was built in the cycles before. This cycle explains when apps or infrastructure can be built, but it doesn’t necessarily explain when to invest in apps versus when when to invest in infrastructure.
📦 [Analysis] Unpacking MKR+A16Z – Yannick Roux
a16z crypto purchased 6% (or 60k tokens) of the total supply of MKR ($MKR) for $15 million, for an implied network valuation of $250 million ($250 per token).
Some of the the interesting things to unpack:
1. This deal once again shows that there are multiple entry points for VCs in crypto. Here a16z is buying directly from the Foundation treasury itself.
2. This deal also demonstrates that there are alternative ways of funding decentralized networks other than ICOs. Not all capital must be raised upfront.
3. Despite the price discount a16z got, a few things to note: a) the headline market price is somewhat meaningless without accounting for market depth and liquidity b) the deal is apparently discounted thanks to a16z’s commitment to deploy operational support over the next three years, and c) a16z tokens are locked-up.
4. Here’s one of the very top projects in the space telling the market that traditional help around “sales and business development (including partnerships), marketing, technical talent, HR operations” is highly valuable.
5. It is possible that Maker wants to get Katie Haun, the GP at a16z who led to deal, on its side for regulatory reasons.
6. The ability of governance tokens to capture value has been and continues to be heavily debated, so A16Z endorsement adds some heavy weights to the governance token model camp.
7. Given the stage and complexity of the project, as well as risks and uncertainties still involved, it would be a little premature to expect full decentralization, despite it being the ultimate goal. In this phase, flexibility is still paramount.
💰 Coinbase is now considered an $8 billion company
Coinbase is finalizing a deal that would value the company at about $8 billion, a transaction that would make Coinbase one of the highest-valued startups in the U.S. The company is in talks with Tiger Global and its current shareholders for an investment of up to $500 million, according to people familiar with the matter. Coinbase is expected to add about $250 million in new money to its own coffers, the people said, and as much as $250 million more could go to buying out existing investors, though the exact amount has yet to been determined. (Messari | Source)
Quick Bits (Don't read that, I read it for you)
Choke Points (Exchange News)
👀 Bitcoin futures firm 1Broker said Monday that it will begin allowing users to access a "read-only" version -- meaning that users can view their balances and transaction history -- of its platform, days after it was hit with charges from U.S. regulators. (Messari | Source)
The dYdX Margin Trading Protocol was launched on Tuesday, which enables anyone to trustlessly lend, borrow and margin trade on any ERC20 token. With dYdX Margin Tokens, it is possible to take a short or leveraged long position by simply buying a token, with no need to borrow or sell the underlying asset. Margin Tokens can be traded on any decentralized and centralized exchange. (Messari | Source)
Startup Signals (ICOs, Cryptos, and Startups)
💻 The Constantinople hard fork will be deployed to the Ethereum Ropsten testnet on Oct. 9, after a unanimous agreement. Created April 20, 2017, EIP 1013, Constantinople, will allow for the transition of the Ethereum network consensus from Proof of Work to Proof of Stake. This update will help the network to solve its scalability problems and lower transaction fees by increasing the efficiency of the chain and the use of space in its blocks. (Messari | Source)
👛 Mining giant Bitmain acquires Telescope, an open-source bitcoin cash wallet, on Monday. The browser-based wallet was launched earlier this year in an effort to enable instant bitcoin cash transactions. (Messari | Source)
💰 Blockchain research group Diar reports that blockchain and cryptocurrency-focused startups have raised nearly $3.9 billion through VC investments in the first three quarters of the year – up 280 percent when compared to the whole of 2017, it says. (Messari | Source)
🥇 Korea Investment Partners (KIP), the largest venture capital firm in South Korea, is investing in its first blockchain startup, Temco. Temco aims to revolutionize supply chain management systems for small to medium-sized businesses (SMEs) using blockchain technology. (Messari | Source)
The Powers That Be (Legal/Reg/Policy)
🇰🇷 The chairman of South Korea's National Policy Committee has called for the legalization of initial coin offerings (ICOs), provided that a regulatory framework is put in place. ICO regulation is necessary to create trust in the industry, but reluctance on the part of the government to draw up new rules is a prevailing issue, Min Byung-Doo said. (Messari | Source)
Jim Cunha the vice president of treasury and financial services at the Boston Federal Reserve spoke at the Forbes 30 Under 30 Summit about the limits of cryptocurrency partnerships. The biggest obstacle Cunha says central banks face when it comes to embracing the speed and borderlessness of blockchain isn’t technological but rather, the uncertainty about the security of the organizations building blockchain. Many developers have opted to remain pseudonymous, and scams involving the technology have proved to be a successful way to make money on the technology. (Messari | Source)
"Celebrities" (Crypto Influencers)
🇨🇳 Chinese bitcoin billionaire Li Xiaolai exits cryptosphere ‘for good’. Chinese bitcoin billionaire Li Xiaolai announced his departure from the crypto world in a Weibo post, saying that he will not invest in any more projects. Li founded BitFund, a Beijing-based venture capital investment fund with a focus on cryptocurrency and blockchain projects. This announcement is a follow up to his previous controversies. (Messari | Source)
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