Table of Contents
Researcher
1. Background - Stagnation of Innovation in CEX
One critical failure point hindering the development of the crypto industry is the centralized exchange (CEX). There are two main reasons why CEX holds significant importance in the crypto sector: firstly, (ironically) most crypto assets are held in CEXs, and secondly, they serve as crucial bridges for users transitioning from off-chain to on-chain.
In terms of the former, the importance lies particularly in asset management. Many incidents that have severely impacted the crypto market downturn have been related to CEX hacks - from the Mt. Gox hack, the collapse of FTX post-Terra, to the recent WazirX hack, we have witnessed a series of this kind of events over a considerable period. However, we have focused primarily on the extent of the assets hacked in each timeframe rather than undertaking any community-wide efforts to find fundamental solutions. Consequently, the burden of dealing with these issues and responsibilities has consistently fallen on CEXs alone.
The latter case is crucial in accelerating crypto adoption aspect. Currently, despite CEXs play a key role in onboarding off-chain users into the on-chain environment, their autonomy is significantly restricted by the various regulatory frameworks that different countries are preparing. Moreover, these regulatory frameworks are not only vastly different from one another but also highly erratic and conservative. This results in substantial economic and temporal costs for CEXs to develop innovative initiatives that can spread the crypto experience on-chain. To make matters worse, as these processes stagnate, the continuous influx of new users is likely to concentrate on CEXs, further burdening them and increasing the risk of hacks.
2. Takeaway
Despite the aforementioned circumstances, most crypto assets continue to be traded primarily on CEXs due to their superior accessibility compared to others. And unfortunately, this trend is likely to continue - even after the FTX incident highlighted the necessity of DEXs, we observed that usage of CEXs soon returned to previous levels.
This suggests that traders either find the trading experience on DEXs significantly inferior or they ultimately prefer the more familiar and convenient trading experience of CEXs, prioritizing aspects such as price discovery and capital efficiency over security and transparency.
For the organic growth of the industry, it is essential for exchanges that can fundamentally eliminate risks like hacking to gain more dominance. However, if traders cannot forgo the superior trading experience of CEXs, the solution may lie in the emergence of a new type of crypto exchange that provides an excellent trading experience built on a trustless infrastructure from the ground up.
An exchange built using this approach is commonly known as a 'Hybrid Exchange (HEX).' - notable examples include projects like @bluefinapp, @cubexch, and @dYdX. The core of their infrastructure is to execute a series of trading logics such as order matching off-chain, and to have settlement that upload transaction records and balances on-chain. This way, it aims to take advantage of both CEX and DEX (or mitigate the shortcomings of each).
Of course, even with the emergence of more HEX platforms, attracting CEX users to HEX in the short term will not be easy. The primary reason for this is that people generally prefer to trade in familiar environments. Additionally, despite the promise of a rich trading experience, various factors such as potentially higher entry barriers compared to CEXs, localization, asset variety, and liquidity management need to be carefully considered.
Nonetheless, for the funnel of crypto adoption—from acquiring crypto assets to utilizing them on-chain—to become more robust and seamless, innovation in the initial experience (i.e., trading) is crucial. HEX's design, which ensures a highly reliable and fast trading experience, can revamp the conventional and conservative exchange market, laying the foundation for more efficient development of the crypto industry.
*An article related to this opinion is set to be published soon. You can follow the @FourPillarsFP account or join the Telegram channel at https://t.me/FourPillarsFP to receive updates.
3. Others’ Opinion
3.1 Rabeel Jawaid from Bluefin
"There is one huge advantage of being on-chain even if your order book is off-chain, which is that it's non-custodial - the something like what happened with FTX and others in the past won't happen when you're on-chain because your assets are collateralized on-chain and users self custodies their assets."
3.2 Bartosz Lipiński from Cube Exchange
"People want a more secure and trusted centralized exchange, but what they don't know is that they need something more hybrid."
3.3 Joe McCann from Asymmetric
"Cube.Exchange tackles counterparty risk through a groundbreaking hybrid market structure, harmonizing traditional exchange strengths with Web3 technology to safeguard user assets against co-mingling, rehypothecation, and misappropriation."
3.4 Austin Federa from Solana Foundation
"Such a refreshing take on the centralized exchange — a hybrid model that gives users more assurance and control over assets on the exchange."
4. Resource
Related Articles/News/Tweets etc. :
Interview for Rabeel Jawaid - https://www.youtube.com/watch?v=AcwU1gP4huU
Tweet from Bartosz Lipiński - https://x.com/baalazamon/status/1800538002604855683
Tweet from Joe McCann - https://x.com/joemccann/status/1716868480241447058
Tweet from Austin Federa - https://x.com/Austin_Federa/status/1662497052411011073
