Opinion: Is the long tail market the future of DEX?

Foreword: The long tail market refers to the phenomenon that the total sales of products or services that are not valued by the small but large variety exceed the mainstream products due to the huge total amount. For example, the growth of Douban in the past is inseparable from the long tail effect.

So is the long tail market of tokens important enough for decentralized exchanges?

(Long tail market sketch, from Wikipedia)

For ease of reading, the following nouns will be replaced by English.

DEX: Decentralized Exchange

CEX: Centralized Exchange

One of the most obvious uses of the blockchain is the ability to conduct unlicensed, non-custodial transactions. The way to achieve this is usually through “distributed exchange” or “decentralized exchanges”.

Although there are many DEXs that are constantly emerging, compared to most CEXs, there are only a handful of people who use DEX. (The currency is able to top 1000 times the four major DEX trading volumes, the four main DEX are Uniswap, Kyber, 0x, DutchX).

If the decentralized exchange is really a future trend, why is the data so ugly? Why is this happening?

The author's hypothesis is that the market for DEX is actually much smaller than people expected. The real thing about DEX is that it provides a long tail market for digital assets.

Because at other times, most people prefer to trade on a centralized exchange. (People prefer to choose convenient and fast service) The so-called long-tail market of digital assets should be: tokens or markets that are not supported by centralized exchanges.

Unsupported tokens are either too small, too risky, or highly competitive exchange tokens.

Too small: Refers to tokens below a certain trading volume threshold, generally referring to tokens with low volume.

High risk: Refers to the absence of highly regulated and highly risky tokens.

Competitive: Refers to tokens issued by different exchanges whose interests are conflicting.

A token that satisfies the above three characteristics is the LEO issued by Bitfinex.

The only CEX that supports LEO is Bitfinex itself, and they are the issuers of tokens themselves. When LEO was just on the line, the volume was very low (about $5 million per day).

In terms of regulatory policies, LEO does not support US investors to buy (Bitfinex can change the white paper at any time or the proportion of LEOs repurchased every month, even if this is unlikely, but it also makes LEO highly uncertain).

At the same time, LEO and other exchanges' platform coins are in a competitive relationship. No CEX is willing to put their own tokens on other CEXs to generate a transaction pair, because you can't know if they are in their own centralized system. Malicious operations are performed using coins that do not exist. Therefore, if American investors want to get LEO, they can only use two ways, OTC or DEX.

Unsupported markets are either new deal pairs (such as early ETH) or in a new trading scenario (such as games or apps like points, game gear, virtual pets, etc.).

These markets and those that CEX does not want to support, in terms of value level, may be insignificant in the early stage.

But over time, these markets will become important if they can serve or meet the needs of most people. (We give a realistic example. For example, the initial Ethereum did not have much value in legal currency, and the real value of the legal currency was at ICO).

DEX offers speculators some of the more differentiated services: a richer range of digital assets and more markets.

By the way, they don't have to compete with mainstream CEX. Those emerging CEX are the targets of their competition. Because emerging CEX is likely to compete with DEX in more (currency) markets, these CEXs may be in a weak position.

Because traders face these highly risky tokens and markets, they prefer to use non-custodial transactions to secure their digital assets. Therefore, the future success of decentralized exchanges is closely related to the future success of the digital asset long tail market. (The tail of the long tail market needs to be long enough).

If you imagine a future dominated by Bitcoin, then the ability to use tokens with rights and features will be rare, and the existence of DEX will not matter. (According to the previous article, most people prefer to trade mainstream tokens on CEX)

But if you imagine a future with millions of different tokens, many people will use different tokens to get different services and benefits. Even if the market for these tokens only exists in the long tail of the market, then going to DEX has been very successful.

And we can't rule out a possibility that DEX is mainstream:

1. If DEX's trading depth and liquidity exceed CEX.

2. The pressure of regulation forced the centralized exchange to move to DEX (reference currency).

3. Innovation outside of DEX creates a huge local encryption user base.

For example, web-based applications, DEX can be used as a convenient exchange interface for games and applications. (Removing DEX as a concept for decentralized exchanges, "DEX" is intended to be a decentralized exchange. A small, decentralized exchange interface/plug-in will replace the existence of a decentralized platform. It is more like a value exchange. A shortcut tool instead of a platform.

Some of the most common arguments I have heard about DEX around me are (sorted by the frequency people mentioned):

1. Non-custodial transactions, the user's funds are in their own hands (to reduce the risk of being hacked, the project side to run the money).

2. Anonymity (a tool for providing secret transactions ==> tax avoidance, capital flight).

3. A broader token market.

But I bet the important factors that determine the future of DEX. These three points should be reversed.

A broad market is the most important, followed by being used as a tool for capital flight. The final guarantee of the security of transactions is a matter of concern to a few talents.

I think many people will not agree with this point of view. What do you think?

This article is mainly from TonySong's point of view on DEX. I also add some content about DEX:

About LEO:

In fact, LEO has been on the mainstream CEX such as OKEX, GATE, and ZB. As a generation of stable currency USDT, Bitfinex is also on the line with USDC, USDK and other trading currencies. So is it that the kings began to decline, or did they form a community of interests?

Why can't you do CEX in the long tail market:

Most project parties are not willing to cooperate with CEX because they cannot fully trust CEX and cannot prevent them from doing evil. In addition, if there is no bottom line in CEX, no matter whether it is the user or the market, it will become a speculative tool, which will be a series of chain effects.

Decentralized switching is more suitable as a small interface, such as P3D made by the famous team JUST. Decentralized switching is more like a plug-in that converts P3D and ETH value. This is one of the author's assumptions about the future of DEX as a component of the application.

The decentralized exchanges such as 0X and Uniswap provide users with more trading depth in the currency market, not limited to the exchange scenario of a single currency. It is more appropriate to describe it with a platform. Whether it is a decentralized exchange or a decentralized exchange, they are able to provide users with financial security.

The long tail market is not good:

The difficulty lies in how to connect the long tail market. For example, when it comes to markets that require cross-chain interaction, the labor costs required will be very high.

If there is a distributed commercial architecture or a new type of transaction matching algorithm, then it is completely subverting the existing centralized business model, which is more like a brand new human social civilization. There are also some DEXs that are in compliance with regulations and embrace supervision (such as the Whale Exchange, their users are involved in KYC issues), then this DEX is difficult to become a tool for tax evasion and capital flight.

Technology and the market are in a state of parallelism, and the efficiency of centralization greatly exceeds decentralization, and security is always only the needs of a few people, and it is the easiest point for DEX to achieve. How to design a self-driven DEX access to the long tail market may be a good direction.

If you have more ideas about DEX, please leave a message in the comment area~


References: https://tonysheng.substack.com/p/niche-markets-most-likely-driver

Compile: 17

Edit: Wind Answer