The history of the rise and fall of the exchange: an important silhouette of the development of blockchain

Original from:

Author: Nathaniel Whittemore & Clay Collins

Compilation: Orange Book

There may be no second controversial example like "Exchange".

On the one hand, the exchange is the most profitable business in the blockchain industry. It is part of the current industry ecology and represents the first impression of the mainstream population on digital currencies, but for many password punks and technicians, they hate the industry being represented by the exchange.

On the other hand, exchanges are always in conflict with anti-fraud, anti-money laundering and other regulations. It walks on the edge of the law gray, and is also harassed by hackers. It has created the myth of riches, and has also caused countless leeks to go bankrupt, causing huge losses for ordinary investors. It has brought many new models and is involved in the disputes between countless scammers, pyramid schemes and air coins.

But in any case, from the birth of Bitcoin to the attempt to subvert the currency, to the introduction of decentralized finance to the birth of Ethereum, the recent rise and fall of exchanges around digital currency in the past 10 years has undoubtedly represented the brutal growth of the entire blockchain industry. An important epitome of the division.

In this article, we try to observe the development of the digital currency industry in the last decade through the rise and fall of the exchange. The original text is based on A History Of Crypto Exchanges by Clay Collins. For a better reading experience, the Orange Book has been added to the content at compile time.

Prehistoric stage

As early as the Internet was emerging, in the ancient times of AOL, some imaginative people saw the opportunity to exchange value in new electronic ways. The representative of this is E-gold, the earliest electronic gold.

Founded in 1996, E-gold's philosophy is simple: to allow people to freely transfer electronic gold to each other online, and the value behind it is supported by treasury gold stored offline in London and Dubai. In 1999, the Financial Times referred to electronic gold as "the only electronic currency that was scaled up on the Internet."

In 1996-1999, E-gold was provided with a specific redemption service by the operator Gold & Silver Reserve. By the year 2000, after people redesigned the system, E-gold's settlement and issuance was completely divorced from the functions of the exchange. As a result, a number of emerging small workshop industries soon appeared on the market, which specifically provided users with a conversion between US dollars and electronic gold. Many of these sites are now also visible through the Internet Archive museum.

In all respects, the earliest electronic gold trading website of this generation set a certain tone for the early digital currency trading. This tone has continued to the entire digital currency trading market today, especially around the transaction. Legal supervision of the institute.

In essence, the story of electronic gold is one after another regulatory story. The problems encountered by the earliest forerunners are no different from those of today's cryptocurrencies: anti-fraud, anti-money laundering, and trading license licenses. One of the FBI's most famous actions was to accuse one of the electronic gold exchanges, Gold Age, of allegedly multi-million dollar money laundering.

The founder of Gold Age subsequently created Liberty Reserve, another digital currency, similar to Tether's predecessor used as a entry point for Bitcoin. At the time, PayPal began to ban Bitcoin transactions, and for a long time, Liberty Reserve became a replacement. But the Liberty Reserve was closed in 2013, and the founder of Arthur Bukovsky Bellanchak was arrested in 2016 and eventually sentenced to 20 years in prison.

After the announcement of the verdict, people were excited to discuss whether the BTC would encounter the same end in the Bitcoin forum. If not, what factors make Bitcoin unique. To date, the inherent link between digital currency and criminal activity is still the most important reason people feel the FUD (fear, uncertainty and doubt) about digital currency, and it also affects the confidence of the entire trading market and the entire industry.

On the other hand, these early discussions also hinted at another hidden danger buried within the industry. This hidden danger represents a tension between agreement technology and commercial business. One side is a technician who develops an open source agreement, and the other is a commercial company that provides users with functions. In the context of modern cryptographic assets, as exchanges become more powerful, the pressure on this tension is growing.

But for now, let's turn our attention to the earliest bitcoin exchanges in the cryptocurrency industry.

Early stage

Although Mt. Gox may be the most iconic story in the early bitcoin trading market, it is not the first bitcoin exchange.

The first bitcoin exchange is the Bitcoin Market. On January 5, 2010, dwdollar of the Bitcoin Talk community posted a post: "Hello everyone, I am working on an exchange. I have a big plan, but there is still a lot to do. It will be a real In the trading market, people will be able to buy and sell Bitcoin each other. In the next few weeks, I should have a basic framework website, so stay tuned."

A few months later, on March 17, 2010, went live. Initially, people used PayPal to exchange BTC and US dollars. But with the growth of Bitcoin, there have been more scammers in the market, which eventually led to PayPal officially banned bitcoin transactions, and the exchange can only find other options.


The earliest bitcoin trading market

A few months after the launch of Bitcoin Market, other exchanges were on the line. Undoubtedly, the most striking of this wave is Mt. Gox, which went live in July 2010.

In the first few years, the exchange provided only the most basic and simple trading functions.

On November 6, 2010, the market value of the entire Bitcoin just reached $1 million. On February 9, 2011, the price of a single bitcoin just reached $1. However, progress has increased since 2011, and new exchanges have been opened around the world. The Bitcoin Brazil market was launched in March, and was launched in Europe shortly after April.

During this time, there have been a lot of problems in both payment and hacking. Bitcoin Market abandoned PayPal in June 2011, and a few weeks later, in July of that year, Bitomat lost 17,000 bitcoins. This story was continued in 2012, and Tradehill, one of the largest exchanges in the United States at the time, closed in February. Exchanges such as Bitcoinica and Bitfloor were hacked.

This period is called the Cambrian of the bitcoin trading market. Most exchanges will be forgotten by history. Companies such as Bitstamp (founded in 2011) and Coinbase (founded in 2012) will rise later.

Mentougou era

Mt. Gox is one of the most iconic and notorious representatives of bitcoin trading history. This is a story that has been written many times, and this story continues. The purpose of this section is not to provide a complete history, but to focus on the most successful and failed exchanges in history.

Mt. Gox's domain name was originally registered by Jed McCaleb (this person will continue to help create Ripple and Stellar), and the initial purpose is to let people trade a magical game Magic the Gathering (Magic The Gathering Online eXchange) In the game card, but in July 2010, Mt. Gox began to appear in the face of the Bitcoin exchange.

Like all the early exchanges, Mt. Gox has encountered great difficulties in payment processing. After discontinuing PayPal in October 2010, it temporarily replaced the payment method with Liberty Reserve (the Liberty Reserve mentioned above). Founder Jed McCaleb left shortly after the site went live and was sold to Frenchman Mark Karpeles in March 2011.

In the next three years, Mt. Gox will continue to be the world's largest bitcoin exchange. At its peak, Mt. Gox handled nearly 70% to 80% of all Bitcoin transactions. This huge success has also laid the foundation for its future collapse.

On February 24, 2014, Ryan Selkis posted an unfortunate message about Mt. Gox on Tumblr's blog: "I received a report from a reliable source that has not yet been verified. The title of this report is “Crisis Strategy Draft”, which outlines the current situation of the exchange. I believe the authenticity of the document, but it needs to be verified again.”

At the beginning of this document, it reads: "For most of the public, this may be the end of Bitcoin." In the report, a huge amount of Bitcoin seems to have been lost forever.

Within two weeks, the rumors proved to be true and everyone was shocked. The huge amount and amount involved are unpredictable. A total of approximately 850,000 bitcoins were lost, at a value of approximately $473 million at the time, accounting for 7% of the total bitcoin supply.

Then the accident became worse and worse. First of all, it turns out that Mt. Gox knew that the vulnerability existed for 8 months before the document was published. Second, the actual hacking took place at the end of 2011. Someone found a way to access the exchange wallet, and in the next two years, the bitcoin on Mt. Gox was sold and sold. Although the value of the lost bitcoin was close to $500 million when the document was published, it was estimated that the hacker would receive much less benefit because the bitcoin was sold immediately after it was stolen.

Mt. Gox subsequently declared bankruptcy. Mark Karpeles was later arrested in Japan for manipulating data and was jailed for one year. At the end of the story, there was a new turn. After the accident was discovered, Mt. Gox found that 200,000 bitcoins were quietly lying on an address for three years without moving. As the price of bitcoin rose in the middle, the value of the 200,000 BTCs today is higher than the amount of claims filed by people (unfortunately, the person claiming the claim at the time was in dollars, not the currency standard). After paying back the claim, Mark Karpeles actually got an unexpected gain.

But for those who have experienced numerous lawsuits and marches, this is a nightmare. Now, someone is launching an activity called "civil rehabilitation" to try to get Mt. Gox back from bankruptcy and allocate the remaining assets to those who have suffered losses.

Mt. Gox left a devastating impact on the exchange industry. Since the closure of Silk Road in October 2013, Bitcoin has started a bear market for several months. Fundamentally, the exchange's landscape has also been changed.

Ark currency rebirth

Two years later, the altcoin debut. But this is not to say that there are no important things happening in the exchange industry in the past two years. In fact, in those two years, on the one hand, new exchanges were born, and on the other hand, better systems were established in technology to avoid the recurrence of the Mentougou incident, and the exchanges were also experimenting with new strategies, such as It completely circumvents the transaction between the legal currency and the digital currency, thus focusing on currency transactions.

However, for the purpose of the narrative, we will start from the birth of Ethereum and the new round of altcoin and 1CO wave triggered by it, and begin to tell the story of this stage.

Ethereum brought a lot of new things. Bitcoin focuses on becoming a decentralized currency for value exchange. Ethereum not only has value exchange, but also brings about the programmability of value, the rise of ERC20 token standard, and also brings about 1CO irrational fanaticism.

For the explosive wave of the industry in 2017, the biggest winner of the exchange is the currency security.

On June 14, 2017, the founder of Binance, Zhao Changpeng (CZ), heard about 1CO for the first time during the dinner. In three days, he also wrote a white paper in both English and Chinese. After nine days, 1CO started. In just one week, 1CO ended, and Coin Security raised a total of 15 million US dollars.

Behind the crazy speed, CZ and his team have actually worked in the exchange industry for many years. The trading system and matching engine launched by the company are the fifth generation trading system they built. Prior to the creation of the currency security, CZ and his team had been providing white-label infrastructure products for major exchanges.

The speed of development after the currency security is not reduced. In five months, according to the transaction volume, the currency security is the world's number one cryptocurrency exchange, and in the following three months, the currency security reached 120,000 users. After another three months, the currency reached 1 million users. Only one week later, there were 2 million users. From a revenue perspective, the currency has become the fastest growing startup in history.

On the one hand, the crazy growth of the currency reflects the accumulated experience of CZ, but on the other hand, it also reflects the irrational enthusiasm and madness of the 1CO era. Between mid-2017 and mid-2020, the exchange's competition is almost entirely based on competition in the currency, which is the competition of the long-tailed altcoin assets.

Thanks to the rapid rise of the currency, it is able to provide maximum liquidity for the altcoin, which in turn makes it the ideal location for the currency. In this way, the currency has established a strong feedback loop and network effects, further accelerating its leading position in this field. Later, the currency has introduced the platform currency BNB, which provides the holder with a discount on transaction fees and promises to repurchase the BNB with quarterly profits.

But at the same time, the 1CO boom has not continued. Soon after, interest in the altcoin in the long tail market has disappeared, and the exchange will have to reinvent itself to adapt to new changes.

It should be noted that the models and innovations provided by the exchange are not always good. Before entering the bear market in 2018, during the short period of the 1CO boom, we did not elaborate on the fact that many of the exchange's models also introduced extremely dangerous factors, especially in the currency project and token evaluation. A tripartite incentive mechanism has been established between the ranking website and the exchange. Under this mechanism, the tripartite bodies can easily collude with each other.

The altcoin project wants to profit from the exchange's liquidity to harvest the leek, and also hopes to get traffic from the ranking website (and thus bring more liquidity); the evaluation website hopes that the market will keep hot spots to attract more traffic so that I am able to sell advertising profits; and in order to be able to charge higher credits from the project, the exchange hopes to have the most trading volume on the ranking website.

If you want to know more about this stage, take a look at Nic Carter's article "The Dark Side of the Cryptographic Money Market."

The success of the exchange is naturally related to the business model, but in many cases this does not represent the whole truth. This phase is an accident in the history of 1CO, not the core of the success of the exchange. In order to survive and develop, the exchange will have to reinvent itself and transform itself, and that is what they are doing now.

Modern stage

After the era of madness in 1CO, we entered the modern stage. This stage has many new opportunities and challenges for the entire trading industry. One of the most important keywords is “derivatives”.

Derivative trading

BitMex is not the only derivatives trading market. OKex is also competitive at this track. As the market matures, only the spot fire coins and coins have launched their own futures trading products.

Derivatives trading is currently on the market and has unprecedented impact compared to the past. One way of saying this is that CFTC allows the emergence of compliant derivatives exchanges such as CME and BAKKT, in order to allow institutions to better enter the market and promote the industry to the mainstream.

Regarding CME and BAKKT, the difference is whether it is cash settlement or physical settlement. BAKKT is a physical settlement means that an organization wants to participate in a transaction, and must first hold bitcoin, which will promote the market demand of Bitcoin. BAKKT has started to climb steadily after experiencing a sluggish trading volume. The recent daily trading volume has exceeded 15 million US dollars.

In addition to compliance exchanges and traditional big exchanges entering the derivatives trading market, we have also seen some new trading products appear. For example, Deribit, CME, bitfinex, OKex, etc., which have the main options, have plans to launch option products.

According to Bloomberg News, the trading volume of the derivatives trading market has reached 50% of the spot market this year. On the day of the 9.25 plunging, according to the research institute data, the derivatives trading volume of the mainstream exchanges is the fourth of the spot trading volume. More than double.

From the niche market to the present situation, the rapid development of the derivatives exchanges is basically concentrated in 2019, and this market still has a lot of room. Compared with the traditional financial market, there are still several times of growth space, except for the mainstream. Exchanges are also emerging as players who are competitive in terms of product and depth.

In addition to the native players, the emergence of compliant players such as CME and BAKKT has also made the market more mature.

Platform Coin & IEO

In 2019, due to the retreat of the ICO, the wealth effect of the spot is no longer obvious. Many users are moving towards derivatives trading, which has led to the outbreak of futures trading, but the spot exchanges still create new ways of playing: platform currency + IEO The combination of punches.

The IEO was first launched by the currency security. The 10 times wealth effect has caused many players to re-focus on the spot market. At the same time, it has become one of the important scenarios of the platform currency application of the exchange and one of the core means of user growth. After all, the platform currency is the threshold for IEO participation. It is beneficial to reduce the circulation of platform currency, and the wealth effect of IEO can flow by itself.

However, after the currency has relied on IEO to live a large number of trading users, the fastest follow-up is not the core competitors such as Firecoin, OKex and other players. Instead, the second and third-line exchanges without baggage began to imitate and seize the users. After seeing the effects of user growth and the surge in trading volume, the platform currency + IEO became the standard for all exchanges, and the boom began to cool down until the second half of the year.

Unlike ICO, the popularity of IEO has not made the industry grow as fast as it did in 2017. It has gradually become a means of growth for the exchange to rationally plan the market and operating budget, that is, to calculate a trading user, I am willing How much is spent. A lot of follow-ups do IEO, and the team that didn't think clearly also lost a lot.

Decentralized exchange

Decentralization is one of the important foundations of this industry. It is the core pursuit of early password punks without the need for anyone to access, without having to face censorship and control their own information and wealth.

But most of the industry's most important infrastructure exchanges are in the hands of centralized organizations. Your bitcoin may be a number that can be changed in the exchange's server.

That's why many people are willing to invest in DEX in 2017. The Bancor agreement received $153 million in ICO.

In 2018 and 2019, new products and agreements were constantly appearing in this field, such as 0x-based Uniswap, the first project of the Ethereum hacker, and the current transaction volume has surpassed its predecessor Bancor, becoming the largest ecological estate in Ethereum. DEX, with more than $20 million in assets, can be traded through it.

In addition to Ethereum, EOS during the 18-year Dapp outbreak, DEX trading volume is also very impressive, there are decentralized exchanges such as NewDex.


The regulation of digital currency is very complicated even in the same region. For some exchanges, it is the first choice to move directly to the relatively loosely regulated areas.

For example, the company claims that it has a globally distributed office and is registered in Malta, but it has offices in Hong Kong, Japan and Singapore.

In today's exchange market, the gap in compliance is very large. In order to avoid regulation, many exchanges have indicated that they do not provide services to US users, such as BitMex and Poloniex.

On the other hand, some exchanges have begun to work closely with regulators. In the United States, there is a tighthold in New York's Gemini. The main focus is compliance. Coinbase is also a US-compliant exchange.

Of course, when we discuss compliance, it does not mean that it is just a card of the exchange Branding. It means more mature market, and eliminates those platforms that are unfavorable to trading users and do illegal operations. Industry shuffling to better protect investors.

So in 2019, almost all exchanges are emphasizing self-regulation, and everyone will embrace supervision to the greatest extent possible.


The exchange industry is still making continuous progress. From the current market trends, we can see that the exchange's growth strategy and product iteration speed are accelerating.

Observing the exchanges is an important perspective to see the rise and fall of the entire industry. They must respond to the needs of all current users, while also providing new products and services to continue to believe in the industry.

They are a barometer of regulatory changes in the environment, and they are also the vanguard of embracing regulation and keeping up with regulation.

In the next few years, the competition between the exchanges will become more and more fierce, and for us to eat melons, do not touch high-risk assets, be wary of being cut of leeks, move a small bench, and watch movies silently.