The next decade of crypto trading

This article comes from The Block author | Tarun Chitra

Translators | Moni

Production | Odaily Planet Daily (ID: o-daily)

The coming of 2020 also heralds our entry into the next brand-new decade. I believe many people have read many articles about "year-end summary" recently. The same is true for the blockchain and cryptocurrency industries. Indeed, we will not be able to foresee what the future of the crypto trading industry will be without gazing at the financial development past!

Historically, every major change brought by financial transaction innovation has been accompanied by a combination of business model innovation and technological improvement. In the field of crypto trading, these innovations include quantitative improvements to valuations (such as using the Black-Scholes option pricing model), and electronic market infrastructure to help new competitors (such as BATS) enter trading platforms.

The development of the past 40 years has brought changes to the structure and valuation models of traditional financial markets. In the next 40 years, it seems that this trend of change will continue. In the 1980s and 1990s, electronic trading markets and novel valuation models pushed options and futures trading to unprecedented heights. Over time, in the first two decades of this century (that is, the 2000s and 2010s), the development of the financial industry also led to the emergence of entirely new forms of algorithmic trading, and the development of the market has made more and more passive investments (and overall Market participation) has become easier.

As in the traditional financial industry, we have also seen "convergence" in business models and technological improvements in the cryptocurrency field. Some of the most typical examples are exchange tokens, on-chain transactions, and lending. In fact, this "convergence" trend will not only be an important goal for the future development of the financial industry, but also a leader in the new era of encrypted quantitative trading.

Exchange tokens: business model innovation or regulatory arbitrage?

I believe many people still remember the "crazy bull market" of cryptocurrencies in 2017. At that time, some exchanges and financial-savvy professionals realized that if they wanted to reduce customers' concerns about the inherent volatility of cryptocurrencies, futures and other Derivatives are one of the most effective "packaging" methods. In this regard, the cryptocurrency exchange BitMEX is at the forefront, but as more and more new cryptocurrency futures exchanges appear on the market, they are beginning to compete for the first-mover advantage and liquidity advantage of BitMEX. This competition is not bad for the industry as a whole, but instead has produced a surprising business model innovation: exchange tokens.

Most other tokens in the market lack utility and value accrual. In view of this, we must naturally think of a question: Since other tokens lack utility and accrual value, why do exchanges Is the certificate special and accruing value? To this end, let's first understand some background on how traditional equity trading venues allocate revenue.

In traditional equity trading markets, exchanges such as the New York Stock Exchange (NYSE) or the Chicago Mercantile Exchange (CME) share revenue with market makers, and the proportion of revenue distribution depends on the market maker's trading volume. Why would they do this? First of all, exchanges don't want to take risks themselves. They just want to collect "tolls" (commissions), but don't want to do any maintenance. However, the exchange needs to ensure that there are no problems in two tasks: first, the difference between the bid price and the ask price cannot be pulled too large, that is, to ensure a small spread; second, to meet regulatory requirements, such as supporting supervision Neutral Market Service (RegNMS). In order to better achieve the above purpose, the exchange usually provides some discounts to market makers. For example, according to the commission rate, you usually need to pay 0.01% of the transaction price per share, but if you trade more than 10,000 shares per day, the exchange will You are offered a discount of 0.005%, which can be paid quarterly or on a per-period basis.

The "Exchange Token" of cryptocurrency exchanges is to find innovative points from the "discount" services provided by traditional exchanges, including BNB of Binance, HT of Huobi, etc. These exchange tokens can provide higher Instant discounts. So, how does an exchange token work?

1. The market maker will continuously obtain rebates paid with these tokens, thus changing the relative supply of these tokens (for example, new tokens are issued);

2.Cryptocurrency exchanges rarely destroy their own exchange tokens in large quantities, which will also make exchange tokens more valuable, and because market makers have already quoted these tokens in the market (such as , FTT / USDT has the bid-ask spread), and they can effectively get "continuous" rebates;

3. Continuous rebates allow market makers to better optimize their capital so that they can:

  • Reinvest these rebates in long positions (we can think of it as a "bonus reinvestment" behavior, but only for market makers here!)
  • Take greater risk and leverage;
  • Reduce the difference between the bid and ask prices and reduce risk.

Of course, the New York Stock Exchange or the Chicago Mercantile Exchange can provide similar functions and services, but they are reluctant to do so because these exchange tokens can be easily identified as securities by regulators. So, this is why we rarely see the boom of exchange tokens in western countries. Now these tokens are mainly targeted at Asian markets, and have successfully encouraged emerging market participants in ways that traditional exchanges cannot provide. These cryptocurrency exchanges increase liquidity. Not only that, these exchange tokens also have a feedback loop, so you will see Binance, FTX, Huobi, and CoinFLEX-these BitMEX competitors use their exchange tokens as a tool to gain market share.

What can we learn from the past of the traditional financial industry?

Today, the endless competition between cryptocurrency exchanges is very similar to the active early stages of the stock market from the late 1990s to the early 2000s. At that time, in addition to the New York Stock Exchange and Nasdaq, there were many competing types Trading platform. At that time, the liquidity of the US stock market was extremely decentralized, and the data was also problematic. Some large data providers (such as Yahoo Finance and Standard & Poor's) provided hundreds of different types of transaction data of different quality. Their role is similar to that of the CoinMarketCap in the cryptocurrency market very similar. To this end, regulators have decided to support the regulation of neutral market services, forcing decentralized stock exchanges to become more centralized, thereby increasing liquidity and transparency.

Supervised Neutral Market Services was implemented in 2005, requiring stock exchanges across the United States to provide a higher National Best Offer Price (NBBO) than all other exchanges, thereby forcing the US stock market to stabilize. However, the move also means that some smaller exchanges will have to "obey" larger exchanges and offer prices that match those of high volumes. In this case, many smaller exchanges in the market inevitably go out of business, because being forced to provide prices that deviate from their liquidity makes them lose money.

In the end, the boom and bust era of the U.S. emerging stock exchanges ended with some of the largest emerging stock exchanges being acquired by traditional exchanges and banks for billions of dollars. When we look back at the exchange token, naturally we will also think about a question: what will the regulatory neutral market service of the cryptocurrency industry look like?

Automated Market Makers: Regulated Neutral Market Services for Cryptocurrencies?

When it comes to regulating neutral market services, the decentralized nature of early US stock markets is very similar to the decentralized nature of today's cryptocurrency exchanges and on-chain transactions.

In the cryptocurrency world, traders can actually use smart contracts for unmanaged transactions, instead of trading on centralized entities such as Coinbase, Binance, or BitMEX. Until 2019, the user experience of these cryptocurrency exchanges is still not very good, such as: expensive (relative to centralized trading competitors), security breaches (higher maintenance costs), extremely low value of fee tokens (or even no value). With the launch of Uniswap and the continuous introduction of new product markets, users of these protocols have experienced tremendous changes in terms of usability, user experience, and cost. Uniswap is a decentralized exchange agreement released on the Ethereum mainnet in November 2018. Its creator, Hayden Adams, has received $ 100,000 in funding from the Ethereum Foundation. Uniswap's idea is simple and clever. It uses equivalent ETH and ERC-20 tokens to establish a pool of on-chain trading pairs to provide liquidity for exchanges. Uniswap also outperforms Bancor and the like because it avoids the mistakes that automated market makers have made and also optimizes for simplicity (resulting in reduced cost complexity and lower costs). The competitors are much better (Odaily Planet Daily Note: Bancor had successfully raised $ 153 million in 2017).

So, what is an automated market maker? We have some methods for assessing assets without a market maker. These methods have been in the academic literature since the early 2000s and are often used in early prediction markets. However, due to the complexity of the user experience and other challenges (such as the Lightning Network / Lay 2 game challenge), the usage rate is often not very high.

So how does an automated market maker work? In fact, they can motivate participants:

1. Lend assets to a pool and allocate transaction costs from the pool proportionally. Market makers are replaced by these lenders, who can obtain passive income by lending their assets to the pool, and can even treat the proceeds obtained by lenders as "shared revenue with the exchange", which is exactly a smart contract.

2. Act as an "oracle", synchronizing the prices of off-chain exchanges and on-chain exchanges (for example, incentivizing arbitrageurs to keep the ETH / DAI price on Coinbase at “ close '' to that of on-chain exchanges Level).

The simplicity of automated market makers has led to a lot of on-chain liquidity. In order to allow token prices to be “Tetherized” on cryptocurrency exchanges such as Coinbase / Binance, automated market makers will change their strategies, never The transaction ledger begins with incentives for those who provide tokens to the token library. Not only that, those who are engaged in the development of the user interface of the decentralized trading protocol can easily integrate with Uniswap. This is why the decentralized margin trading contract Synthetix is ​​leading the liquidity of synthetic token traders, and it is also decentralized trading. One of the many attempts by BitMEX. Synthetix can be regarded as a model for on-chain trading venues to allow new use cases to guide existing liquidity, and as its native token value increases, it also makes it one of Uniswap's largest assets. So, what is driving the continuous increase in on-chain transaction activity? There may be several reasons:

1. The scrutiny of KYC is getting stricter (It is said that BitMEX must also comply with EU Anti-Money Laundering Order 5);

2. The introduction of practical automated market makers involves providing reasonable (but not perfect) passive income for token lenders, and at the same time encouraging arbitrageur price synchronization;

3. The growth of on-chain loans (such as Compound) provides traders with important leverage;

4. It turns out that the market forces of more and more exchange aggregation service providers (such as the new design of 1inch,, 0x) can synchronize prices (and reduce fees!) In these trading pools without trading Entrusted ledger.

This is a considerable innovation, because the price synchronization in the traditional market is relative to the national best bid and offer price (NBBO), and there must be a transaction commission ledger;

This already looks like a decentralized version of RegNMS and does not require KYC (Know Your Customer) compliance constraints.

How will these changes affect the future of crypto trading?

Considering the emergence of two financial tools in the cryptocurrency industry in 2019, many people naturally want to ask, what is the next step, and how will these tools change crypto trading in the next ten years? Here, we will analyze from four aspects: Bitcoin, Ethereum, other Layer 1 protocols, and future valuation models.


  • Lightning Network (Lightning) has always been the main form of lending activities on the Bitcoin chain. Lending transactions correspond to the original network value provided in terms of routing. We believe that the Lightning Network will make great progress in 2020, especially cryptocurrency exchanges such as Sparkswap and games such as Lightning Poker have made good improvements in user experience and usability;
  • Centralized exchanges will connect to the Lightning Network (Bitfinex announced it was connected to the Lightning Network in December) and provide more arbitrage opportunities because Lay 2 cross-chain solutions will start to have more intrinsic value (for example, making Uniswap Arbitrage opportunities are more valuable);
  • There are many projects that hope to introduce DeFi to Bitcoin through sidechains, such as Echo and Money on Chain (based on RSK). These projects will provide ample opportunities for Bitcoin holders who do not want to earn income through cross-chain;
  • Cross-chain solutions such as Cosmos and tBTC will also help increase liquidity, as traders can lend tokens on one blockchain to another without having to rely on a token like Genesis or Celsius External suppliers;
  • Lightning and cross-chain solutions will provide Bitcoin holders with almost all on-chain borrowing and transaction profits, while sidechains will have difficulty gaining widespread application.


  • More and more margin trading platforms are starting to launch on Ethereum, such as Monte Carlo DEX (Bitcoin Synthesis with up to 5 times leverage), UMA and Synthetix. In the next decade, we may see growth in these projects, which are designed to use novel revenue sharing protocols (such as exchange tokens, transaction fee pools, etc.) to minimize gas usage and optimize user experience ;
  • The number of lending projects on Ethereum has been increasing, mainly to support transactions. Increasing borrowing pool trends (such as Compound's support for exchanges / wallets, better user experience through Dharma), and increased demand for derivative lending tokens will also have a flywheel effect (but we hope this is the same as in 1929 Margins are different when the stock market crashes;)
  • As the profitability of preemptive transactions decreases and costs are higher, private Ethereum transactions will open different transaction methods (such as shielded ERC-20 tokens through the Aztec Protocol);
  • Front-end supervision will increase, for example, even if Uniswap smart contracts are running on the Ethereum blockchain and anyone can use them, they still restrict users from accessing their front-end Webapps in some countries;
  • In contrast to the improvements in Layer 1, Layer 2 will make a lot of improvements in driving transactions and loans in the foreseeable future. Matter Labs is in charge of this, and between zkRollups and StarkDEX, opportunities will increase significantly.

3.Other Lay 1 agreements

  • Many protocols will be launched on on-chain exchanges (such as Celo), these protocols need to be exchanged to maintain stability (for example, stablecoins), and provide on-chain liquidity for validators early in the network
  • These networks will need to establish liquidity in the loan pool on Ethereum to guide both parties to the transaction;
  • The cross-chain solution will also guide liquidity to the new chain from the existing blockchain (such as Bitcoin, Ethereum);
  • In 2020, in addition to mortgage derivatives, we may also see breakthrough trading applications such as Algorand / DFINITY / NEAR / Solana.

4. Future valuation models

  • As on-chain transactions become more mature, the actuarial and quantitative tools and technologies used to analyze and protect these networks will also mature.
  • In most Ethereum trading venues, preemptive trading is already common, and one should expect to see that taking advantage of the underlying transaction data involves more complex trading strategies and dominates the market;
  • 2020 may be an exciting time! There will be significant improvements in valuation models (such as the Black-Scholes option pricing model), as well as improvements from market infrastructure. In 2020, there will be more and more crypto asset valuation tools;

After reading this, you may already have a certain understanding of the development direction of crypto trading. If you still feel a little vague, then please keep in mind that with the development of business model innovation and technological improvement, the next decade of crypto trading will definitely It is very different from the last ten years.