Co-authors
Peter Yoon (@whitebitcoin8)
Andrew Kang (@adr_sk_)
This article is Episode 4 of Why Gno?, a series featuring a deep dive into Gno.land, the most performant smart contract platform powered by Gnolang, and Gnoswap, an innovative concentrated liquidity DEX aspiring to become the liquidity hub of Gno.land.
[Why Gno?]
Episode 1: Tracing the History of Crypto
Episode 2: Hello World, Meet Gno.land
Episode 3: A Deep Dive into Gno
Intro
Crypto Exchange — A Gateway Into Crypto
Running a crypto exchange has proven to be one of the most successful business models in the blockchain industry. Exchanges have built a massive user base by serving as a gateway between crypto and fiat systems and thus have gained substantial revenue and influence.
Despite the irony that a centralized form of business has given birth to the most powerful entities in the blockchain industry, in its short history of 15 years, blockchain has clearly revolutionized one of the most primitive interactions of mankind — trading.
Don’t reinvent the wheel
Humanity possesses a remarkable gift — the capacity to enhance the status quo by drawing insights from the trailblazers of the past. As we embark on the quest to shape the future landscape of exchanges, we must first cast a glance backward to review the learnings from past trails of this realm.
This article will delve into three invaluable lessons that the industry has gleaned from the experiences of past exchanges during their intense battles to capture the market.
Lesson 1 — Make Trading Reliable
Relevant Exchanges: Mt. Gox, Mintpal, Cryptsy, Bitfinex, FTX
The Mt. Gox Scandal
The first leader of the industry was Mt. Gox, a crypto exchange based in Japan. In 2013, Mt. Gox handled over 70% of all Bitcoin trades, heavily dominating the market with no close competitors.
The reign of Mt. Gox ended abruptly, as the exchange took a destructive hit from the largest Bitcoin hack of all time where 740,000 BTC from customers and 100,000 BTC from the company were stolen. Factoring in the price of BTC at the time of the hack, it suffered a total loss of $460 million. Customers were left devastated, powerless, and fully exposed to the damage.
Mt. Gox soon went bankrupt, disappearing from the industry along with the majority of lost Bitcoins of its customers.
Endless Noise
Many cases of tragedy struck other popular exchanges of the past. In 2014, 10,000 BTC worth of VeriCoin was hacked from Mintpal, which incautiously stored their holdings in a hot wallet. Despite an acquisition followed by a reorganization of Mintpal after the incident, it soon suffered another disaster. This time, however, the “hack” was caused by none other than its newly appointed CEO, who stole over 3,700 BTC from the customer funds. Similarly, Cryptsy Exchange became defunct after losing $5M worth of crypto to a hacker and $1M in BTC to its own CEO who was later charged with fraud.
Another notable hack occurred in 2016 when almost 120,000 BTC were stolen from Bitfinex, an exchange based in Hong Kong. The impact caused Bitcion’s price to plunge by 20%, and Bitfinex had to halt all trading and withdrawals on the exchange to prevent bankruptcy. Customers were yet again reminded of the importance of selecting the right platform to store and trade their crypto on.
The FTX Collapse
Less than a decade after recovering from previous disasters, the industry has witnessed one of the largest downfalls of a single entity in its history — the collapse of FTX, the second-runner crypto exchange that was home to millions of traders. Similar to past mistakes of exchange operators, the root of the collapse was the unethical use of customer funds followed by a hack. According to the official bankruptcy filing, the sum of assets and liabilities that FTX was responsible for was in the range of $10~50 billion.
The FTX blowup has kindled a new trend where traders started migrating from centralized exchanges to decentralized ones such as Uniswap and Curve for spot, and DYDX and GMX for derivatives, where they have full control and transparency of their assets.
Lesson 2 — Offer Diversity and Leverage
Relevant Exchanges: Poloniex, Bittrex, Huobi, OKX, Bitmex
The More The Merrier
The ICO Bubble of 2017 was brought forth by the creation of Ethereum, which allowed the permissionless issuance of tokens based on the simple and intuitive ERC-20 standard. The market grew exponentially during these times, causing many exchanges to appear to capture the opportunity. In the beginning, Poloniex took the lead, but its passive approach of delisting 55 tokens from 2017 to 2018 caused its users to drift away to other platforms. One of the fastest-growing alternatives was Bittrex, which took an aggressive approach, listing over 250 ERC-20 tokens, targeting the demand for a place to trade tokens launched on Ethereum via ICOs. It became clear that in a fast-evolving market like crypto where the meta shifts daily, users want exposure to higher diversity of trendy assets.
The Rise of Derivatives
Meanwhile, new competition emerged between platforms that offered derivatives. Major contenders were Bitmex and the ones based in China including Huobi and OKX (previously Okcoin). Bitmex, based in Seychelles (and now also in Hong Kong) led the pack in terms of volume with an innovative perpetual futures mechanism, which allowed high leverage and liquidity on derivatives without the need for a settlement — a breakthrough that traditional futures products couldn’t rival.
Benchmarking the success of Bitmex, many exchanges started to adopt its unique perpetual futures model, which drove the growth of the derivatives market relative to the spot market. Coupled with higher leverage, the derivatives market quickly gained adoption and has become one of the essential features that all major exchanges should provide.
Lesson 3 — Offer Deep Liquidity & Streamline UX
Relevant Exchanges: Binance, Upbit, Metamask Swap
Binance, the Everything Exchange
The issuance of stablecoins has also rapidly escalated since 2017. The exchange that best synergized with this trend was Binance, which actively offered a vast majority of tokens paired with stablecoins. Compared to predecessors who mostly offered markets with BTC or ETH pairs, stablecoin pairs offered a new level of intuitive trading experience, naturally leading to deep liquidity.
Binance had become the dominant exchange in all of crypto by pioneering the exchange token narrative by issuing BNB — a revenue-sharing token, offering a futures trading platform with up to x100 leverage, simplified crypto finance products, and highly vetted token listings and sales — all of which offered endless opportunities for users to make a profit. To top it off, Binance had moved its headquarters to Malta, one of the most crypto-friendly countries on the planet at the time. As a result, Binance became one of the single most used platforms in all of the industry, with over 150 million registered users, which means that almost 1 out of 53 people on Earth are registered on Binance.
Notable Approaches For Streamlining UX
Upbit is an exchange based in South Korea, known for its strict regulatory compliance. As one of the first licensed exchanges in South Korea, Upbit offers seamless fiat deposits and withdrawals with the whole process taking just a few seconds. Upbit is also known for its simple, intuitive user interface, which resembles stock trading applications that users were familiar with. All of these combined, Upbit has become the unrivaled leader among Korean exchanges and has gone further and beyond, ranking 2nd place in global crypto trading volume in Q1 of 2023, according to Kaiko, a crypto data analytics platform.
Metamask launched a decentralized, in-app swap product based on the credibility and reliability that it has built over the years as the leading non-custodial wallet with over 21M users. Despite its high fee rates of 0.875%, Metamask Swap is flourishing with a cumulative revenue of $227M since its launch in 2020.
Conclusion
In Retrospect and Beyond
Reflecting on the milestones and incidents in the cryptocurrency exchange landscape yields invaluable insights and wisdom. These lessons have crystallized into a set of fundamental desires that users expect from an exchange:
- Reliability and security of assets.
- Quality token listings and leverage.
- Deep liquidity and seamless user experience.
How is the blockchain industry evolving to respond to these demands? This is the question we will explore in the next episode.
This marks the end of Part 1. Stay tuned for Part 2.
