Why crypto exchanges proliferate in the era of blockchain

Weimin Teng
Apr 23 · 6 min read
Hi…My tokenID is c4tzRule5th3w0rld

Not too long ago, a friend of mine ‘adopted’ a virtual cat she thought was cute with some ETH change her friend paid her for a cup of coffee, Never did she realize this fancy virtual feline was her maneki-neko (a.k.a. fortune cat). Sold it, made an unexpected windfall and cashed out via a Digital Assets Exchange (DAE) in 2017. Sounds too familiar? Yet it is not too braggish to say that CryptoKitties was one of the most popular and trending blockchain-based game till date.

Come token come…

Since then, this kitty-mania spawned all sorts of similar products and fueled the rise of crypto-currency exchanges, mainly due to the mainstream adoption of the ERC-721 (Ethereum Request for Comment) interface by Ethereum. In short, Ethereum was the first blockchain by then to provide a standardized interface for various various entities to be ‘tokenized’. Suddenly, ICOs sprang up using ERC-20 as a method for crowd-funding. What are the differences between ERC-20 and ERC-721 then, and what they mean for the digital asset exchange market?

Separating 20 from 721

The single biggest difference is that of fungibility. ERC-20 provided for fungible tokens and ERC-721 for non-fungible ones. Fungible tokens essentially means tokens are interchangeable — something like I sell you 10 shares of Google. Will you discriminate or know what share it is. Probably not as long as its Google share. In other words, all units of the tokens are of the same value or make. On the other hand, ERC-721 tokens represents non-interchangeable token — I’m sure you will not exchange your dog for someone else’s as you know they are downright different entities no matter how similar they look. That is the same to say for ERC-721 tokens, the traits are embedded within each token. CryptoKitties is a perfect use case of the latter.

Having said that, ERC-20 or ERC-721 are essentially interfaces. And by interface, it means that the tokens in the said smart contract (the above mentioned are essentially smart contracts) respond to a common set of commands (as shown below). In the case of Ethereum, they are rather limited. It does not mean that the token contains any value or that it belongs to anyone. All you can tell is that some ID has a certain number of units of the tokens — So the next time someone says they are rich because they hold x tokens, it really just means that own nothing other than the fact of some values written on a smart contract.

Why then, are these seemingly limited set of commands so revolutionary? The answer is simple. We live in a world where the common unit for trade is a token of value — Money. Everything from food to sexual services are essentially an exchange of money (think of it as a token) for another entity. This practice is so deeply embedded within us it feels almost natural to tokenize (commoditize) things. In the cyber world, this proliferates much more freely as it transcends red tapes and geographical boundaries that are otherwise hard to circumvent. Hence, what ERC-20 and ERC-721 did was to provide a quasi-framework for such ‘trade’ tp take place.

Rise of Digital Assets Exchange

Trading is a process of discarding what you do not require for something you desire. From the ancient Silk Route to current online marketplaces, the practice of trade merely took on a different form. In the context of blockchain, cryptocurrency exchange was merely one of the early applications to drive trading between a plethora of tokens. As the digitization of businesses and economies continues to share the future societies, it is not difficult to project the trajectory of Digital Assets Exchanges (DAE). In terms of industry, gaming will be one of the earliest adopters. With the sector worth roughly USD$150 billion in 2018, software games and in-app purchases will continue to expect strong growth. The relatively lack of governmental red tapes and transient nature of the industry means developers can make quick gains from their initial investments.

The adoption of blockchain in the gaming industry revolves around the nature of blockchain in terms of data immutability and transparency. Just imagine you paid a grand of actual money for some coveted limited edition virtual treasure, only to realize a thousand more was released in the game, not hard to imagine that feeling of anguish and deceit when you paid top dollar in vain. Game developers knows this sense of exclusivity and feel-good factor too well. Hence, the integration of blockchain into their in-app or even OTC (over-the-counter) virtual item exchange platform aims to enhance this sense of exclusiveness, where limited supply will continue to drive insatiable demands with some clever marketing.

Ecosystem is key to the future of DAE

Just before you think exchanges are a bed of roses, consider the Darwinian theory of Natural Selection. Why use your exchange when I can use another. Why your initial impression of online search = Google; and shopping = Amazon. It is all about maintaining an ecosystem. Exchanges are the same. They will need to maintain a fair price with a wide range of entities that can support demand — just this will you visit the same shop if you can’t find what you want initially. And in the case of DAE, can the tokens that they have exchanged for be used to trade for something else. The rule of thumb remains, the greater number of application the token has, the more mainstream the exchange platform will be. Ceteris paribus, the latency and throughput capability of the underlying blockchain tech is still the lynchpin for building a successful DAE.

In summary, DAEs will continue to form the most applicable use case for the blockchain space within the near future. As users go more LoL and WoW (pun intended), the desire for more praises and gazes of exclusive virtual gears will definitely fuel the industry adoption. As for the cat lovers, HODL them as you might never know when they will be that fortune cat bringing you a great windfall.

About the author: Weimin Teng

Thinker+Wanderer. Can be found somewhere between the mountains and sea snapping photos when not thinking about finding the best solution to solve a social problem.

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