Why do exchanges build their own Blockchain?

Why do exchanges build their own Blockchain?

On April 17, exchange operator Binance released a white paper describing the inner workings of a smart contract on the new blockchain. After a year, the Binance Chain (BC) blockchain was first launched. The new blockchain, dubbed Binance Smart Chain (BSC), will act as a smart contract layer in parallel with the existing chain.



Why is Bitcoin exchange building their own Blockchain?

“This innovative solution brings the interactivity and programming of the Ethereum Virtual Machine (EVM) to Binance Chain. Both Binance Chain and Binance Smart Chain will allow money transfer and communication thanks to its own interoperability support, ”the exchange said.

Although the exchange asserts that BSC is not designed to compete with Ethereum, today's largest smart contract platform, Binance's new smart contract platform will have superior performance compared to Ethereum in a Certain sectors, including faster and cheaper transactions, said white paper.

Binance's recent white paper is just the latest bockchain development announcement in Bitcoin exchanges. Since Binance launched its own blockchain in April 2019, at least three other leading centralized digital exchanges have announced that they are also developing a blockchain network.

In February, OKEx announced that their own OKChain blockchain is in beta. The Malta-based exchange first revealed that it was developing a blockchain, along with a decentralized exchange (DEX) in March 2020.

“OKChain is a public commerce chain developed independently by OKEx, and it has been 100% open source to provide an efficient, free and limitless value-added ecosystem for all partners. cooperation in our ecosystem. Cross-chain technology and 'OpenDEX' allow us to advance our vision of the Commercial Chain Alliance to facilitate the significant development of the blockchain industry, ”Jay Hao. , CEO OKEx said.

In March, Huobi also announced that its blockchain is entering a test mode. After nearly two years, for the first time, the Singapore-based exchange revealed its own plan to develop a blockchain. Bithumb, a South Korean-based exchange, also announced that it is developing its own blockchain in November 2019.

Some people in the cryptocurrency industry see this trend as a threat to decentralization, which is an important feature of public blockchain networks.

Building competitive advantage and market sharing

The exchange is one of the biggest beneficiaries from the growing popularity of cryptocurrencies. They play an important role as a gateway to the cryptocurrency world, and many of them have built businesses worth millions of dollars from there.

US-based Coinbase exchange reportedly reported revenue of nearly $ 1.3 billion in 2018. Binance is estimated to have achieved $ 1 billion in cumulative profits, as of September 30, 2019. .

At its core, the emerging trend of blockchain platforms built by exchanges is a move to bolster their position as industry leaders, and in a way, build building surrounds their businesses. That is the critics' consensus view on cryptocurrencies and blockchain.

By developing their own blockchain, the exchange will be able to increase market share and operate more effectively, according to Ken Misuma, Quras of Quras, a smart contract platform that claims to bring users and businesses. the freedom to set the level of privacy in their transactions.

“Exchanges try to attract as many traders as possible to increase their user data, which is the core driving force for their profits. Developing a blockchain allows an exchange to have more flexibility from a usability and trading perspective without a centralized operator, ”Misuma said.

Hugo Renaudin, CEO and co-founder of LGO, an organized trading platform in Europe mentioned how to have a blockchain that can make trading more efficient.

“In terms of operations, it's a significant cost-cutting tool because a lot of operations and fund movements (deposits, withdrawals or payments) can be automated through regular contracts. intelligent. And since a transactional blockchain reduces the listing price for a cryptocurrency that has issued a chain, one can argue that it allows exchanges to list more and more assets at a lower cost. ”, Said Hugo Renaudin.

As the blockchain space and cryptocurrency continue to grow, more and more digital assets will be released. The end result of many cryptocurrency assets is that the trading of exchanges will enjoy higher demand.

Before exchanges started building their own blockchain, new projects released digital assets via a public blockchain like Ethereum. These projects then seek to list their respective digital assets or tokens on various exchanges. Token holders and traders have the flexibility to trade these tokens on different exchanges (where they are listed). However, this flexibility means that exchanges face the risk of constantly losing their user data to competitors, which can lead to a drop in revenue.

In addition to competition from other centralized exchanges, emerging decentralized transactions also make the threat increasingly urgent g increase.

Develop a blockchain of its own by inviting projects to release digital assets, an exchange that is most likely to retain transaction volume, a key element of their forefront.

However, the building principles of the exchanges are different and are likely to develop the sectors of the industry that each of them find most appropriate.

The Binance chain is a bet on the future of the exchange

While the development of a dedicated smart contract blockchain provides the opportunity for it to compete with Ethereum, Binance seems to focus on increasing its market share in the cryptocurrency trading market.

BSC's white paper reiterates that the company's DEX is the main focus of the blockchain platform, an indication that the development of a smart contract platform is to strengthen DEX more than anything else.

“The focus on providing and trading appropriate digital assets also brings limitations. Binance Chain's most requested feature is programmable scalability, or simply smart contracts and virtual machine functions. Publishers and digital asset owners struggle to add new decentralized features to their assets or introduce any kind of activity and community governance, ”said White paper BSC. Another sign that Binance is betting on the future of exchanges is the launch of Binance Cloud in February, a Cloud-specific solution for exchanges. Through it, the company is providing anyone with the ability to launch an exchange that can take advantage of the established trading infrastructure. Changpeng Zhao, CEO of Binance, known in the cryptocurrency space as CZ, estimates that the Binance Cloud service will become the company's revenue source in five years. Liquidity is one of its promises, a promise that can be insured by the weight retention benefit of owning a blockchain.

OKChain bet on decentralized finance

Follow in Binance's footsteps to move his activities to crypto-friendly island nation, Malta. OKEx seems to have played doppelgänger with Binance. However, OKEx asserts that its own blockchain efforts are not imitations.

“OKChain did not copy Binance. Our blockchain software has a completely different vision and location than Binance Chain and we are actually working on different products, ”an OKEx spokesperson said.

The vision with OKChain is to promote the development of decentralized commercial applications, especially towards financial inclusion.

“We believe that decentralized finance is the key to financial inclusion and financial freedom for everyone. That is why we have wished to unleash the power of DeFi. 100% OKChain is a big milestone for us, meaning we can now provide an open, low-cost and autonomous ecosystem for everyone to enjoy the benefits blockchain and decentralization bring. ” , Jay Hao, CEO Okex confirmed.

Whether the exchange plans to use its blockchain network to participate in the DeFi space remains unclear.

Currently, OKEx continues to take its transaction work seriously, DEX will be the first application on OKChain. Compared to Binance, "the company is building a chain [of its own] and creating DEX applications, we are building financial infrastructure and OKEx DEX is just one of the applications on OKChain," the spokesperson said. of OKEx adds.

OKEx said it will allow users to create and customize their own DEX on OKChain.

In addition, OKChain supports the deployment of smart contracts immediately, compared to Binance, the company has just announced the development of a separate chain for smart contracts.

Huobi wants to capture traditional financial institutions

While other exchanges are avoiding regulatory agencies, Huobi has decided to build relationships with the Chinese government. Last December, Huobi announced that it would join a government-led blockchain alliance. The exchange is seeking to strengthen relationships with regulators and then financial businesses, making regulatory compliance central to its blockchain development.

“DeFi has become one of the most promising applications of blockchain technology but its future requires both parties - regulatory agencies and businesses - to collaborate to set the standards and guidelines of the platform. New decentralized economy. With Huobi Chain, we want to provide a decentralized framework that facilitates industry-wide collaboration, which is critical for the widespread adoption of DeFi, ”said Ciara Sun, vice president of Global Business at Huobi Group said.

Huobi Chain will allow managers to join the network as validators through the specified node feature. This may look familiar to those who follow li regulatory updates Concerning the blockchain in the United States last year, the Federal Reserve Bank of Boston released a white paper that contains detailed concepts for a "monitoring node" for on-chain regulatory oversight.

Common denominator: Original token value

While the blockchains of blockchains are being set up to deal with different parts of the blockchain space, they all benefit from an increase in the value of their native tokens.

For an exchange token, originally used to pay for listing and transaction fees, is currently converted into coins that power the entire blockchain. That expands the usability and value for these tokens.

In fact, it could give the companies behind each blockchain network a valuation increase. According to Jack O’Holleran, CEO of SKALE Labs:

“The valuation multiple for transactions is significantly lower than for multiples on crypto assets, not causing a devaluation of equity. For a simple example, if an exchange made $ 100 million in a year of fees, they could get 5 times their value, meaning they were worth between 500 and 700 million dollars. la from the equity perspective ”.

"If they issue tokens that are used to pay fees, that token could be worth several billion from a complete fee reduction perspective with the same amount of revenue."

Decentralized alarm bell

It is unclear how much transaction energy exerts on their original blockchain networks and that raises the question of how these networks are decentralized. "A major drawback is that blockchains built by exchanges are not really decentralized and decentralization is one of the most valuable aspects of blockchain technology," Misuma said.

After the release of the White paper Binance Smart Chain, Tom Shaughnessy of Delphi Digital, a cryptocurrency asset research firm, echoed similar concerns.

“Decentralized Chains do not understand the essential or important part of it, without exception. The problem is not to offer cheaper deals, anyone can do this using Amazon's web service, but to promote a community-driven spirit of builders, people who like to work together without a mission in focus. ”