Coinbase: Bitcoin’s dominance and the DEX revolution

1. Bitcoin’s dominance and Coinbase customer behavior

Compared with other cryptocurrencies, Bitcoin’s market value advantage is well known. One of the most frequently cited indicators is relative market value, which compares the market value of Bitcoin’s network with the market value of other cryptocurrencies.

How does Coinbase’s customer behavior prove Bitcoin’s dominance? First, let us look at the market value advantages that Bitcoin has over the years:


Overall, Bitcoin’s position as a blue chip asset has not been challenged. But we do see a trend that in the case of a bull market, alternative assets are showing increasing appeal .

There may be many reasons for this, but the main reason is psychological. As people feel good about their initial cryptocurrency investment (Bitcoin), they will start looking for other possible category winners (a bull market in 2017 is an obvious example). Vice versa, as prices fell and fear shook the market (2018-2019), a flight about cryptographic security pushed Bitcoin back to the forefront.

However, we only focus on the market value advantage, which is the market’s overall valuation of these assets. Another indicator is how Coinbase customers trade these assets:


We can see that the same large-scale trend is obvious. Bitcoin also dominates, but it was threatened in 2017 and regained its dominance in 2018-2019. However, Coinbase’s retail volume shows an increasing tendency to buy and trade alternative assets .

This growth momentum is partly due to Coinbase’s continuous increase in new assets, but a deeper reason is that price volatility has significantly changed consumer behavior towards non-BTC assets. This trend first appeared in 2017, but now it clearly appears in the skyrocketing market. It is worth noting that some alternative assets are driven at the end of 2019 (Tezos, Chainlink, BAT, 0x and Stellar) and early 2020 (Ethereum, Tezos and Chainlink).

On average, the ratio of Coinbase customers trading non-BTC assets is about 3% higher than their relative market value suggests.


Therefore, on the one hand, Bitcoin clearly dominates, but on the other hand, Coinbase’s customers have shown relative preference, and they will also turn to other assets .

The data proves this. Among customers who have at least 5 purchases or more, 60% of them will start buying bitcoin, but only 24% only buy bitcoin. Overall, more than 75% of people end up buying other assets.


So why has Bitcoin always occupied the first place?

As a king, Bitcoin has many good reasons:

  • Philosophy and mission : Bitcoin is subverting currency. It is the world’s first currency with a fixed supply;
  • Consciousness sharing : Bitcoin is the pioneer and the most attractive;
  • Security : This is the most secure PoW asset, and no other asset can even approach it;
  • To the center : This property is difficult to quantify, but Bitcoin is the most decentralized, it has the largest number of nodes, the largest operator of distributed power, but also can be said to have the most conservative governance functions;
  • Infrastructure and liquidity : Bitcoin has the most mature services and the best liquidity;
  • Technical simplicity : When other protocols try to expand to new use cases, Bitcoin’s technology has been able to achieve its mission;
  • Creation of myths and intangible assets : Bitcoin has an anonymous creation myth, an explosive vision, and undeniable traction, all of which are wrapped in a mathematically controlled new economic model;

Bitcoin is the flag of the entire cryptocurrency field, and we should embrace it. But retail investors tend to choose some other assets, which shows that new users are starting to enter the world of cryptocurrency through Bitcoin, but usually look for alternative assets and use cases. In this sense, Bitcoin is also the top of the broader crypto growth funnel.

If we believe that alternative assets and networks will provide differentiated services (beyond the value storage and Crypto gold targeted by Bitcoin), then the industry must also establish support for other assets.

Bitcoin is the king. It is likely to maintain the king’s status for a long time, but it also paves the way for the bloom of a thousand flowers.

Second, the rushing DEX revolution

Since the launch of Ethereum, we have been speculating that with the emergence of decentralized exchanges (DEX), centralized exchanges may be disrupted. This is the first part of a two-part series that explores the field of DEX and potential future revolutions.

1. Background

Today, Crypto’s killer application is investment and speculation, which leads to a technology that may bring incredible changes in the future.

Currently, most transactions are conducted on centralized exchanges. These platforms hold customer funds, pair buyers with sellers, and provide cryptocurrency and fiat currency services to manage deposits and withdrawals. But centralized exchanges also face challenges. Their headquarters is located in a specific geographic location, subject to strict supervision, requires customers to open accounts and deposits, needs to set restrictions on customer behavior, and has always been the target of malicious attackers. Generally speaking, they are centralized, which is in stark contrast to the trend of open and decentralized cryptocurrencies.

DEX has the advantages that centralized exchanges do not have:

  • Security : Funds will not be transferred to any third party, nor will it be affected by counterparty risk, you can directly use your wallet to conduct transactions;
  • Globalization and permissionlessness : the concept of no boundaries, not to mention restricting who can conduct transactions;
  • Ease of use and pseudonymity : no need to register an account or personal details;
  • Better execution (potential): In theory, we should see global DEX liquidity accumulate on a few winning platforms, thereby achieving deep liquidity;

Since DEX has such obvious advantages, why haven’t they subverted centralized exchanges?

It turns out that they also face some major challenges:

  • User experience : DEX transactions are conducted through self-custodial wallets, which is confusing and frightening for many people;
  • Speed ​​and scale : The transactions are all carried out on the chain and will be limited by the block time and basic transaction throughput. (For example, try to send 1000 transactions per second on Ethereum …)
  • Limited trading pairs : DEX is limited to tokens on a single blockchain, with limited interoperability. For example, trading BTC-ETH pairs on DEX is very difficult because BTC is on the Bitcoin blockchain, not on the Ethereum blockchain (this situation will change soon)
  • Limited functions, etc . : Centralized exchanges can quickly build new services, and DEX must work within the limits of each blockchain and carefully release new functions that have undergone security audits;
  • Regulatory issues : Although DEX aims to achieve decentralized management and resist regulatory pressures, some hybrid models can cause problems. Increased pressure from regulatory agencies may inhibit the development of DEX;

What excites us? The above problems seem to be solvable. They boil down to product and technical challenges and have a clear path forward in concept. Ultimately, we should be able to create a DEX that competes with centralized exchanges, while retaining all their benefits. When this day comes, the centralized exchange may be mature enough to be subverted.

2. The current status of DEX

Today’s DEX is usually divided into two main parts:

(1) How is the transaction settled?

DEX usually adopts the traditional order book model or automatic market maker (AMM) model.

The order book matches each buyer with a unique seller (same transaction as centralized exchanges such as Coinbase Pro). This model has obvious advantages that price discovery is transparent and efficient for high-liquidity order books, but it is usually possible to perform certain manipulations (cheating, preemptive trading, etc.) in order books with poor liquidity. .

The automatic market maker (AMM) model matches each transaction to the pool of funds in a smart contract, where the transaction price is determined by the ratio of assets in the pool. This may sound a bit confusing, but this model does not require a specific counterparty for each transaction (transactions are based on smart contracts). This makes the AMM model an ideal choice for more illiquid tokens. An unfavorable factor is that traders usually encounter higher price declines when conducting large transactions.

(2) Where is the transaction settled?

DEX will either settle the transaction on the basic blockchain (usually Ethereum), or use the side-link transaction to obtain more throughput before final settlement.

Although sidechain-based solutions have shown promise, they still have trade-offs in security, user experience, and decentralization compared to the current mainchain-based model, making them less attractive today. But these challenges are also solvable, and some promising models are expected to be launched in the next few years. There are also hybrid models that combine on-chain and off-chain models, as well as some DEX aggregators that provide optimal execution.

Today, the popular DEX almost only settles transactions directly on Ethereum, because it has a significant lead in developer traction, a large token network, extensive infrastructure, and wallet support.


3. Trading volume and traction

Due to the challenges faced by DEX in terms of scale and throughput, user experience and limited trading pairs, its attractiveness is minimal compared to centralized exchanges. But DEX’s market share has been growing slowly.

According to data from Dune Analytics, Uniswap’s AMM model provides liquidity advantages, and it is currently in a leading position in terms of trading volume and traction. DyDx is in second place, relying on leveraged trading, lending services, and the recently launched BTC perpetual contract market similar to BitMEX.



Compared with centralized exchanges, the transaction volume of DEX is still relatively small, but it shows a steady growth. Today, the total transaction volume of DEX accounts for about 6% of the transaction volume of Coinbase Pro.


4. Looking to the future

As of now, we say that the volume of DEX is still very small, but as the ecosystem matures, it will usher in substantial growth. The challenges they face can be solved, more about the question of when than the question of “whether it is possible”.

Key areas of focus:

  • Improvements to self-custodial : make wallet password or key management very simple, which will attract new user groups to use DEX for transactions (Translator’s Note: such as smart wallet);
  • Interoperability : Introduce assets from other blockchains and expand optional trading pairs;
  • Sidechain and L1 layer network expansion progress: improving transaction experience, reducing preemptive transactions and griefing attacks will bring better user experience;
  • Regulatory pressure : This is a double-edged sword. If regulators begin to pressure centralized exchanges, DEX may become the only viable option for some traders. On the contrary, if regulators put pressure on DEX developers and teams, these DEX platforms may take longer to achieve large-scale;
  • Emerging functional differentiation: DEX is closely connected with programmable currency, they can create new derivatives and synthetic assets, and deeply combine with other DeFi services to create truly differentiated products;

How close are we to this reality? It is difficult to determine, but considering the long development time and the slow and steady growth of those key areas that need attention, it can be considered that we are still several years away from the DEX revolution.

3. Popular news and reviews

1. UMA performs initial Uniswap release

Recently, UMA conducted an initial token issuance (IUO) on Uniswap. This process is essentially the first token issuance through the exchange, but it provides some advantages:

  • Uniswap is very simple, you can give up all the complexity, just create a market and increase liquidity, this is a 2-step process, which only takes about 5 minutes, which does not require development experience or audit work.
  • Liquidity and price discovery are built in, and Uniswap provides instant price discovery and continuous liquidity through its AMM model without the need for a market maker.
  • The issuer can profit from the secondary transaction: prove that Uniswap’s liquidity can bring transaction fee income (minus non-permanent losses).

The negative factor is that since there was no bilateral market (only buyers, no sellers) at the beginning, this is likely to cause price discovery problems. If there is no external token source, it also means that the price will never be lower than the starting price. In the case of UMA, this mechanism triggered a battle to see who could get confirmation at the initial price.


This model has proved to be effective, and its combination of simplicity and liquidity advantages may attract many projects and individuals to adopt this model.

For example, this year:

  • Former Coinbase lawyer Reuben Bramanathan said he would tokenize his time and sell his token to the public through Uniswap;
  • NBA star Spencer Dinwiddie tokenized his current NBA contract;
  • Fashion brand Saint Fame tokenized commercial goods and developed a community;
  • Alex Masmej and Kerman Kohli tokenized their future profit potential;

DeFi continues to push the boundaries of capital formation. These are possible, the first rays of the new funding mechanism.

But the details are very important. In this case, if the tokenization event constitutes an investment contract, the Securities and Exchange Commission (SEC) may treat it as securities. The tension between the regulator and the DeFi product is obvious, and it may hinder the adoption of the product until the regulator clarifies further.

2. The new DEX derivatives platform shines

Futureswap is a nascent DEX composed of Compound, Uniswap and BitMEX. It currently only provides ETH-DAI order book, but provides 20 times leveraged trading. It modified the Uniswap-style price curve (restricted to decline). Financing rate control.

This is a novel idea, it is very suitable for speculators. During the 4-day alpha release process, they announced a transaction volume of US $ 17 million and received a liquidity pool of US $ 1.5 million. This ratio will make their DEX transaction volume only lag behind Uniswap!

In addition, DyDx launched a perpetual Bitcoin contract similar to BitMEX, with a leverage of 10 times. Unlike Futureswap, DyDx uses a real order book model and provides an open clearing mechanism for iceberg transactions.

Taken together, these are just starting but strong data points, indicating that the DEX derivatives market may have a strong product market fit.

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