Original text from:blog.nomics.com
Original text from:
By Nathaniel Whittemore Clay Collins
Compilation: Orange Book
There may never be another example as controversial as exchange.
On the one hand, exchanges are the most profitable business in the blockchain industry. It is an integral part of the current industry ecology and represents the mainstream peoples first impression of digital currency, but for many cypherpunks and technicians, they hate the industry being represented by exchanges.
On the other hand, the exchange always conflicts with anti-fraud, anti-money laundering and other regulations. It walks on the edge of legal gray and suffers from endless attacks by hackers. It has created the myth of getting rich, and it has also bankrupted countless leeks, causing ordinary investors to suffer huge losses. It has brought many new models, and has also been involved in the disputes of countless scammers, pyramid schemes and air coins.
In this article, we try to observe the development of the digital currency industry in the last decade through the rise and fall of exchanges. The original text of this article is based on A History Of Crypto Exchanges by Clay Collins. For a better reading experience, the content of the Orange Book has been added and deleted during compilation.
secondary title
prehistoric stage
Back in the early days of the Internet, in the days of AOL, some very imaginative minds saw an opportunity to exchange value electronically in new ways. The representative of this is E-gold, the earliest electronic gold.
E-gold was founded in 1996. Its concept is simple: to allow people to freely transfer electronic gold to each other online, and the value behind it is backed by gold stored offline in London and Dubai vaults. In 1999, the Financial Times called electronic gold the only electronic currency that has reached scale on the Internet.
In 1996-1999, E-gold was provided with a specific exchange service by the operator Gold Silver Reserve. In 2000, after people redesigned the system, the settlement and issuance of E-gold were completely separated from the functions of the exchange. As a result, a number of emerging small workshop industries soon appeared in the market, and they specialized in providing users with conversions between U.S. dollars and electronic gold. Many of these sites can still be seen through the museum Internet Archive.
From all aspects, the earliest electronic gold trading website of this generation set a certain tone for the early digital currency transactions, and this tone has continued to the entire digital currency trading market today, especially around the transaction law enforcement.
In essence, the e-gold story is one regulatory story after another. The earliest pioneers faced the same problems that cryptocurrencies face today: anti-fraud, anti-money laundering, trading licenses. One of the FBIs most famous operations was the accusation that one of the electronic gold exchanges, Gold Age, was involved in multimillion-dollar money laundering.
Gold Ages founders went on to create Liberty Reserve, another digital currency similar to Tethers predecessor that serves as an entry and exit point for bitcoin. That’s when PayPal started banning Bitcoin transactions, and long after that, Liberty Reserve became the replacement. But Liberty Reserve was also closed in 2013, and founder Arthur Bukovsky Bellanchak was arrested in 2016 and sentenced to 20 years in prison.
After the verdict was announced, people on Bitcoin forums discussed whether BTC would suffer the same fate, and if not, what makes Bitcoin different. So far, the inherent connection between digital currency and criminal activities is still the most important reason why people feel FUD (fear, uncertainty and doubt) about digital currency, and it is also affecting the confidence of the entire trading market and the entire industry.
But for now, let’s turn our attention to the earliest Bitcoin exchanges in the cryptocurrency industry.
secondary title
early stage
While Mt. Gox may be the most iconic story of the early bitcoin trading market, it was not the first bitcoin exchange.
A few months later, on March 17, 2010, BitcoinMarket.com went live. Initially, people used PayPal to exchange BTC and USD. However, with the growth of Bitcoin, there are more scammers in the market, which eventually led to PayPals official announcement to ban Bitcoin transactions, and the exchange had to look for other options.
image description
The earliest bitcoin trading market
A few months after Bitcoin Market launched, several other exchanges followed suit. Undoubtedly the most notable of this wave is Mt. Gox, which went live in July 2010.
In the first few years, exchanges provided only the most basic and simple trading functions.
On November 6, 2010, the market capitalization of the entire bitcoin had just hit $1 million. On February 9, 2011, the price of a single bitcoin had just hit $1. But progress has picked up since 2011, with new exchanges opening up around the world, with the Bitcoin Brazil market going live in March, followed by Bitmarket.eu in Europe shortly after April.
This period can be called the Cambrian of the bitcoin trading market. Most exchanges will be forgotten by history. Companies such as Bitstamp (founded in 2011) and Coinbase (founded in 2012) would follow.
secondary title
Mentougou era
Mt. Gox is one of the most iconic and notorious representatives in the history of Bitcoin transactions. This is a story that has been written countless times, and the story continues. The purpose of this subsection is not to provide a complete historical record, but to highlight some of the most successful and most unsuccessful exchanges in history.
The Mt. Gox domain name was originally registered by Jed McCaleb (who would go on to help create Ripple and Stellar) initially to allow people to trade the popular game Magic the Gathering (Magic The Gathering Online eXchange ), but by July 2010, Mt. Gox began appearing on Bitcoin exchanges.
Like all early exchanges, Mt. Gox had great difficulty with payment processing. After stopping using PayPal in October 2010, it temporarily changed the payment method to Liberty Reserve (the Liberty Reserve mentioned above). Founder Jed McCaleb left shortly after the site went live, and the site was sold to Frenchman Mark Karpeles in March 2011.
Over the next three years, Mt. Gox would go on to become the largest bitcoin exchange in the world. At its peak, Mt. Gox handled nearly 70% to 80% of all Bitcoin transaction volume. This huge success also paved the way for its future collapse.
On February 24, 2014, Ryan Selkis posted sad news about Mt. Gox on his Tumblr blog: I have received an unverified report from a reliable source titled Draft Crisis Strategy which outlines the current situation at the exchange. I believe the document is authentic, but will have to verify it myself.
“For most of the public, this may be the end of Bitcoin,” the document begins, and in the report a huge number of bitcoins appear to have been lost forever.
Within two weeks, the rumors were proven true, and everyone was stunned. The huge amount and amount of money involved is unexpected. In total, approximately 850,000 bitcoins were lost, worth approximately $473 million at the time, or 7% of the total bitcoin supply.
Then, the accident went from bad to worse. First, it turns out that Mt. Gox knew about the vulnerability for eight months before the document was made public. Second, the actual hack happened in late 2011. Someone figured out how to access the exchange wallet, and for the next 2 years, bitcoins on Mt. Gox were resold as soon as they were stolen. Although the lost bitcoins were worth close to $500 million at the time the documents were released, the hackers are estimated to have made much less since the stolen bitcoins were immediately sold.
Mt. Gox subsequently declared bankruptcy. Mark Karpeles was later arrested in Japan on data manipulation charges and spent a year in prison. The story takes a new turn at the end. After the accident was discovered, Mt. Gox found 200,000 bitcoins sitting quietly on an address that had not been moved for 3 years. That 200,000 BTC is worth more today than the amount of people claiming (unfortunately, those claiming at the time were denominated in U.S. dollars, not the currency standard) due to the mid-price rise of Bitcoin. After paying off the claim, Mark Karpeles actually got a windfall.
Mt. Gox left a devastating impact on the exchange industry. After the Silk Road was shut down in October 2013, Bitcoin began a months-long bear market. Fundamentally speaking, the exchange landscape has also been changed anew.
secondary title
Altcoins reborn
Two years later, altcoins hit the scene. But this is not to say that there have been no important things happening in the exchange industry in the past two years. In fact, during those two years, on the one hand, a new exchange was born, and on the other hand, a better system was established technically to avoid a repeat of the Mentougou incident. At the same time, the exchange was also trying new strategies, such as Completely avoid the transaction between legal currency and digital currency, so as to focus on currency transaction.
However, for narrative purposes, we will start telling the story of this stage from the birth of Ethereum, and the new wave of altcoins and ICOs that it triggered after that.
Ethereum brings many new things. Bitcoin focuses on becoming a decentralized currency for value exchange. Ethereum not only has value exchange, but also brings value programmability, the rise of the ERC20 token standard, and the irrational frenzy of ICO.
For this explosive wave of the industry in 2017, the biggest winner of the exchange is Binance.
On June 14, 2017, Binance founder Changpeng Zhao (CZ) heard about ICO for the first time while attending a dinner party. Within three days, he wrote a white paper in both Chinese and English. Nine days later, the ICO started. In just one week, the ICO ended and Binance raised a total of $15 million in funding.
Behind the crazy speed, CZ and his team have actually been working in the exchange industry for many years. The trading system and matching engine launched by Binance is the fifth generation trading system they built. Before founding Binance, CZ and his team have been providing white-label infrastructure products for major exchanges.
The speed of development of Binance has not slowed down since then. Within 5 months, Binance was the number one cryptocurrency exchange in the world by trading volume, and 3 months after that, Binance reached 120,000 users. After another 3 months, Binance reached 1 million users. Just one week after that, there were 2 million users. From a revenue standpoint, Binance became the fastest growing startup in history.
On the one hand, the crazy growth of Binance reflects the experience accumulated by CZ before, but on the other hand, it also reflects the irrational enthusiasm and madness of the ICO era. Between the middle of 2017 and the middle of 2018, the competition of exchanges was almost entirely based on the competition of listing coins, that is, the competition of long-tail altcoin assets.
Due to Binance’s meteoric rise, it is able to provide the greatest liquidity for altcoins, which in turn makes it the most ideal place to list. In this way, Binance built a strong feedback loop and network effect that further accelerated its leadership in the space. Afterwards, Binance introduced the platform currency BNB to provide holders with discounted transaction fees, and at the same time promised to repurchase BNB with quarterly profits.
But at the same time, the ICO craze did not last. Before long, interest in long-tail altcoins has died down, and exchanges will have to reinvent themselves once again to adapt to the new changes.
It should be noted that the models and innovations provided by exchanges are not always good. Before entering the bear market in 2018, during the short few months during the ICO craze, what we did not elaborate on is that many models of the exchange also introduced extremely dangerous factors, especially in the token issuance project side, token evaluation A tripartite incentive mechanism has been established between ranking sites and exchanges. Under this mechanism, it is easy for the tripartite agencies to collude with each other.
The altcoin project side hopes to gain profits from the liquidity of the exchange, and also hopes to obtain traffic from the evaluation ranking website (thus bringing more liquidity); the evaluation website hopes that the market will remain hot to attract more traffic, so that I can sell advertisements to make a profit; and in order to be able to charge higher listing fees from the project, the exchange hopes to appear as the largest trading volume on the evaluation and ranking website.
The success of the exchange is naturally related to the business model, but in many cases this does not represent the whole truth. This stage is an accident in the history of ICOs, not the core of the exchanges success. In order to survive and thrive, exchanges will have to reinvent themselves and reinvent themselves, which is exactly what they are doing now.
secondary title
modern stage
After the crazy era of ICO, we have entered the modern stage. This stage means many new opportunities and challenges for the entire trading industry, and one of the important keywords is derivatives.
Derivatives trading
BitMex is not the only derivatives trading market. OKex is also competitive on this track. As the market matures, Huobi and Binance, which only had spot products before, have launched their own futures trading products.
Derivatives trading currently has unprecedented influence on the market compared to the past. One theory is that the CFTC allows the emergence of compliant derivatives exchanges such as CME and BAKKT in order to allow institutions to enter the market better and promote the industry to the mainstream.
Regarding CME and BAKKT, the difference lies in whether it is cash settlement or physical settlement. BAKKT is physical settlement, which means that institutions must first hold Bitcoin if they want to participate in the transaction, which will promote the market demand for Bitcoin. After experiencing the sluggish trading volume at the opening, BAKKT has begun to climb steadily, and the highest daily trading volume has recently exceeded 15 million US dollars.
In addition to compliance exchanges and large traditional exchanges entering the derivatives trading market, we have also seen the emergence of some new trading products. For example, Deribit, which focuses on options, CME, bitfinex, OKex, etc. all have plans to launch option products.
According to Bloomberg, the trading volume of the derivatives trading market this year has reached 50% of the spot market, and on the day of the 9.25 sharp drop, according to data from research institutions, the trading volume of derivatives on mainstream exchanges was four times that of the spot market. more than double.
From the niche market to the current situation, the rapid development of derivatives exchanges is basically concentrated in 2019, and this market still has a lot of room for growth. Compared with the traditional financial market, it still has several times the room for growth. Exchanges are also constantly emerging with competitive players in terms of products and depth.
In addition to native players, the emergence of compliant players such as CME and BAKKT has also made the market more mature.
Platform Token IEO
In 2019, due to the receding wave of ICO, the wealth effect of spot is no longer obvious, and many users are migrating to derivatives trading, which has led to the outbreak of futures trading, but spot exchanges still create a new way of playing: platform currency + IEO combined punches.
IEO was first launched by Binance. The 10-fold wealth effect has made many players pay attention to the spot market again. At the same time, it has also become an important scenario for the application of exchange platform currency and one of the core means of user growth. After all, platform currency is the threshold for IEO participation. It is beneficial to reduce the circulation of platform currency, and the wealth effect of IEO can bring its own flow.
Different from ICO, the popularity of IEO did not allow the industry to achieve the rapid growth in 2017. It has gradually become a means of growth for the exchange to rationally plan the market and operate the budget, that is, to calculate a trading user, I am willing How much does it cost. Many teams followed the trend to do IEO, and the teams who did not think clearly also lost a lot.
decentralized exchange
decentralized exchange
Decentralization is one of the important foundations for the existence of this industry. It does not need to be accessible to anyone, does not need to face censorship, and controls its own information and wealth by itself, which is the core pursuit of the early cypherpunks.
But most of the most important infrastructure exchanges in this industry are in the hands of centralized institutions. Your bitcoin may be a number that can be changed in the exchange server.
This is also the reason why many people are willing to invest in DEX in 2017. The Bancor agreement received an ICO of 153 million US dollars at that time.
In addition to Ethereum, during the Dapp explosion of EOS in 2018, the transaction volume of DEX was also very considerable, and decentralized exchanges such as NewDex appeared.
compliance
compliance
The supervision of digital currency is very complicated even in the same region. For some exchanges, it has become the first choice to move all their staff directly to regions with relatively loose supervision.
For example, Binance, which claims to have globally distributed offices and is registered in Malta, has offices in Hong Kong, Japan, and Singapore.
In todays exchange market, there is a huge gap in compliance. In order to avoid supervision, many exchanges have stated that they do not provide services for US users, such as BitMex and Poloniex.
On the other hand, some exchanges have begun to cooperate closely with the regulators. In the United States, there is Gemini in New York State, which focuses on compliance. Coinbase is also a compliant exchange in the United States.
secondary title
epilogue
epilogue
The exchange industry is still making continuous progress. From todays market trends, we can see that the growth strategy and product iteration speed of exchanges are accelerating.
By observing the exchanges, it is an important angle to see the rise and fall of the entire industry. They should not only respond to the needs of all current users, but also provide new products and services to make everyone continue to believe in the industry.
In the next few years, the competition among exchanges will become more and more intense. For those of us who eat melons, we should not touch high-risk assets, be vigilant about being cut leeks, move the small bench, and just watch the show in silence.
(over)
