In this report, we will start from Binance and explore why Binance has become the leader among centralized exchanges in the Crypto industry. We discuss how "decentralized Binance" becomes possible with the iteration of technology and the implementation of decentralized order book exchanges. By introducing StarkEx, zkLink, StarkNet, zkSync, Arbitrum, and Cosmos in detail, we analyze and compare their user experience, security, performance, and costs, aiming to guide readers to a deeper understanding of these infrastructures.
Here are some key points in the report:
Why do we need a "decentralized Binance"?
Binance is currently the largest Crypto exchange in terms of trading volume in the blockchain industry, with over 120 million registered users. As a centralized exchange, Binance offers a wide range of assets and ample liquidity. Its trading experience and performance are also far ahead of its competitors.
However, in the blockchain industry, centralization is considered the "original sin". As a centralized exchange, Binance faces certain risks in asset security, business transparency, and regulation. This intensifies people's concerns, and they start to crave for creating a Crypto exchange that combines the user experience of CEX and the self-custody advantages of DEX - a fully decentralized Binance.
The path to "decentralized Binance"
Many attempts have been made in the process of building a decentralized Binance.
The pioneer of decentralized exchanges is Uniswap. It was initially deployed on Ethereum and used the AMM mechanism to trade with a constant price formula and liquidity pools. However, this mechanism suffers from issues such as low capital efficiency, slippage, and impermanent loss. This means that while achieving decentralization, it has to sacrifice some liquidity and trading experience.
After the initial attempt with AMMs, many high-performance Layer 1 solutions emerged. The performance improvements they bring make it possible for order book DEXs to exist. However, Layer 1 sacrifices security and a mature ecosystem like Ethereum while improving performance. Additionally, they cannot support the trading volume of a large user base like Binance.
With the continuous advancement of technology, Ethereum scalability solutions Layer 2 have emerged. They help decentralized exchanges improve transaction speed and reduce transaction fees. These Layer 2 solutions as Ethereum scalability solutions retain the security of Ethereum and inherit its mature ecosystem. However, there are certain limitations to general Layer 2 networks in terms of high-frequency trading. They lack seamless interoperability between blockchains other than Ethereum.
Recently, a new generation of application-specific, transaction-centric order book infrastructure solutions has entered the cryptocurrency market. Each solution improves the user's trading experience by providing a high-performance and secure trading environment. They further innovate on Layer 1 and Layer 2 and open up possibilities for building a "decentralized Binance".
Overview of Trading Infrastructure
When analyzing the infrastructure for building "decentralized Binance," we consider four main factors that impact trading:
User experience
Security
Performance
Cost
Around these 4 dimensions and combining examples of decentralized order book trading protocols, we analyze several of the hottest infrastructure solutions currently.
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StarkEx
StarkEx is a transaction infrastructure designed for specific applications. It is based on the STARK zero-knowledge proof technology developed by StarkWare and operates as a Layer 2 scaling engine for the Ethereum mainnet, providing specific ZK-Rollup services for independent applications. StarkEx was officially launched on the Ethereum mainnet in 2020. Its services are currently used by many well-known decentralized derivative trading protocols such as dYdX v3, immutableX, and ApeX.
zkLink
zkLink is a multi-chain middleware based on ZK-Rollup technology with transactions at its core. Its main feature is its ability to connect multiple Layer 1 and Layer 2 blockchains, aggregating liquidity from different ecosystems, enabling transactions and compositions of native DeFi assets on different chains. It achieves multi-chain functionality and extends the classic ZK-Rollup through the mechanism of "ZK-Rollup + Oracle Network".
StarkNet
StarkNet, developed by StarkWare, is a general Layer 2 scalability solution based on ZK-Rollup. StarkNet supports the deployment of any smart contract, allowing developers to create various types of decentralized applications on it, which can be combined with each other. It uses Rollup based on STARK technology to execute transactions, providing high scalability and low transaction costs.
zkSync
zkSync is a series of general Layer 2 Ethereum scaling protocols based on ZK-Rollup, mainly consisting of two products: zkSync 1.0 (later renamed zkSync Lite) and zkSync 2.0 (later renamed zkSync Era). zkSync Lite uses SNARK proof programs but is not compatible with EVM, meaning it does not support smart contracts and only supports basic transactions such as transfers. On the other hand, zkSync Era implements EVM compatibility based on zkSync Lite.
Arbitrum
Arbitrum is an Ethereum Layer 2 scalability solution based on Optimistic-Rollup, currently consisting of two products: Arbitrum One (general purpose) and Arbitrum Nova (specific to gaming/social applications). Among them, Arbitrum One is the main product of Arbitrum, and most DeFi applications are concentrated on Arbitrum One.
Cosmos
Cosmos is a Layer 1 blockchain network based on the Tendermint consensus mechanism with a mesh structure. Each blockchain in the network is an independent and fully-featured PoS blockchain. Inter-chain communication can be achieved through the IBC protocol, allowing for shared security and liquidity. Additionally, Cosmos provides a custom blockchain development toolkit - Cosmos SDK, which enables developers to utilize existing modules for building blockchains that meet various requirements, offering a high degree of flexibility.
Infrastructure Comparison
Application-specific ZK-Rollup
Application-specific ZK-Rollup infrastructures, such as StarkEx and zkLlink, have significant advantages in terms of technical availability. Due to the use of ZK technology, they also possess certain advantages in transaction security compared to the Cosmos network and optimistic solutions. However, application-specific infrastructures may face significant limitations in terms of functionality development. By comparison, applications deployed on StarkEx are currently on Ethereum, providing higher fundamental security. On the other hand, zkLlink supports native multi-chain architecture with richer transaction assets and liquidity sources.
General-purpose ZK-Rollup
The representative general-purpose ZK-Rollup infrastructures are Starknet and zkSync. Both support Turing-complete programming languages, providing high flexibility in functionality development and enabling the deployment of order book applications. However, as general Layer 2 solutions, they will encounter scenarios where multiple applications run simultaneously. Therefore, the expensive gas fees and network congestion issues currently faced by Ethereum cannot be avoided by Starknet and zkSync in the future.
Optimistic Rollup
Representing the infrastructure of Optimistic Rollup, Arbitrum's advantage lies in the flexibility of function development and compatibility with Ethereum. It is highly compatible with Ethereum, supports Solidity language, and is user-friendly for developers, making it easier for function development. Compared to the ZK-Rollup infrastructure, Arbitrum has some advantages in terms of cost as it eliminates expensive zero-knowledge proof computation fees. However, compared to ZK-Rollup, it lags behind in terms of transaction finality time. Moreover, in terms of security, it is slightly inferior to the ZK-Rollup infrastructure with multi-chain functionality.
Cosmos Layer-1
As a technologically mature Layer 1 infrastructure, Cosmos has significant advantages in transaction performance and cost. Its Tendermint consensus provides faster transaction confirmation speed for order book applications. Additionally, its other two core technologies, Cosmos SDK and IBC protocol, greatly contribute to enhancing user transaction experience. However, in terms of decentralization and security, Cosmos performs relatively average. Also, due to the early stage of the entire Cosmos ecosystem compared to Ethereum, it has certain disadvantages in key metrics such as asset class and liquidity that affect the transaction experience.
The above is a key part of this entire report. For detailed content, please download the full report to read.
