Intense competition in the BOH space: Why are the three major exchanges successively building public chains?

Cryptocurrency exchanges are a significant part of the blockchain industry structure. As decentralized exchanges (DEX) are still relatively immature, centralized exchanges provide ample liquidity for the transfer of crypto assets. With the cryptocurrency market growing rapidly, exchanges have become a battleground. Forbes recently analyzed the future strategies of exchange giants Binance, OKEx, and Huobi.

• Binance: Betting on the future of digital asset exchanges
• OKChain: Focused on decentralized finance (DeFi)
• Huobi Chain: Connecting with traditional financial institutions

On April 17, Binance was the first to release support for smart contracts and the Ethereum-compatible "Binance Smart Chain" testnet. Its whitepaper outlined its advantages and features:

• EVM-compatible, supporting all existing Ethereum tools with lower transaction fees
• Native dual-chain interoperability allowing cross-chain communication for high-performance dApps
• DPoS (Delegated Proof of Stake) based on 21 verification nodes will provide power decentralization, promoting extensive community involvement

In fact, since Binance launched its own blockchain in April 2019, at least three mainstream exchanges have announced the development of their blockchain systems.

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In February this year, OKEx announced the official launch of its public chain OKChain and the testnet of its decentralized exchange OKEx. OKEx CEO Jay Hao stated:

OKChain is a commercially developed public chain by OKEx, with 100% open-source code to provide an efficient, free, and infinitely value-added ecosystem for all ecological partners.

In March this year, Huobi also announced that its blockchain entered the testnet phase. South Korean exchange Bithumb also announced in November 2019 its plan to develop its own blockchain.

Building Moats and Market Share

Exchanges are among the biggest winners in the growing popularity of cryptocurrencies. They play a crucial role as gateways between users and the world of cryptocurrencies, with many building multi-million-dollar businesses around this service.

The US-based exchange Coinbase was estimated to have revenue close to $1.3 billion in 2018. According to The Block, as of September 30, 2019, Binance's accumulated net profit has reached $1 billion, estimated based on the burn structure of its platform coin, BNB.

The emerging trend of exchanges launching their own blockchains is essentially to solidify their position as industry leaders and to some extent build moats around their businesses. Ken Misuma, the CMO of the smart contract platform Quras, pointed out:

By developing their own blockchains, exchanges can increase their market share and operate more efficiently. Exchanges are trying to attract more traders to increase their user base, which is their main source of revenue. Developing a blockchain gives exchanges greater flexibility without the need for centralized mechanisms.

More Efficient Trading

Hugo Renaudin, CEO of the European institutional cryptocurrency exchange LGO, believes that blockchain will help exchanges become more efficient. He stated:

This will significantly reduce trading costs, automate many operations and fund flows (deposits or settlements) through smart contracts. The exchange's own blockchain will also reduce the listing costs of issuing cryptocurrencies, leading to arguments that exchanges can list more assets at lower costs.

As the blockchain and cryptocurrency field continues to develop, there will be more digital assets issued, leading to increasing demand from users for exchanges. Furthermore, by inviting projects to issue assets on their own blockchains, exchanges are more likely to capture all the trading volume of those assets.

However, the reasons for exchanges building their own blockchains vary, but can be inferred from the most relevant areas in the past.

Binance Chain

• Betting on the Future of Cryptocurrency Exchanges

While the launch of the "Binance Smart Chain (BSC)" provides Binance with an opportunity to compete with Ethereum, Binance seems more focused on market share in the cryptocurrency trading market. The BSC whitepaper reiterates that the DEX is still the main focus of Binance, indicating that the launch of BSC is solely for the future development of DEX.

Even with a focus on providing convenient asset issuance mechanisms and trading markets, there are still limitations that cannot be overcome. What Binance Chain most needs is programmable scalability, or smart contract and virtual machine functionalities. The BSC whitepaper also notes that projects will focus on bringing decentralization features to assets and introducing any form of community governance and related activities.

Another sign of Binance betting on the future of exchanges is the launch of Binance Cloud in February, a cloud solution for exchanges. Binance can offer its exchange infrastructure to any business with a cryptocurrency trading business, assisting in launching independent trading platforms through Binance Cloud.

Changpeng Zhao, CEO of Binance, estimated that Binance Cloud will become a source of revenue for the company within five years. Liquidity is also one of the promises of Binance Cloud, a promise that may materialize due to the development of Binance's own blockchain.

OKChain

• Focusing on Decentralized Finance (DeFi)

Previously, Binance moved its registered location to crypto-friendly Malta, and OKEx seems to be following suit. However, OKEx emphasizes that its efforts in the blockchain field are not copycats. A spokesperson for OKEx stated:

OKChain will not replicate Binance. Our vision and positioning with the Binance Chain are completely different, and we are actually developing different products along a different development path. This includes driving growth of decentralized business applications, especially in financial inclusivity. We believe that DeFi is key to achieving financial inclusivity and freedom for all. This is why we are eager to unleash the power of DeFi. OKChain is a significant milestone for us, representing our ability to provide an open, low-cost, and autonomous ecosystem for everyone to enjoy the benefits of blockchain and decentralization.

It is still unclear how OKEx plans to use its blockchain to develop in the DeFi field. For now, OKEx stated that DEX will be the first application released on OKChain, continuing to focus on trading business.

The OKEx spokesperson added: Compared to Binance, which is building its own blockchain and creating DEX, we are constructing financial infrastructure, and DEX is just one of the applications on OKChain, allowing users to create and customize DEX on OKChain.

Furthermore, unlike Binance's recent announcement of supporting smart contracts on its smart chain, OKChain already has built-in smart contract functionality.

Huobi Chain

• Connecting with Traditional Financial Institutions

While major cryptocurrency exchanges are eager to avoid regulatory authorities, Huobi decided to establish a relationship with the Chinese government. In December last year, Huobi announced its participation in a government-led blockchain alliance. The exchange is seeking to deepen its relationship with regulatory authorities and financial enterprises by making compliance the core of its blockchain development.

Ciara Sun, Vice President of Global Business at Huobi, stated:

DeFi has become one of the most promising applications of blockchain technology, but it will require both regulatory authorities and businesses to jointly establish new decentralized economic standards and guidelines. Through Huobi Chain, we hope to provide a decentralized framework to promote industry-wide collaboration, which is crucial for the widespread adoption of DeFi.

Huobi Chain will allow regulators to join the network as validators through regulatory nodes. This may look familiar to those familiar with blockchain-related regulations in the US. Last year, the Boston Federal Reserve Bank issued a whitepaper detailing concepts related to regulatory nodes on the chain.

Understanding that exchanges launching blockchains are focusing on their respective areas, if they succeed in the areas they are betting on, their platform tokens will also see significant growth. The initial use case of platform tokens for trading fees and listing fees is evolving, broadening the application areas and potentially increasing their value.

Decentralization Alarm Bells Ringing

The blockchains built by exchanges have raised concerns about their level of decentralization. Ken Misuma, CMO of the smart contract platform Quras, pointed out: The main drawback is that blockchains built by exchanges tend to be less decentralized, while decentralization is the most valuable aspect of blockchain technology.

Following the release of the Binance Smart Chain whitepaper, the cryptocurrency research firm Delphi Digital also responded to similar concerns, stating: These centralized exchanges are consistently missing the point. The key is not to provide cheap transaction fees; anyone can achieve that with Amazon's cloud platform. The focus should be on fostering a community-led builder spirit.