Centralized Exchanges Embrace On-Chain Services: A Strategic Shift in the Crypto Landscape

Introduction: The New Frontier for Centralized Exchanges

In a bold move, major centralized exchanges (CEXs) are venturing into on-chain services, signaling a proactive approach to the evolving crypto ecosystem. This report by Tiger Research, authored by Chi Anh and Ryan Yoon, delves into the motivations behind this shift and the strategies employed by leading exchanges like Bybit, Binance, and Coinbase.

The Strategic Landscape of CEXs in DeFi

Differentiation in Approach: Tailored Strategies for Diverse Users

CEXs are carving out unique identities in the decentralized finance (DeFi) space. Binance is focusing on retail-friendly on-chain services to simplify access to Web3. Bybit has introduced ByReal, a platform designed to deliver CEX-level liquidity on-chain. Meanwhile, Coinbase is implementing a dual-track strategy that caters to both retail and institutional clients.

The Shift to On-Chain Services: Addressing Market Dynamics

As early-stage tokens increasingly debut on decentralized exchanges (DEXs), CEXs are grappling with delays in listing due to regulatory hurdles, which can lead to lost trading volume and revenue. By adopting on-chain services, these exchanges can engage with emerging token flows and retain users without the need for formal listings.

Exploring CEX Initiatives in DeFi

Bybit’s ByReal: A New Liquidity Paradigm

Bybit’s recent launch of ByReal marks a significant step in its on-chain strategy. This platform aims to replicate the liquidity levels of centralized exchanges in a decentralized environment. Bybit employs a hybrid model that combines a request for quote (RFQ) system with a centralized liquidity market maker (CLMM) approach, enhancing capital efficiency and reducing slippage.

Coinbase’s Integrated Approach: Serving Diverse User Needs

Coinbase is set to integrate DeFi trading directly into its main application, providing users with seamless access to a wide array of tokens. This strategy not only enhances user experience but also introduces Verified Pools, which cater specifically to institutional clients who have undergone KYC verification.

Binance Alpha: Simplifying Access for Retail Users

Binance Alpha stands out as a retail-focused initiative, allowing users to trade on-chain tokens directly through the Binance app. This approach minimizes the complexity of Web3, enabling users to engage in DeFi without the need for separate wallets or complicated setups.

Key Drivers Behind CEXs’ Transition to DeFi

Capturing Early Token Opportunities

CEXs are motivated to gain early access to popular tokens, which are increasingly being launched on DEXs. The inability to list these tokens promptly due to regulatory constraints results in lost trading opportunities and revenue. By establishing on-chain products, CEXs can facilitate token trading in a controlled environment while awaiting formal listings.

Retaining Users in a Competitive Landscape

User behavior is another critical factor driving CEXs to integrate DeFi access. Many users find it challenging to navigate the complexities of DeFi, including asset transfers and gas fees. By embedding DeFi functionalities within their platforms, CEXs can keep users engaged and prevent them from migrating to DEXs.

The Future of CeDeFi: A Transformative Shift

Blurring Boundaries: A New Trading Paradigm

The integration of on-chain services by CEXs is redefining the lines between exchanges and protocols. Users may not distinguish between decentralized and centralized platforms, leading to a significant transformation in liquidity dynamics and product offerings.

The Role of Exchange Tokens in a Hybrid Ecosystem

As CEXs expand their on-chain capabilities, the utility of their native tokens is evolving. These tokens may soon offer users benefits such as fee discounts and yield opportunities, transforming them into essential assets within integrated ecosystems.

A Competitive Landscape in Flux

The movement of CEXs into on-chain services reflects a strategic bet on the future of the crypto market. Rather than viewing DeFi as a competitor, exchanges are embracing it as a complementary space. This trend could lead to a more cohesive market structure, with liquidity flowing seamlessly between centralized and decentralized environments.

In conclusion, the ongoing evolution of CEXs into the DeFi realm represents a significant shift in the crypto landscape, paving the way for a more integrated and user-friendly financial ecosystem.

Disclaimer: This article is provided for informational purposes only and does not constitute financial advice. Readers are encouraged to conduct their own research before making any investment decisions.