When we think of blockchain, we think of decentralization and the sort of use cases that benefit from this: gaming dApps, DeFi, NFTs, prediction markets, and lending protocols to name but a few. However, we rarely consider the benefits that blockchain brings to bear when enhancing crypto exchanges. That’s because, for the most part, CEXs don’t operate on blockchain rails, but that distinction is increasingly blurred.
A new wave of hybrid crypto exchanges combines the best elements of CEX and DEX by taking advantage of advances in blockchain technology. Faster, cheaper, and more feature-rich base layer innovations mean that trading types once best handled on centralized infrastructure can be delivered just as efficiently on-chain. As a result, emerging crypto exchanges have a wealth of options when it comes to choosing the optimum back-end for hosting high-volume trading including centralized, decentralized, and hybrid solutions.
Blockchain Without the Bottlenecks
DEX volumes have been growing steadily since the first AMMs emerged around 2020 and have been slowly eroding CEX’s market share. That said, DEXs still account for less than 15% of all crypto volume for spot trading. One of the key drivers behind the slow grind upwards of DEXs is the major improvements in blockchain technology, particularly when it comes to scaling.
The days when Ethereum was the only serious smart contract chain for DEX trading and fees were $20 per swap on a good day are long gone. EVM L2s, Solana, and new L1s optimized for high-frequency trading have dramatically improved the on-chain trading landscape. Swaps can now be executed for cents rather than dollars and in sub-second times rather than in seconds.
Not only have these scalability improvements allowed a new wave of DEXs and hybrid exchanges to flourish, but they’ve also powered on-chain perps markets that can match CEXs for speed and TPS. These improvements aren’t just limited to scalability either: on-chain privacy is also now possible thanks to technology such as zero-knowledge proofs, allowing high-net-worth individuals to trade without disclosing wallet balances and pro trading firms to conceal sensitive data such as stop losses.
Hybrid Exchanges in Action
The capabilities of hybrid exchanges today are manifested in platforms such as GRVT, an Appchain with the ability to support on-chain settlement of 600K TPS. Coupled with off-chain order matching, it comfortably outperforms a conventional CEX while providing the benefits of self-custody.
While hybrid exchanges such as GRVT are still obliged to implement KYC, the fact that users don’t need to deposit funds and entrust them to a centralized platform is a major plus point. With the ability to keep on-chain trading data private using Validium technology, it’s easy to see the appeal of the hybrid model, not just for retail users, but also for institutions and trading firms, that can access CEX-like features such as sub-accounts and role-based permissions.
Putting an End to Liquidity Fragmentation
The other key way in which on-chain exchanges have empirically lagged begging CEXs is when it comes to liquidity. Put simply, there are too many blockchains and only so much liquidity to go around. With every new L2 or protocol that springs up, liquidity fragments further, impairing the trading experience for all on-chain users who are subjected to slippage and high volatility when swapping assets.
Thankfully, this problem is also being conquered through the emergence of liquidity layers that can channel liquidity from multiple blockchains as well as from centralized sources. As a result, projects can launch exchanges on new L1 and L2 chains without needing to stress over incentivizing liquidity provision while existing DEXs can dramatically improve available liquidity.
Liquidity layers at the forefront of this trend include Orderly Network, which provides projects with unified liquidity through a powerful SDK, and Orbs, which is beginning CEX-level order execution to DeFi. Orderly’s service incorporates delivering liquidity to perps exchanges, allowing on-chain futures DEXs to flourish. At the same time, Orbs has developed plug-and-play products such as dTWAP, which allows traders to split large orders into smaller buys to reduce slippage and enable dollar cost averaging.
Where Next for Onchain Exchanges?
Thanks to improvements in liquidity availability, support for private transactions, and on-chain order books, traders can now enjoy all the benefits of decentralized trading, including self-custody, with the sort of performance once the preserve of CEXs. But these aren’t the only technological innovations that have served to transform the on-chain trading landscape.
The rise of tokenized RWAs, which have grown into a multi-billion dollar sector, allows hybrid exchanges in particular to expand the range of assets they support. Given that these assets require user verification to be accessed due to their status as securities, they’re ideally suited to be listed by exchanges that enforce on-chain KYC. The same exchanges can also introduce yield-generating DeFi products, providing the potential for users to be able to trade a diverse range of assets through a single interface.
Better blockchain technology has made web3 better for all users. However, the real winners of this trend are the exchanges that combine the latest base layer tech with superior UX. CEXs remain the driver of most crypto trading activity and will likely continue to dominate for the foreseeable future. But their hegemony is by no means guaranteed. Everything CEXs can do, the best hybrid and decentralized exchanges can now comfortably match.
