Encryption Intent and Ideal: On-chain Barter

In this article, we will explore two interrelated theoretical logical clues: the first clue traces the evolutionary history of DeFi's liquidity technology, while the second elucidates the transformative impact of on-chain barter trading from the perspective of economic development history. This article aims to confirm that a profound DeFi revolution is imminent: it only requires a little more patience. Those visionary builders who adhere to idealism will ultimately be rewarded by the market.

We have closely tracked the development of the decentralized exchange (DEX) market to illustrate that the emergence of on-chain barter trading is by no means a coincidence, but rather a true game changer. It represents an important chapter in the history of Web3 builders. Achieving its functionality requires a significant amount of innovation and improvement, not only within the DEX itself but also at the underlying infrastructure layer.

If on-chain barter becomes a significant historical milestone, we believe that all related efforts and contributions should be appropriately commemorated.

Have we lost control over the rhythm of the encryption industry?

Since January 2023, driven by ETF approvals and new expectations for quantitative easing, Bitcoin has rebounded from its lows to new highs. However, the prices of most altcoins are not performing as strongly as before. After BTC has created an imagined space, they show stronger upward momentum. Some investors mock genuine innovation due to the high valuation and low liquidity of the VC token market, viewing the crypto world as a criminal domain. At certain industry conferences, some industry builders even bluntly referred to the entire industry as akin to a casino. Many crypto enthusiasts are intoxicated by the excitement of PvP( player battles). Overall, the market shows that memecoins were favored early in the bull market, while value tokens were overlooked and absent from the entire bull run.

In this round of the bull market, many seasoned individuals feel that this time is indeed different, even surpassing the industry chill of 2018-2019. Some developers are confused and begin to question their original intention for entering the industry: can encryption truly change the real world? Since last year, with the rise of AI, many people have shifted their attention to artificial intelligence, while even more remain hesitant.

Why is the cryptocurrency market different this time?

We cannot ignore the impact of venture capital and team greed, misaligned interests, unethical behavior, and short-term thinking. The market has long been in a dark forest. There are not many rules to regulate participants aside from the code. Although these issues have existed for a long time, they are not enough to explain the weakness of this bull market.

Therefore, we have put forward an additional reason: the self-inflation within the encryption market is no longer sufficient to provide the necessary liquidity for our encryption ecosystem.

The above image shows the activity of various encryption equivalents. From the chart, it can be seen that since 2018, non-stablecoins have been continuously losing market share. In terms of trading volume proportion, in the last year or two, the vast majority of trades have been provided liquidity by USD stablecoins. If the market capitalization of USD stablecoins cannot continue to expand, as new coins are continuously issued, the liquidity pool will be drained.

In the past, Bitcoin and Ethereum were largely the general equivalents of the market. Bitcoin and Ethereum could become the liquidity for others, and during bull markets, altcoins and mainstream coins as liquidity spiraled upwards, mutually promoting each other. In such a market structure dominated by the tokens themselves leading liquidity, altcoins rarely lacked liquidity. Fast forward to now, most trading pairs are stablecoins pegged to the US dollar. Even explosive growth in the value of Bitcoin or Ethereum is useless; the status of stablecoins makes it difficult for BTC and ETH to inject liquidity into other tokens.

The pricing power of encryption currency has fallen into the hands of Wall Street.

All US dollar-pegged stablecoins and other compliant financial instruments are bait. Cryptocurrency follows the Wall Street clock.

In October 2014, a stablecoin platform began offering a stable digital currency that bridges the gap between encryption currencies and fiat currencies, providing the stability of traditional money and the flexibility of digital currency. It has now become the third largest token by market capitalization. Additionally, this stablecoin has the most trading pairs in the index, being 10 times that of Ethereum or wBTC.

In September 2018, a certain platform collaborated with another platform to launch a stablecoin under the alliance. It is pegged to the US dollar, with each token linked to the US dollar reserves at a 1:1 ratio. As an ERC-20 token, this stablecoin enables seamless trading and integrates with various decentralized applications.

On December 10, 2017, the Chicago Board Options Exchange (CBOE) launched Bitcoin futures, which, even if settled only in USD, can influence the spot price of Bitcoin, especially since Bitcoin's open interest currently accounts for 28% of the global market.

Wall Street not only physically influences the encryption market but also psychologically affects the liquidity within the encryption market. Do you remember when we started paying attention to the Federal Reserve's stance, a certain trust's write-down, the FOMC's "dot plot," and the cash flow of BTC-ETF? All this information psychologically influences our behavior.

Stablecoins are the bait thrown by the US government. Since we accepted stablecoins pegged to the US dollar as a means of providing liquidity, they have begun to accumulate consensus, replacing the liquidity role of native encryption tokens, competing with and undermining the credibility of other tokens, and the US dollar is gradually dominating the market for universal equivalents.

In this way, we have lost our own market rhythm.

I am not trying to criticize stablecoins pegged to the US dollar; on the contrary, this is a natural result of fair competition and market choice. Stablecoins help investors directly invest in assets pegged to the US dollar on-chain, allowing them to take on risks equivalent to those of the US dollar, while also providing investors with more options.

The market is struggling for liquidity! Losing control over liquidity means we have also lost control over the rhythm of the encryption industry.

The Millennium War of Liquidity

Liquidity is always the real demand.

Liquidity is a fundamental characteristic of the market, and any innovation that can improve market liquidity is a significant advancement in history.

According to organizational theory, the market is defined as a structured environment for the exchange of goods, services, and information between buyers and sellers. This environment is guided by established rules, norms, and institutions to facilitate coordination, reduce transaction costs, and support efficient economic interactions.

Liquidity is crucial for market organization as it directly affects the efficiency, stability, and attractiveness of the market. High liquidity reduces trading costs by minimizing slippage and increasing trading volume. Markets with high liquidity also exhibit greater price elasticity, better prices, attract more participants, and help find more accurate price information. Information economics emphasizes the role of markets in information discovery. In an ideal market, information flows freely, enabling participants to make informed decisions, optimize resource allocation, and achieve equilibrium prices. Markets with high liquidity generate reliable information, aiding in more effective resource distribution.

Whether it is price discovery efficiency, price stability and resilience, or lower transaction costs, these characteristics enhance the market's ability to attract participants. The attractiveness of the market, in turn, further enhances the market's liquidity and improves the efficiency of various aspects of the market. Therefore, improving liquidity is essential for any market.

The currency is an innovation aimed at alleviating liquidity issues.

Academically, there are two mainstream theories regarding the origin of currency. One believes that currency is a convenient medium of exchange, widely accepted by the general public and scholars; the other posits that currency originates from debt relationships, while also acknowledging the role of currency as a universal equivalent.

Scholars agree that the function of currency after its birth is as a general equivalent, a product that resolves market liquidity. The divergence lies in whether the starting point of the currency vehicle is goods or debt.

Currency is the answer of ancient elites to the issue of market liquidity before the advent of the value internet; currency is a means to increase liquidity.

In the past, the old forces that equated currency with liquidity rarely attempted to improve the organizational structure of the market to achieve better liquidity conditions. They never considered how to construct market liquidity under the conditions without currency. Perhaps it is because they, like fleas trapped in a covered box for too long, have forgotten how high they can jump.

DEX: The Power of Transformation

The primary goal of any market is to provide the most accurate prices and the most efficient allocation of resources. Every component, mechanism, and structure is designed to achieve this purpose. Since ancient times, humans have continuously created new ways to improve market efficiency.

Over the centuries, the market has undergone tremendous changes. The price generation mechanism has experienced multiple upgrades. To meet different economic needs, the market has developed various settlement procedures, such as dealer markets, order-driven markets, brokerage markets, and dark pool markets.

With the emergence of blockchain technology, we have encountered new limitations and touched upon new opportunities to solve liquidity issues. At this point, we can create innovative methods to address exchange needs and provide liquidity for tokens.

In summary, contemporary token exchanges face a trilemma: 1) sufficient liquidity, 2) effective pricing, 3) decentralization.

Although some centralized exchanges provide the best trading experience, their users are also plagued by fraud risks and monopolistic exploitation. Even the once world's second-largest exchange is now bankrupt due to misappropriating user assets. Any exchange with even slightly better liquidity charges significant listing fees to project parties and imposes other stringent terms. In contrast, decentralized exchanges are more flexible, designing different mechanisms to cater to various demand scenarios. For example, one platform is known for providing extremely sensitive token supply curves, while another platform offers the best liquidity in most cases rather than price discovery sensitivity. These exchanges adopt various models to meet the trading preferences of their different target customers. It is undeniable that each has its own focus and sacrifices.

Attempt to create on-chain liquidity

Decentralized exchanges have made significant progress in innovatively addressing this trilemma and other on-chain trading challenges. A journey of a thousand miles begins with a single step, and the first step is to establish on-chain liquidity. Here is a brief industry overview: a certain DEX is the benchmark of this niche industry. The innovation of the joint curve marks the beginning of a new era. Before the "X*Y=C" curve of this DEX, decentralized exchanges used order books to settle on-chain trading demands. The subsequent automated market maker (AMM) followed the exploratory direction of this DEX and created liquidity pools. In the V2 version of this DEX, liquidity from different trading pair pools is connected through algorithms. The V3 version introduced segmented liquidity pools, allowing users to define the price ranges in which they wish to provide liquidity. The V4 version further advances this by offering customized solutions for liquidity pools.

For assets with relatively stable trading prices, the market demands more concentrated liquidity supply. A certain protocol focused on stablecoin trading has developed its own liquidity supply curve to provide more token liquidity around a predetermined balance point. To address the challenges of combined liquidity pools, the protocol invented a multidimensional formula that allows users to place two or more tokens in a single liquidity pool, thereby sharing liquidity among all tokens in the pool. In practice, centralized exchanges (CEX) exhibit better liquidity and pricing efficiency. On-chain pricing systems typically lag behind off-chain CEX. A certain platform established a specialized market maker pool (PMM) with the help of oracles to connect on-chain and off-chain liquidity.

However, for small-scale tokens, the traditional joint curve is costly, and the contradiction of liquidity funding costs is more pronounced. A certain platform has designed a steeper joint curve to cater to small investors who prefer price increases over ample liquidity. As the scale of the token's value increases, investors' preferences shift towards liquidity. Inspired by this, a certain platform uses a steep curve when the token value is low, but as the value increases, the curve transitions to different slopes or even different curves.