The Liquidity Revolution in the Encryption Industry: The Rise of On-Chain Bartering

In the current cryptocurrency market, many people feel lost and confused. This article will analyze the current situation from two perspectives: first, tracing the evolution of on-chain liquidity technology in decentralized finance ( DeFi ); second, explaining the transformative impact of on-chain barter trading from the perspective of economic development history. We believe a profound DeFi revolution is about to arrive, requiring just a bit more patience. Those visionary individuals who adhere to idealism will ultimately be rewarded by the market.

01. The Loss of Control in the Rhythm of the Encryption Industry

Since the beginning of 2023, Bitcoin has rebounded from its lows to new highs driven by ETF approvals and expectations of a new round of quantitative easing. However, most altcoins have not shown the same strong upward momentum as usual. Some investors mock the performance of VC tokens with high valuations and low liquidity, seeing them as lacking true innovation. At some industry conferences, individual leaders even compared the entire industry to a casino. Memecoins were favored in the early stages of the bull market, while value-type tokens have been overlooked by the market.

Many veterans feel that this bull market is indeed different, even surpassing the industry winter of 2018-2019. Some developers have started to question their original intentions for entering the industry and wonder whether encryption can truly change the real world.

Why is the encryption market different?

In addition to factors such as venture capital and the greed and misalignment of interests of the team, we believe an important reason is: the self-inflation within the encryption market is no longer sufficient to provide the necessary liquidity for the ecosystem.

Data shows that since 2018, the market share of non-stablecoins has been continuously declining. In recent years, the vast majority of trades have been provided liquidity by US dollar stablecoins. If the market capitalization of US dollar stablecoins cannot continue to expand, the liquidity pools will be drained as new coins are continuously issued.

In the past, Bitcoin and Ethereum were largely the general equivalent of the market, providing liquidity for other tokens. But now, most trading pairs are stablecoins pegged to the US dollar. Even if the value of Bitcoin or Ethereum rises significantly, it is difficult to inject liquidity into other tokens.

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

Stablecoins pegged to the US dollar and other compliant financial instruments have become bait, causing cryptocurrencies to follow the rhythm of Wall Street. The emergence of stablecoins like USDT and USDC, along with the launch of Bitcoin futures, has allowed Wall Street to influence the liquidity of the crypto market both physically and psychologically.

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, weakening 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.

02. The Millennium War of Liquidity

Liquidity is always the true demand.

Liquidity is a fundamental characteristic of the market. Any innovation that can improve market liquidity is a significant advancement in history. High liquidity can reduce transaction costs, improve price elasticity, attract more participants, and contribute to price discovery and the optimal allocation of resources.

The currency is an innovation aimed at alleviating liquidity issues.

The academic community has different views on the origins of currency, but it is generally believed that the function of currency after its birth is that of a general equivalent, which is a product of solving market liquidity issues. Currency is the response of ancient elites to the problem of market liquidity and a means to increase liquidity.

DEX: The Power of Transformation

With the emergence of blockchain technology, we are facing new limitations and touching upon new opportunities to solve liquidity issues. Contemporary token exchanges are confronted with a trilemma: sufficient liquidity, effective pricing, and decentralization.

Decentralized exchange ( DEX ) addresses this triple dilemma through various innovations. Uniswap introduced the joint curve, ushering in a new era of automated market makers ( AMM ). Curve developed special liquidity curves for stablecoin trading. Hashflow connects on-chain and off-chain liquidity. Friend.tech and Pump.fun have designed different curves for small-scale tokens.

MEV: the race for on-chain Liquidity

The maximum extractable value ( MEV ) is another competitive area of on-chain Liquidity. To retain transaction value and return it to participants, developers have constructed various algorithms and mechanisms to manage MEV. Projects like Flashbots, Eden Network, and KeeperDAO have all contributed to this field.

Liquidity decentralization calls for agents to solve problems

As token Liquidity becomes dispersed across different chains and protocols, DEX aggregators have emerged to integrate this dispersed Liquidity. The introduction of batch auction mechanisms further enhances the role of agents, providing new market mechanisms to alleviate Liquidity constraints.

Batch Auction: The culmination of DEX development

The batch auction mechanism will transfer the complexity of optimizing exchange results to professional participants and redistribute the remaining portion to relatively less mature exchangers. It can address the challenges of DEX from multiple aspects, including MEV redistribution, cross-chain Liquidity, and more.

03. Barter Trade Returns to the Stage

In the trading model of the decentralized exchange ( DEX ), there is no pre-determined universal equivalent role. Traders can use any token to exchange for other tokens. Through batch auctions and intention matching, barter trading will return to the market in a more efficient state.

This matching of barter demand is based on the global market and stronger information matching capabilities, extending the traditional barter culture of cryptocurrencies. It provides us with an opportunity to regain control of the market pace.

Barter transactions under batch auctions are an important milestone in the DEX era. It gives us confidence that we will ultimately be able to surpass centralized exchanges (CEX). DEX has evolved from having only liquidity pools to a comprehensive liquidity system with different participant roles, specialized components, and permissionless composability.

04, Postscript

Despite the current confusion in the market, exciting progress is still being made in DeFi and other areas. As long as technology continues to advance, we need not worry. For all the industry builders forging ahead, we firmly believe: "Do not worry that there are no friends on the road ahead; who in the world does not know you?"