Encryption Intention and Ideal: On-chain Barter

In this article, we will explore two interrelated theoretical clues: the first clue traces the evolution of liquidity technology in DeFi, while the second emphasizes the transformative impact of on-chain barter from the perspective of economic development history. This article aims to argue that a profound DeFi revolution is imminent, requiring just a little more patience. Those builders who adhere to idealistic foresight will ultimately be rewarded by the market.

We have carefully tracked the development of the decentralized exchange (DEX) market to illustrate that the emergence of on-chain barter trading is not accidental, but a true game changer. It represents an important chapter in the history of Web3 builders. Achieving its functionality requires significant 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 properly commemorated.

01, 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 fallen to a low point and rebounded to a new high. However, the prices of most altcoins haven't exhibited the same strong upward momentum as before; after BTC has created an imaginative space, they have not performed as strongly. Some investors mock true innovation due to the performance of the VC token market, which is characterized by high valuations and low liquidity, viewing the crypto world as a criminal domain. At certain industry conferences, some industry builders have bluntly referred to the entire sector as similar to a casino. Many crypto enthusiasts are intoxicated by the excitement of PvP( player battles). Overall, the market performance shows that memecoins were favored in the early bull market, while value tokens were overlooked by the market, absent from the entire bull run.

In this round of a bull market, many veterans feel that this time is indeed different, even surpassing the industry chill of 2018-2019. Some developers feel confused and begin to question the original intention of 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 this cryptocurrency market different this time?

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

Therefore, we propose an additional reason: the self-inflation within the encryption market is no longer sufficient to provide the necessary liquidity for our encryption ecosystem. Please see the figure below:

The above figure shows the activity of various encryption equivalents. From the chart, we can see that since 2018, non-stablecoins have been continuously losing market share. If we look at the trading volume ratio, 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 constantly 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 of others, and during bull markets, altcoins and mainstream coins as liquidity spiral upwards, mutually promoting each other. In such a market structure where tokens themselves dominate liquidity, altcoins rarely lack 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 of no use; 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 stablecoins and other compliant financial instruments pegged to the US dollar are bait. The cryptocurrency follows the Wall Street clock.

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

In September 2018, a company partnered with a trading platform to launch a stablecoin pegged to the US dollar. 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, it allows for seamless trading and integration with various decentralized applications.

On December 10, 2017, the Chicago Board Options Exchange became the first to launch Bitcoin futures, which, even though settled only in USD, can influence the spot price of Bitcoin, especially since the current positions in Bitcoin account 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 to pay attention to the Federal Reserve's stance, the write-down of a certain trust, the "dot plot" of the FOMC, and the cash flow of BTC-ETF? All this information psychologically influences our behavior.

Stablecoins are a lure thrown by the U.S. government. Since we accepted stablecoins pegged to the 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, while the dollar gradually dominates the market for universal equivalents.

In this way, we have lost our market rhythm.

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

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

02, 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 market efficiency, stability, and attractiveness. 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, contributing to a more effective allocation of resources.

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 market's attractiveness, in turn, further enhances the market's liquidity and improves efficiency in 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 public and scholars; the other comes from the work of a certain scholar, who posits that currency originates from debt relationships, while also acknowledging the role of currency as a universal equivalent.

Apart from the works of certain scholars, there are other materials that hold similar views on the origin and evolution of currency.

For example, a scholar pointed out in his work that the development of currency also originated from society's demand for an efficient exchange system, starting from barter and gradually evolving into a more complex system using items with intrinsic value.

Similarly, in the works of a certain scholar, the author also discussed the concept of money as a social technology, which developed out of the demand for a more efficient exchange system. Like Marx, this scholar believes that money is a universal equivalent, originating from a common commodity in the era of barter.

Finally, a scholar's work presents a unique perspective, arguing that currency evolved from systems of debt and obligation, which predate the invention of currency itself. However, this view still aligns with a core idea: currency was created as a universal equivalent, with the purpose of facilitating the exchange of goods and services.

These resources further emphasize the role of currency as a medium of exchange, resonating with the views of other scholars.

In summary, the consensus in academia regarding currency is that its function after its birth is as a general equivalent, a product that solves market liquidity. The disagreement lies in whether the starting point of the currency medium is goods or debt.

Currency is the answer of ancient elites to the market liquidity issue before the emergence 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 had never considered how to construct market liquidity 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 resource allocation. Every component, mechanism, and structure is designed to achieve this purpose. Since ancient times, humans have continuously created new methods 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 face new limitations and encounter new opportunities to address liquidity issues. At this point, we can create innovative ways to meet exchange demands and provide liquidity for tokens.

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

Although centralized exchanges, represented by certain trading platforms, provide the best trading experience, their users are also plagued by the risks of fraud and monopolistic exploitation. Even the once second-largest exchange in the world is now bankrupt due to misappropriation of user assets. Any exchange with slightly better liquidity demands significant listing fees from project parties, as well as other stringent terms. In contrast, decentralized exchanges are more flexible, designing different mechanisms to cater to various demand scenarios. For example, some platforms are known for providing extremely sensitive token supply curves, while others provide 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 focus and sacrifices.

Attempt to create on-chain liquidity

Decentralized exchanges have made significant progress in innovatively addressing this threefold dilemma 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’s a brief overview of the industry: a certain DEX is the benchmark for this niche industry. The innovation of the combined 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, creating liquidity pools. In this DEX V2, liquidity across different trading pair pools is connected through algorithms. A certain DEX V3 introduced segmented liquidity pools, allowing users to define the price ranges in which they want to provide liquidity.