In this report, we will start from Binance and explore why Binance has become the leader of centralized exchanges in the crypto industry. We discuss how with the iteration of technology, the realization of “decentralized Binance” through decentralized order book exchanges becomes possible. By introducing StarkEx, zkLink, StarkNet, zkSync, Arbitrum, and Cosmos in detail, we analyze and compare their situations from the perspectives of user experience, security, performance, and cost, guiding readers to gain a deep understanding of these infrastructures.
Here are some key points in the report:
Why do we need “decentralized Binance”?
Binance is currently the largest crypto exchange in terms of trading volume in the blockchain field, with more than 120 million registered users. As a centralized exchange, it has a wide range of assets and sufficient liquidity. Its trading experience and performance are also far ahead of other competitors.
However, in the blockchain industry, centralization is the “original sin”. As a centralized exchange, Binance has certain risks in terms of asset security, business transparency, and regulation. This exacerbates people’s concerns, and they begin to yearn for creating a crypto exchange that combines the user experience of a CEX and the self-custody advantages of a DEX – that is, to establish a fully decentralized Binance.
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The path to “decentralized Binance”
Many attempts have been made in the process of building a decentralized Binance.
- The pioneer of decentralized exchanges is Uniswap. It was initially deployed on Ethereum, using the AMM mechanism to trade with constant price formulas and liquidity pools. However, this mechanism has issues such as low capital efficiency, slippage, and impermanent loss. This means that while achieving decentralization, it has to sacrifice some liquidity and trading experience.
- After the initial attempt of AMM, many high-performance Layer1 solutions emerged. The improvement in trading performance brought by these solutions made it possible for order book mechanism DEX to exist. However, while improving performance, Layer1 solutions also sacrifice the security and mature ecosystem of Ethereum. Moreover, they cannot support trading for large user volumes like Binance.
- With the continuous advancement of technology, Ethereum Layer2 scaling solutions came into being. They help decentralized exchanges further improve transaction speed and reduce transaction costs. These Layer2 solutions, as Ethereum’s scaling solutions, retain the security of Ethereum and inherit its mature ecosystem. However, general Layer2 networks have some limitations in high-frequency trading. They lack seamless interoperability between blockchains other than Ethereum.
- Recently, a new generation of application-specific, transaction-centric order book infrastructure solutions have entered the crypto market. Each solution can improve the user’s trading experience by providing a high-performance and secure trading environment. They have further innovated based on Layer1 and Layer2, opening up possibilities for building a “decentralized Binance”.
Overview of Trading Infrastructure
When analyzing the construction of the “decentralized Binance” infrastructure, we considered four main factors that affect trading:
- User experience
We analyzed several popular infrastructure projects based on the above four dimensions and combined with examples of decentralized order book trading protocols.
StarkEx is a trading infrastructure designed for specific application services. It runs as an Ethereum Layer2 scaling engine based on STARK zero-knowledge proof technology developed by StarkWare, providing specific ZK-Rollup services for independent applications. StarkEx was officially launched on the Ethereum mainnet in 2020. Its services are currently used by many well-known decentralized derivative trading protocols such as dYdX v3, immutableX, and ApeX.
zkLink is a multi-chain middleware centered around transactions and based on ZK-Rollup technology. Its biggest feature is that it can connect multiple Layer1 and Layer2 blockchains, aggregating liquidity from different ecosystems, thereby enabling the trading and composition of native DeFi assets on different chains. It achieves multi-chain functionality and extends classical ZK-Rollup through the mechanism of “ZK-Rollup + oracle network”.
StarkNet, developed by StarkWare, is a general-purpose Layer2 scaling solution based on ZK-Rollup. StarkNet supports the deployment of arbitrary smart contracts, and developers can create different types of decentralized applications on it, which can be combined with each other. It uses Rollup based on STARK technology to execute transactions, with high scalability and low transaction costs.
zkSync is a series of general-purpose Layer2 Ethereum scaling protocols based on ZK-Rollup, mainly consisting of two products: zkSync 1.0 (later renamed zkSync Lite) and zkSync 2.0 (later renamed zkSync Era). zkSync Lite uses SNARK proof programs but is not compatible with EVM. That is, it does not support smart contracts, only basic transactions such as transfers. zkSync Era implements EVM compatibility on the basis of zkSync Lite.
Arbitrum is an Ethereum Layer2 scaling solution based on Optimistic-Rollup, which currently includes two products: Arbitrum One (general-purpose) and Arbitrum Nova (game/social application-specific). Among them, Arbitrum One is the main product of Arbitrum, and most DeFi applications are concentrated on Arbitrum One.
Cosmos is a Layer1 blockchain network based on the Tendermint consensus mechanism with a mesh structure. Each blockchain in the network is an independent and fully functional PoS blockchain. Cross-chain communication between chains can be achieved through the IBC protocol, while sharing security and liquidity. In addition, Cosmos also provides a custom blockchain development toolkit – Cosmos SDK, which allows developers to use existing modules to develop blockchains that meet different needs, with a high degree of flexibility.
Application-specific ZK-Rollup infrastructures, such as StarkEx and zkLlink, have obvious advantages in terms of technical availability. They also have certain advantages in transaction security compared to the Cosmos network and Optimistic solutions due to the use of ZK technology. However, application-specific infrastructures may have greater limitations in terms of functional development. In comparison, the applications of StarkEx are currently deployed on Ethereum, which has better underlying security. On the other hand, zkLlink supports native multi-chain, providing richer transaction assets and liquidity sources.
The representatives of general-purpose ZK-Rollup infrastructures are Starknet and zkSync. They both support Turing-complete programming languages, so they have higher flexibility in terms of functional development and can deploy order book applications. However, as a general Layer2 solution, there will be many applications running simultaneously. Therefore, Ethereum still faces the problems of expensive gas fees and on-chain congestion, which Starknet and zkSync will also face in the future.
The representative of Optimistic Rollup infrastructure, Arbitrum, has advantages in terms of flexibility in functional development and compatibility with Ethereum. It is highly compatible with Ethereum and supports the Solidity language, making it more developer-friendly and facilitating functional development. Compared with ZK-Rollup infrastructure, Arbitrum has some advantages in terms of cost due to the elimination of expensive zero-knowledge proof computation fees. However, compared with ZK-Rollup, it lags behind in terms of transaction finalization time. In terms of security, it is slightly inferior to ZK-Rollup infrastructures with multi-chain functionality.
Cosmos, as a mature Layer1 infrastructure, has significant advantages in transaction performance and cost. Its Tendermint consensus can provide faster transaction confirmation speed for order book applications. In addition, its two core technologies, Cosmos SDK and IBC protocol, have great help in improving user transaction experience. However, in terms of decentralization and security, Cosmos performs relatively average. Moreover, due to the early stage of the entire Cosmos ecosystem compared to Ethereum, it has certain disadvantages in key indicators affecting transaction experience, such as asset class and liquidity.
Above are some key contents of this report. For detailed information, please download and read the full report.