Inside Web3 | DEX vs CEX
Inside Web3 | DEX vs CEX
Logbook of a Web3 builder: News, resources, fundraising, and learnings
Hello guys,
I hope you are feeling good today :)
Busy week on my side. We worked on Safetin.com, a (new) StaySAFU company. We also worked on the positioning and processes of our NFT agency Alchemist. I will tell you more soon!
As you can see, I changed the newsletter publication day. You will now receive the edition every Tuesday. Several people recommended not sending the newsletter on Monday. MailChimp data confirm that Monday is not the best day to send a newsletter. Tuesday and Thursday are the two most popular days, so let's go with Tuesday.
The plan of this edition:
1/ Top 5 Resources of the Week
2/ The intervention of the week: Sylvain Ng, CEO of the NFT agency
3/ Focus of the week: DEX vs CEX
Or how StaySAFU's token was worth $12 on PankakeSwap (CEX)
and $40 on CoinTiger (Dex) at the same moment.
ANNOUNCEMENT: We are launching Mobula, a 100% decentralized & peer-to-peer data aggregator, like the Web3 version of CoinMarketCap. We finished the alpha this weekend. We will share a beta very soon, don't hesitate if you have ideas for us. We are open to partnerships (free API), advice & investments. More information will be shared soon 🏴☠️
1 / Top 5 Resources of the Week
🇪🇺 EU Crypto Proposal Seen as De-Facto Bitcoin Ban Fails in Vote. A proposal that would have effectively banned the mining and trading of energy-intensive crypto-currencies like bitcoin in the European Union failed to win approval from a parliamentary committee as the bloc moves forward with regulating the growing sector.
🎶 Spotify is hiring for Web3 roles. In the last edition, we talked about the music industry in Web3, its genesis, its benefits, and its development. Music streaming giant Spotify has posted job openings for employees to explore Web3 technologies and special projects, reports the Financial Times.
🖼 Mark Zuckerberg confirms NFTs are coming to Instagram. NFTs will be on Instagram soon. Mark Zuckerberg says NFTs will be on Instagram “in the near term”, hinting that users would be able to display and mint tokens, Engadget reported.
🌅 HSBC is buying land in the metaverse. The global bank is buying virtual land in The Sandbox, a virtual world built on a blockchain, becoming the first financial institution to do so. Research reports expect the market opportunity for the metaverse to reach $800 billion (roughly Rs. 59,58,719 crore) by 2024.
🙉 Yuga Labs announces $APE. Yuga Labs, the team behind Bored Ape Yacht Club, has officially launched ApeCoin ($APE), "a token for culture, gaming, and commerce used to empower a decentralized community building at the forefront of the web3".
2/ The intervention of the week
This weekend, I'm sharing the secrets of one of my business partners, Sylvain Ng, CEO of the NFT agency Alchemist. I was impressed by his team, and he told me about an interesting concept that I would like to share with you :) I let him tell you about it.
Spoiler: NFT collection creation is not that expensive if you recruit the right people
Hey guys, I introduce myself, I'm Sylvain from Alchemist Studio.
We are the Studio that produced the NFT collection for
BABOLEX x SnoopDogg !
And many others ;)
Today I'm going to talk to you about the importance of finding anomalies when you build an NFT project.
You may ask what is an Anomaly?
I see an anomaly as someone who is 5x-10x better than most people at their job.
Like a junior who has the level of a senior
How to find them?
It's really simple, BRUTE FORCE...
You need to audition 150 people to try to find the "Anomaly".
You post a lot of job ads and take 20 calls a day without a break.
I know it sounds crazy ... but it works and it's worth it!
So much...
When you find out, it will be obvious.
And this is how you will have the best "Avengers" team for your NFT COLLECTION.
Because a Senior who costs 10k is easy to find but is not competitive...
Whereas finding Junior with a Senior level who cost 5x less is.
And this is how you can build the most competitive NFT project in this industry that keeps maturing and becomes harder day by day.
3/ Focus of the week: DEX vs CEX
I understood the difference when our StaySAFU token was worth 12$ on PancakeSwap (DEX) while it was worth 40$ on CoinTiger (CEX)
DEX means "Decentralized exchange", while CEX means "centralized exchange".
Both terms refer to crypto exchange platforms where crypto-currency users can seamlessly trade, buy, and sell crypto-currencies.
CEX offers guaranteed liquidity, crypto-to-fiat exchange, and ease of use, which have led to concerns about security, lack of full user ownership, and lack of anonymity. Binance, Bitmax, Bitfinex, CEX.io, Kraken, and OKEx are examples of CEX.
DEX offers full coin ownership and private key control, token governance capability, and full anonymity but can be more complex to learn and use for beginners, does not allow fiat payments, and may have limited liquidity. PancakeSwap, Uniswap, and Biswap are examples of DEX.
What is a crypto exchange platform:
Just like stock exchanges exist as a means for people to buy and sell assets in the form of shares and derivatives, cryptocurrency exchanges are a crypto marketplace where people get to buy and sell blockchain-based coins and tokens. How your transaction works and the possibilities for the user depend on the type of exchange you’re using.
ZOOM ON CEX:
This exchange platform is created and owned by a centralized organization that acts as an intermediary connecting buyers and sellers.
They are custodians
One of the main characteristics of centralized exchanges is that they are depositories. What does this mean? It means that when you want to trade on a CEX, you keep your funds in a portfolio linked to the exchange itself, not in your own portfolio. Importantly, the exchange keeps the private keys to the wallet, not you - instead, you get the login details to the platform.
Centralized exchanges are very liquid.
The CEX facilitates trading by centrally matching users' buy and sell orders, known as an "order book" system. Again, it’s like the stock market. This means that liquidity is a function of the number of buys and sell orders in the books, and since most people's first steps into crypto take place on a centralized exchange, order volumes are necessarily higher than their decentralized counterparts.
*Companies like Binance, for example, have recorded over $30 billion in trades per day, and because the trading numbers are so high, you're likely always to find liquidity for the trade you need.
They collect & centralize data.
With global standards evolving to accept that cryptocurrency is here to stay, exchanges have made concerted efforts to ensure that coins and tokens cannot be used to launder money. So, before you start trading on a centralized exchange, you must produce documents confirming your identity and sometimes your address to coordinate with these measures.
ZOOM ON DEX
Like a CEX, the purpose of a decentralized exchange is to allow you to trade your crypto assets. But the structure of this type of exchange is fundamentally different. There are two main types of DEX:
order-book based
automated market makers
Order-book based
Like centralized exchanges, the older generation of DEXs tends to operate using a decentralized version of an order book system.
Here is some DEXs Order Book: LoopRing, Gnosis Protocol or IDEX
All of these use an algorithm (instead of a central platform) to find and route the trades between individual users, and smart contracts record the exchanges on the blockchain to reflect the coins and tokens moving between buyers and sellers. In other words, there is a market – but no one is in the middle selling for you, only an algorithm. This is how the service remains decentralized.
Automated Market Maker
Also known as AMM DEXs, they were developed in response to a key problem prevalent in crypto-currency exchanges - lack of liquidity. You may already be familiar with some of these protocols - SushiSwap, Uniswap, and Compound are just a few of the most common.
Instead of matching buyers and sellers, trades on the AMM DEX are conducted using pools of liquidity managed by DEX's own smart contract. Liquidity comes from users who donate their coins or tokens (in trading pairs) in exchange for passive income or, if they take a more calculated approach, as part of a broader yield farming strategy. These revenues come from the true transactions of the protocol.
The exchange automatically prices trade between coins based on supply and demand for those assets. This is done through an algorithm that constantly rebalances to reflect changes in liquidity and is not necessarily in sync with the rest of the market - which, by the way, is a great opportunity for eagle-eyed traders to make returns through arbitrage. This video explains very well how the automated market maker works.
You can see that it's super convenient! I can buy crypto in one go, in a fraction of a second, just by interacting with the liquidity pool, even if no one else is available in the market right now to sell them to me. The liquidity pool (in a smart contract) will then be able to handle the transactions independently and vary the price of its assets so that the value always remains the same on each side.
However, there is a small flaw: if the liquidity pool is too small, then the price of the assets will become very volatile very quickly.
Let's imagine that in our pool, there is 1 BTC and 36,000 USDT. If I want to buy 0.5 BTC, I want to buy half the pool.
If the protocol let me buy half of the pool at 36,000 USDT/BTC, it would let the pool be emptied of BTC without making the price fluctuate. That's why we have a Price Impact for large transactions compared to the size of the liquidity pool.
Price Impact is the price variation uniquely related to your transaction on the liquidity pool. It can be as low as 0.01% or as high as 49% (the maximum allowed generally). This means that after our purchase, the price of BTC will be 49% higher, and we will pay more.
We understand that the problem with liquidity pools is that they quickly become very volatile if they are too small compared to the volume.
Hence the challenge for DEX is to have the largest possible liquidity pools to support the volume!
Why the price of a token on a CEX / DEX can differ significantly
One day I woke up and saw the StaySAFU token worth $ 40$ on DEX and $ 12$ on a CEX. I didn't understand. A very simple explanation makes it clear.
When a token is added to a CEX, trading is managed by an order book that controls supply and demand locally in the CEX used (not in all CEXs).
When someone buys a token in this CEX at the market price, the token's price corresponds to the cheapest offer that someone sells for the same token in the same CEX. Even if a person wants to buy a token at the current token price, defined by the liquidity of the token ($12 on a DEX, for example), the price (bought at the market) on a CEX will be one of the people who sell that same token at the lowest price on the CEX and not the one displayed on the DEX.
When there are not a lot of transactions and a lot of volatility, we can find situations where the price is completely different from CEX / DEX. For the price to be coherent in a CEX, many transactions must frame the price on the market reality each time. The prices can be disproportionate if there are few transactions and a lot of volatility.
P.S.: I talk about the StaySAFU token a lot because it was one of the first tokens we made, and we made many mistakes that we learned from. StaySAFU was initially a token project, then became a tool, and today it is a security label in DeFi, with the realization of Audit / KYC of blockchain projects. So I do not encourage you to invest in this token.
Thanks for this valuable content!!