Today's Recommendation | An analysis of three trends in the development of exchanges in 2019

As the crypto-asset market enters a deep bear market, where will the exchanges that are deeply affected by it go? Which exchanges with certain characteristics will survive?

In response to the invitation from Chain Catcher (ID: iqklbs), Ju Jianhua, founder and CEO of BHEX Exchange, wrote this article. As a senior technology and product expert in the blockchain industry, his BHEX has developed rapidly in the past period of time. I believe his analysis of the exchange industry in 2019 can inspire you.

Author/Ju Jianhua

2018 was an unusual year for the blockchain industry: the rapid rise in Bitcoin prices at the beginning of the year brought about a wealth effect that attracted a large number of speculators to rush into the market, while the rapid drop in asset prices at the end of the year caused countless people to sell out.

We have deeply felt the changes in the industry last year: on the one hand, as people's cognition has evolved, encrypted digital assets have stepped out of the small circle of geeks and are increasingly considered a better way to store value and investment opportunities; on the other hand, after the industry's rapid expansion and chaos, global regulators and industries are exploring effective ways to promote the healthy development of the industry. This is reflected in the emergence of some hot topics in the exchange market, such as whether the brokerage model and decentralized exchanges will become mainstream?

Currently, there are tens of thousands of exchanges in the encrypted digital asset market. The market depth and liquidity are severely fragmented. Various security incidents and bankruptcies have had a lot of negative impacts on the industry. In fact, many small trading platforms do not have the ability to select assets and manage financial risks, let alone the technical ability to develop and maintain trading systems. In essence, they are just a platform for acquiring and serving customers. These small and medium-sized exchanges have very high technical costs and security risks, but why are most central exchanges unwilling to do brokerage business?

This leads to the biggest bottleneck in the current development of the industry - the issue of asset custody security . Currently, there is no complete solution for custody in the crypto digital asset industry in terms of supervision and technology. Most user assets are stored in centralized exchanges or personal wallets, and the risk of misappropriation and loss of user assets is extremely high.

Under such circumstances, every exchange is not confident in placing its customers' assets in the hands of other exchanges, which makes the brokerage model impossible to talk about. The characteristics of decentralized assets mean that there is no credible "official" asset custody that can solve the trust problem. We believe that only when a credible decentralized custody and liquidation solution is verified to be effective, everyone no longer has to worry about the security of asset custody, and brokerage services will become the mainstream of the market .

Another hot topic that I often think about is what trends will the exchange industry see in 2019. I have the following insights.

Trend 1: Compliance issues are becoming increasingly clear and industry development is becoming more standardized.

In the past, compliance issues have always been the sword of Damocles hanging over the blockchain industry. For a long time, a large number of exchanges and project parties have operated solely on the credit endorsement of individuals and companies. Due to the uncertainty of policies and regulations in various countries, each exchange is at risk of being shut down at any time, which has led to institutional funds not daring to enter the market, greatly restricting the development of the industry.

Therefore, the implementation of compliance policies in many countries in 2018 brought great good news to the entire industry:

At present, the Financial Services Agency of Japan has issued 16 cryptocurrency exchange licenses; the South Korean government has previously allowed cryptocurrency trading by default, and it has just been reported that it has begun to introduce temporary regulatory measures; the Hong Kong Securities and Futures Commission has issued new regulations for cryptocurrency, starting sandbox supervision; the Swiss Stock Exchange, the fourth largest in Europe, allows cryptocurrency ETPs to be listed; at the end of 2018, the news that ICE, the parent company of the New York Stock Exchange, invested in the establishment of the Bakkt exchange once dominated the industry. Bakkt has achieved compliance operations of cryptocurrency trading business through the regulatory system of the U.S. Commodity Futures Trading Commission, and is seen as an exploration of compliance by the government.

I believe that compliance issues will become clearer in 2019. Financially developed countries such as Europe, the United States, and Japan will continue to improve the relevant supervision and legislation in the field of encrypted digital assets and blockchain. Financially developed countries with smaller economies such as Malta and Singapore will hopefully include blockchain under a long-term regulatory mechanism. Embracing regulation and gradually complying will become the common choice of all exchanges committed to long-term development. Currently, many exchanges, including BHEX, are promoting compliance procedures in Malta, the United States, Singapore and other places.

Trend two: the driving effect of emerging high-quality assets on the industry will become increasingly obvious.

Looking back at 2018, high-quality assets have a significant driving effect on the industry: at the beginning of 2018, many platform coins had a good market; even in the cold winter of the market at the end of 2018, the emergence of two new anonymous coins, GRIN and BEAM, also made the entire industry see the hope of decentralized encrypted digital assets led by innovative technologies... Whenever new high-quality assets appear, the market will be more active. Innovative high-quality assets are the focus of investors and industry practitioners, and this effect will be more obvious in 2019. For the majority of exchanges, continuously discovering more valuable encrypted digital assets will become one of the core competitiveness of the exchanges.

Trend three: decentralized custody and clearing solutions will become the key to the development of the industry.

Exchanges played a huge role in promoting the market in the early stages of the industry. However, with the occurrence of the "Mentougou Incident", a large number of Bitcoin assets were stolen. In addition, many exchanges have raised money through Ponzi schemes and other models, and fake transactions have manipulated prices. This has caused people to question the security of centralized exchanges. "Decentralization" is the most dazzling label for encrypted digital assets and even blockchain technology, but the entire industry has been questioned because of the centralized nature of exchanges.

In the traditional financial trading market, transaction matching, asset custody and liquidation are completed by different institutions, and all institutions have strong credit endorsements, which to a certain extent ensure the security and reliability of transactions. However, the encrypted digital asset industry has never had a systematic solution for asset security. Hundreds of millions of dollars of encrypted digital assets are stolen or lost every year. Large exchanges need to spend huge amounts of money on system security and maintenance. The industry urgently needs a complete decentralized asset custody and liquidation solution .

After recognizing this problem, we started the development of the decentralized custody and clearing public chain Bluehelix at the beginning of the company's establishment. In the future, decentralized exchanges with good security and user experience will be more competitive. Exchanges cannot misappropriate users' assets, and transaction clearing and settlement are dominated by blockchain. This will solve the current common problems of exchanges such as "inaccurate accounting, inflated assets, and targeted liquidation", ensuring asset custody security and fast and accurate transaction clearing.

In general, after the industry has gone through a period of explosive growth, the effect of the leading trading platforms will become increasingly obvious, and exchanges that do not pay attention to compliance, do not have the ability to select high-quality assets, and lack technical accumulation and business innovation capabilities will find it difficult to survive .

Perhaps, when we look back at the development of cryptocurrency exchanges in a few years, the exchanges dominated by blockchain technology in 2019 will become an important watershed in the industry.