Encryption's Original Intention and Ideal: On-chain Barter

In this article, we present two interrelated theoretical logical clues: the first clue traces the evolution of liquidity technology in DeFi, while the second narrative emphasizes the transformative impact of on-chain barter from the perspective of economic development history. The intention of this article is to confirm that a profound DeFi revolution is on the horizon: it just requires a bit more patience. Those visionary builders who can adhere to idealism will ultimately be rewarded by the market.

We have closely tracked the development of the decentralized exchange (DEX) market to illustrate that the emergence of on-chain barter trading is by no means coincidental, and that on-chain barter trading is a true game changer. It represents an important chapter in the history of Web3 builders. Realizing its functionality requires a great deal of innovation and improvement, not only within the DEX itself, but also at the underlying infrastructure level.

If on-chain barter becomes a historically significant 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 the approval of ETFs and expectations of new quantitative easing, Bitcoin has fallen to a low and rebounded to new highs. However, the prices of most altcoins have not performed as strongly as before; after BTC created the imagined space, they showed stronger upward momentum. Some investors mock true innovation due to the overvalued and low liquidity of the VC token market, viewing the crypto world as a criminal domain. At certain industry conferences, some industry builders have even bluntly referred to the entire sector as akin to a casino. Many crypto enthusiasts are intoxicated by the thrill of PvP (player versus player). The overall market performance shows that memecoins were favored in the early stages of the bull market, while value tokens were overlooked by the market, missing out on the entire bull cycle.

In this round of the 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 cryptocurrency really change the real world? Since last year, with the rise of AI, many people have shifted their attention to artificial intelligence, while even more are still hesitant.

Why is this cryptocurrency market different this time?

We cannot ignore the impact of venture capital and the greed of teams, misalignment of interests, unethical behavior, and short-term thinking. The market has long been in a dark forest. Aside 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 chart below:

The above image shows the activity of various encryption equivalents. From the chart, it can be seen that since 2018, non-stablecoins have been continuously losing market share. If we look at the proportion of trading volume, in the last year or two, the majority of trades have been provided by US dollar stablecoins. If the market capitalization of US dollar stablecoins cannot continue to expand, with new coins constantly being issued, the liquidity pool will be drained.

In the past, Bitcoin and Ethereum were largely the general equivalent of the market. Bitcoin and Ethereum could become the liquidity for others, and during the bull market phase, altcoins and mainstream coins as liquidity spiraled upward, mutually promoting each other. In such a market structure where the tokens themselves dominate liquidity, altcoins rarely lack liquidity. Fast forward to now, most trading pairs are pegged to stablecoins linked to the US dollar. Even the explosive growth in value of Bitcoin or Ethereum is useless, as 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 dollar-pegged stablecoins and other compliant financial instruments are bait. Cryptocurrencies follow the Wall Street clock.

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

In September 2018, Circle partnered with Coinbase to launch USD Coin (USDC) under the Centre Consortium. It is pegged to the US dollar, with each USDC token backed 1:1 by US dollar reserves. As an ERC-20 token, USDC enables seamless transactions and integration with various decentralized applications.

On December 10, 2017, the Chicago Board Options Exchange (CBOE) was the first to launch Bitcoin futures, which, even though settled in USD, can influence the spot price of Bitcoin, especially considering that the current holdings of Bitcoin account for 28% of the global market.

Wall Street not only physically impacts the encryption market but also psychologically affects the liquidity within the encryption market. Do you remember when we began to pay attention to the Federal Reserve's stance, Greyscale's trust markdown, the "dot plot" from the FOMC, and the cash flow of the 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 credit of other tokens, and the dollar is gradually dominating the market for universal equivalents.

In this way, we have lost our own market rhythm.

I am not criticizing stablecoins pegged to the US dollar; on the contrary, this is a natural result of fair competition and market choice. Tether and Circle help investors directly invest in on-chain assets linked to the US dollar, allowing them to assume risks equivalent to the US dollar, while also providing investors with more choices.

The market is struggling for liquidity! Losing control over liquidity means we also lose 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 historical advancement.

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 impacts 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 pricing, 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 produce reliable information, aiding in more effective resource distribution.

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 market liquidity and improves efficiency in all 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 posits that currency is a convenient means of transaction, accepted by the general public and scholars alike. The other comes from David Graeber's "Debt: The First 5,000 Years," which argues that currency originates from debt relationships, while also acknowledging the universal equivalent function of currency.

In addition to Green Davis's "A History of Money: From Ancient Times to the Present" and Karl Marx's "Capital: Volume One", there are other materials that hold similar views on the origins and evolution of money.

For example, Neil Ferguson points out in his book "The Ascent of Money: A Financial History of the World" that the development of currency also originates from society's demand for an efficient exchange system, starting from barter and gradually evolving into a more complex system that uses items with intrinsic value.

Similarly, in Felix Martin's "Money: An Unauthorized Biography", the author discusses the concept of money as a social technology, which has developed out of the need for a more efficient system of exchange. Like Marx, Martin believes that money is a universal equivalent that originated from a common commodity in the era of barter.

Finally, David Graeber ('s "Debt: The First 5000 Years" presents a unique perspective, arguing that money evolved from systems of debt and obligation, which emerged before the invention of money itself. However, Graeber's view still aligns with a core idea: money 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 Davis and Marx.

In summary, the consensus in academia about currency is that its function after its inception is as a general equivalent, a product that addresses market liquidity. The divergence 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 problem 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 never considered how to build market liquidity in the absence of 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 allocation of resources. Every component, mechanism, and structure is designed to achieve this purpose. Since ancient times, humans have been continuously creating 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 demands, 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 have encountered new limitations and touched on new opportunities to solve liquidity issues. At this point, we can create innovative methods to address exchange demands and provide liquidity for tokens.

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

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Although centralized exchanges represented by certain trading platforms provide the best trading experience, their users are also plagued by fraud risks and monopolistic exploitation. Even the former second largest exchange in the world is currently undergoing bankruptcy liquidation due to misappropriation of user assets. Any exchange with slightly better liquidity charges project parties hefty listing fees and imposes other stringent terms. In contrast, decentralized exchanges are more flexible, designing different mechanisms to cater to various demand scenarios. For example, Pump.fun is known for providing extremely sensitive token supply curves, while a certain DEX offers 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 own focus and sacrifices.

) Attempt to create on-chain liquidity

Decentralized exchanges have already made significant progress in innovatively addressing this triple 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.