Why does the Web3 market need brokers? Analysis of the future of securities firms in the post-ETF era

Author: Beihai, PicWe Co-founder; Source: Bailu Living Room

Bitcoin spot ETF was approved by the US SEC, opening up a new world for the virtual asset market 's door. Regulations are constantly pushing the industry to develop in an orderly and secure direction, and compliance has become one of the highlights in 2024. Whoever can take the lead in implementing compliance can seize the opportunity in the future when institutions enter the market.

Whether it is a compliant exchange or an independent brokerage firm, their era has just begun.

Bailu Living Room’s recommended reading today: Bei Hai, co-founder of PicWe, who specializes in Web3 brokerage purchasing services, explains the development of compliant exchanges and Web3 brokerages. Understand the existing problems in the Web3 industry, recognize the importance of compliant exchanges and Web3 brokers, and interpret the positioning and future of Web3 brokers in the post-ETF era.

The following is the original content.

A drama "Flowers", half a history of securities companies.

People in Web3 have a strong resonance with the drama Fanhua. Many people subconsciously replaced "stocks" with "Tokens" when watching the show. The Chinese stock market in the 1990s is exactly the same as the current cryptocurrency market. There are always people who get rich by rolling positions or "stand upright" by blowing up their positions. They hope that their friends will make money every day but are afraid of "friends driving Land Rover". Every month, there are missed opportunities for freedom that make people break their thighs. Now that the ETF has been approved, Web3 will also enter the era of great prosperity from the era of "old stereotypes".

In "Flowers", "No. 101 Xikang Road" was written by my uncle to A place where Po buys stocks. The nickname of the Jing'an Securities Trading Department of the Industrial and Commercial Bank of China Shanghai Trust and Investment Company is "No. 101 Xikang Road". "The tree that embraces each other is born from the smallest grain of wood." This is the starting point for Chinese securities companies during the reform and opening up period.

Then we can’t help but ask, where is Web3’s “No. 101 Xikang Road”.

1. Why does the Web3 market need securities firms?

In the traditional securities market, ordinary traders cannot enter the exchange and can only be established at securities firms (securities companies). The business office places an order, and the brokerage agent completes the actual transaction of the stock. In the Web2 era, users do not need to go to offline business halls to place orders, but can complete remote ordering operations through electronic terminals. However, ordinary traders still cannot place orders directly on the exchange, and brokers still need to complete transactions on behalf of users. This is the most basic role of a securities firm, "buying service."

There are no restrictions on the exchange (Exchange) in Web3, and any user can trade directly in the exchange. So does Web3 need a broker?

Many traditional exchanges adopt a membership system, and stock exchanges are not for profit. Members are autonomous, self-disciplined and restrained by each other, and members can participate in stock trading and delivery on the exchange.

(1) Compliance transformation of Web3 exchanges

Web3 exchanges are divided into two types: centralized exchanges (hereinafter referred to as Cex) and decentralized exchanges. Centralized exchange (hereinafter referred to as Dex). Dex's profits come from two items: one is transaction fees, and the other is the appreciation of Dex's platform Token. In addition to these two incomes, Cex also has a third income, which is customer losses. Customer losses refer to the amount lost by users due to transactions on the exchange. When a user places an order on the exchange, the exchange needs to simultaneously help the user trade the corresponding number of Tokens. This is the trading function of the exchange. As for Launchpad and other businesses, as compliance transformation progresses, they will no longer be the exchange’s main business.

Qiang Zong United Exchange, Bao Zong and Qilin will all be buried. Imagine, if the exchange stocks in "Flowers" do not require the trading of real funds and can rise or fall with just a word from Mr. Qiang, then ten Qilin Clubs will not be able to save Mr. Bao.

In the actual operation of current exchanges, transaction matching and virtual trading will occur. Trade matching is reasonable and can improve transaction efficiency. But virtual trading is very risky. Financial derivatives such as perpetual contracts were originally virtual transactions that allowed users to bet against each other. The perpetual contract price does not need to be consistent with the spot price, and the perpetual contract price of the same Token on various exchanges can also be inconsistent. However, when bets and "hands" are transparent to exchanges, many exchanges will take the initiative to manipulate virtual transaction prices to win over users. Therefore, we often see situations where positions are liquidated by exchange pins. For example, Brother Sun staged the incident of HT burying a large owner last year.

Some Cex clearly do not have enough Tokens, but they provide corresponding trading volume. It is true that most users on the exchange only speculate in coins, but occasionally users want to withdraw cash. Some small exchanges will take measures not to allow "coin withdrawals" and only allow digital purchases and sales. Major exchanges will suspend "coin withdrawals" and use this time to purchase sufficient Tokens on the chain or other exchanges. However, the fluctuation of currency prices in this process will cause certain losses to the exchange. Therefore, the number of tokens held has become the core competitiveness of Cex. The exchange's currency settlement will further aggravate Web3's lack of liquidity.

These problems are obstacles to exchanges’ compliance, and they will eventually be solved in the future.

(2) The overall liquidity of cryptocurrency is insufficient

The overall size of the cryptocurrency market is still small. At present, the traditional financial market still dominates, and its size is far from comparable to the cryptocurrency market. Take the securities market as an example. The total market value of the global securities market is approximately US$110 trillion, of which the total market value of the US securities market is approximately US$45.5 trillion, accounting for approximately 42.1%. After experiencing substantial growth from November last year to recent times, the total market value of the cryptocurrency market has just returned to a market value of US$1.59 trillion. The overall volume has just surpassed Australia, which ranks 16th in the global securities market, and is still slightly behind the Korean securities market, which ranks 15th.

Cryptocurrency assets are not convertible into each other. Tokens, NFTs, inscriptions and other assets use different protocols, such as ERC-20, ERC-721, BRC-20, etc. Assets in different protocols cannot be directly converted. Some can be swapped with the help of third-party tools, and some can only be settled through market auctions and Token settlement.

Every public chain is dividing liquidity. Tokens on different chains can only be transferred through cross-chain bridges, which is slow and unsafe. As a result, funds in a large number of public chains basically only flow in a single chain. Every time a new public chain is issued, when external capital entry is limited, it is dividing the cryptocurrency market, which is already lacking in liquidity.

The development of Dex cannot meet the needs of growing users. Dex is limited to a single public chain or part of the ecosystem. For ordinary users, compared with Cex, the operation of Dex is more cumbersome and the learning cost is higher. Moreover, there is a risk of arbitrage or “sandwich attack” in on-chain transactions, which can easily lead to large losses if done carelessly.

MEV sub-category data from December 14, 2023 to January 11, 2024

Arbitrage case on January 10, 2024, using 25U through flash loan Earn profit of 17,000 U at cost.

(3) User trading experience needs to be improved

You cannot purchase any Token with one click. Many people have had the experience of seeing a “wealth password” but not knowing where to buy the token, and some even bought counterfeit coins. Many Tokens can only be purchased on some exchanges, and some Tokens can only be purchased on the chain. To this day, Web3 still does not have a product that allows users to buy any Token. Even if you use on-chain tools, you can only buy the corresponding Token in a specific ecosystem. For example, 1inch is useless in non-EVM.

The learning threshold for on-chain transactions is too high. Even the "old masters" in the circle often have troubles about "where to buy" and "how to buy". Each ecology and protocol is hugely different, and each chain will create artificial obstacles in order to lock in liquidity and prevent the loss of TVL as much as possible. Many heterogeneous chains only support their own ecological wallets, and each chain will also establish its own Defi ecosystem. This directly results in users being unable to complete all Token transactions using the universal wallet + universal Dapp.

2. The role of Web3 brokers in the post-ETF era

(1) The positioning of exchanges in the post-ETF era

ETF has been approved, and the Web3 industry will become more and more standardized in the future. Cex will gradually return to the nature of an exchange and is unlikely to continue to "be both a referee and an athlete." In the future, the income of compliance Cex will come from four items: first, transaction commission; second, brokerage membership fee; third, consulting service fee; fourth, currency holding and withdrawal fees. The first three items are consistent with traditional exchanges, and the fourth item is unique to Web3.

Coin holding and withdrawal fees will be important income for Web3 exchanges. Securities and Tokens are quite different in terms of attributes and functions. Tokens have broader financial rights and usage scenarios than securities. In securities trading, users will not request to "withdraw securities", but in the Web3 world, users often have the need to withdraw Tokens, and holding a large amount of Crypto is a considerable capital cost. In the future, there will be situations where securities firms do not hold the currency but are held by exchanges. When withdrawing coins, it is initiated by the brokerage and transferred to the user by the exchange. The exchange charges brokers a certain currency holding fee and charges users a certain currency withdrawal service fee.

Cex’s asset holdings

(2) Positioning of Web3 brokers

Web3 brokers provide five services :

The first is purchasing service. The brokerage uses Web3 infrastructure to connect Cex and Dex, enabling one-click purchase of any Token and helping users complete Token transactions. Just like securities, users do not care who provides the stocks, only the convenience of trading.

The second is consulting services. On one side is preaching. Brokerages need to explain the basic knowledge of Web3 to new users and do a good job in promoting blockchain technology. At the same time, in accordance with local policies and regulations, we provide assistance with account opening, deposits and withdrawals and other services. On the other hand is investment consulting. Provides various types of Web3 consultation to assist users in finding investment targets and making trading decisions.

The third is capital allocation and financial derivatives services. When exchanges move toward compliance, perpetual contracts and leverage businesses will be transferred from exchanges to brokers. This can effectively avoid the problem of "the referee personally leaving the field". When projects and users need financial support, the funds in the hands of brokers and the credit granted by brokers to withdraw tokens from the exchange will be the first choice. In addition, current business such as documentary trading and on-chain monitoring will also be integrated into the services of brokers.

The fourth is asset management. Web3 brokerage not only provides traditional financial management and fund products, but also provides on-chain mining, stablecoin pledge lending and other unique products on the chain. Help users achieve cyclical and stable appreciation of assets.

The fifth is underwriting, distribution and OTC business. Although Web3 can raise funds directly through IDO and ICO, with the endorsement of brokers, underwriting and distribution will be more marketable. A large number of Tokens are unlocked every month in the circle, and OTC business can avoid price fluctuations on the market. In OTC business, it is easier to facilitate transactions through brokers with a foundation of trust.

3. Web3 brokers will become a subdivision of the trading track

Whether it is the traditional financial market or the cryptocurrency market, every time a bull market starts, first of all What breaks out is the trading track, and "buy brokers in the bull market" is the consensus.

At present, Web3 brokerage is still an emerging track, but some projects have already emerged. It is divided into several categories according to the types of services provided:

The first is purchasing tools on behalf of others. Web3 has always lacked an app similar to Oriental Fortune or Flush in securities, where users can buy any stock with just one click of an order. Web3 will have a series of buying tools in the future, allowing users to buy any Token without having to learn on-chain operations or registering with an exchange.

Currently, the PicWe platform can provide this service. The platform is based on AA wallet, aggregate trading system and SIS technology (state certificate service based on lightning network), opening up the liquidity of Cex and Dex. Users do not need to provide exchange APIs or register on the exchange. PicWe platform’s purchasing agent The service can help users "buy any Token with one click." Moreover, all user assets are locked on the chain, which is very safe. The platform Dapp and Tgbot have been launched and are in the Beta testing stage.

The second is information tools. The news of the adoption of ETF caused ETH to instantly take off by 10 points, while the L2 track and ETH-related concepts (such as ETC) exploded to nearly 20 points. Obtaining information first in Web3 means "getting started earlier", with lower costs, lower risks, and higher returns.

The fastest Web3 off-chain data intelligence system on the entire network is undoubtedly the BubbleAI platform. Combined with the team's self-developed AI large model analysis engine, an "All in One" AIFi ecosystem is created to empower global users with the most difficult and complex data in the fastest and easiest way. The beta version of BubbleAI terminal has been launched. Its core functions include real-time signal aggregation, AI public opinion analysis, AI agent following orders, AI popular sector tracking, and AI strategy bot. Currently, the BubbleAI platform is conducting a whitelist application activity, and the number of applicants has exceeded 20,000.

The third is financial derivatives. There are many types of financial derivatives, and the one closest to the services of a brokerage is undoubtedly the documentary service. Documentation services can be divided into three types according to business types: DeFi mining, documentary trading (which is further divided into Cex documentary and on-chain Smart Money tracking) and quantitative trading. Among them, the DeFi mining type focuses on "matryoshka" or stable coins. Strictly speaking, it is more of a Fi type. The volume of copy trading is relatively large and will become the main part of Web3 brokerage services in the future.

There is one brokerage documentary service worth paying attention to. Logearn is the world's first decentralized automatic follow-up investment/copy trading middleware and an aggregated decentralized copy trading platform. The platform provides a decentralized copying SaaS solution, completely opening up the copying data and processes of CEX, DEX, wallets, communities and other scenarios, and can aggregate the liquidity of all copying in the industry. Allowing users to enter Web3 more conveniently for investment or trading.

The fourth is asset management tools. The cryptocurrency market has always maintained a high rate of return, and the Web3 asset management project has always been very popular. Asset management platforms can be divided into three categories: centralized, decentralized and semi-centralized based on the authority of asset holders, with different product forms and technical routes. Generally speaking, Web3 asset management projects are uneven. Often tools with high returns in a short period of time have low returns or even losses in the long term. Only projects that have experienced a cycle of market testing are excellent asset management projects.

The Enzyme project was born in 2017. Managers can build their own investment portfolios in Enzyme, and investors can choose specific investment managers to invest. After the V2 version is launched, it supports nearly 200 assets, has more than 1,300 investment portfolios, and manages nearly 1.7 billion US dollars in on-chain assets. However, because users in this circle prefer short-term high returns, although Enzyme is the leading project in the decentralized asset management track, it is still relatively small. This bull market may see the emergence of semi-centralized high-quality asset management projects on the chain.

The fifth is the underwriting, distribution and OTC business platform. Platforms represented by Amber can provide channels for non-cryptocurrency market users to purchase crypto assets. However, there is currently no OTC business platform based on smart contracts that helps project parties complete Token transactions in non-secondary markets.

January 11, 2024 marks the beginning of a new era for Web3. In the future, Web3 compliant exchanges and brokers will work together to create a more convenient trading infrastructure, introduce a large number of outside users to hold crypto assets, provide more warm trading services, aggregate the liquidity of the entire cryptocurrency market, and enhance the efficiency of the blockchain. There is a worldwide consensus to welcome the blossoming of Web3 together.