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

The Bitcoin spot ETF was approved by the U.S. SEC, opening a new door to the virtual asset market. 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.

Be it compliant exchanges or independent brokers, their era has just begun.

Recommended reading for Bailu Living Room today: Bei Hai, co-founder of PicWe, who specializes in purchasing services for Web3 brokers, explains the development of compliant exchanges and Web3 brokers. 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.

Web3 people have a strong resonance with the drama “Flowers”. 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 overnight by rolling positions or “stand at attention” 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”, address “No. 101 Xikang Road” is the place where my uncle wrote to Abao to buy 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.

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

1. Why does the Web3 market need brokers?

In the traditional securities market, ordinary traders cannot enter the exchange and can only place orders in the business halls set up by securities firms (securities companies), and the actual trading of stocks is completed by the brokers’ agents. 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 within Web3, and any user can trade directly on 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 (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.

At boss Mr. Qiang’s United Exchange, Bao Zong and Qilin will both be buried. Imagine, if the exchange stocks in “Flowers” do not require real funds to buy and sell, and can rise or fall with just a word from Mr. Qiang, then ten Qilin will not be able to save Mr. Bao.

In the actual operation of current exchanges, transaction matching and virtual trading will occur.Transaction 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’s manipulation.

Some Cex obviously do not have enough tokens, but they provide corresponding trading volume. It is true that most users on the exchange only speculate in tokens, 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 the exchange’s compliance journey, 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.Taking 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 one another.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 the entry of external funds 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 data by category from December 14, 2023 to January 11, 2024

▲ Arbitrage case on January 10, 2024, making a profit of 17,000 U through flash loan with a cost of 25U.

(3) User trading experience needs to be improved

Unable to purchase any Token with one click. Many people have had the experience of seeing a “wealth code” but not knowing where to buy this Token, and some even end up buying fake coins. Many Tokens can only be purchased on certain exchanges, and some Tokens can only be purchased on the blockchain. Up to now, there is still no product in Web3 that allows users to buy any Token. Even with on-chain tools, you can only buy corresponding Tokens in specific ecosystems, such as 1inch being useless outside of EVM. The learning curve for on-chain transactions is too high. Even the “veterans” in the industry often struggle with questions like “where to buy” and “how to buy”. Each ecosystem and protocol has significant differences, and each blockchain artificially creates obstacles to lock in liquidity and prevent TVL from flowing out. Many heterogeneous chains only support wallets within their own ecosystems, and each chain establishes its own DeFi ecosystem. This directly results in users being unable to complete transactions for all Tokens using a universal wallet + universal Dapp.

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

(1) Positioning of exchanges in the post-ETF era

ETF has already been approved, and the Web3 industry will become more and more standardized in the future. Cex will gradually return to the attributes of exchanges and is unlikely to continue being both a referee and a player. The future revenue of compliant Cex will come from four sources: trading commissions, brokerage membership fees, consulting service fees, and holding and withdrawal fees. The first three are consistent with traditional exchanges, while the fourth is unique to Web3.

Holding and withdrawal fees will be an important source of revenue for Web3 exchanges. Securities and tokens differ significantly in terms of attributes and functionality, with tokens having broader financial rights and more use cases than securities. In securities trading, there is no concept of users requesting to “withdraw securities”, but in the Web3 world, users often have a need to withdraw tokens, and holding a large amount of crypto is a significant financial cost. In the future, there may be cases where brokerages do not hold tokens and the exchange holds them on behalf of users. When users initiate a withdrawal, it will be initiated by the brokerage and transferred to the user by the exchange. The exchange will charge the brokerage a certain holding fee and charge the user a certain withdrawal service fee.

▲ Cex’s asset holdings

(2) Positioning of Web3 brokers

Web3 brokerage provides five services:

One is the proxy buying service. Securities firms connect Cex and Dex through the Web3 infrastructure to achieve one-click purchase of any token, helping users complete token transactions. Like stocks, users do not care about who provides the stocks, but only care about the convenience of the transaction.

The second is consulting services. On the one hand, it is preaching. Securities firms need to explain the basic knowledge of Web3 to new users and promote blockchain technology. At the same time, according to local policies and regulations, they provide assistance in account opening, deposits, and withdrawals. On the other hand, it is investment consulting. Provide various Web3 consultations to assist users in finding investment targets and making trading decisions.

The third is margin trading and financial derivatives services. When exchanges move towards compliance, perpetual contracts and leverage business will be transferred from exchanges to securities firms. This can effectively avoid the problem of “the referee personally entering the field”. When projects and users need financial support, the funds in the hands of securities firms and the credit of Token withdrawals from exchanges by securities firms will be the preferred options. In addition, current business such as copy trading and on-chain monitoring will also be integrated into the services of securities firms.

The fourth is asset management. Web3 securities firms provide not only traditional financial and fund products, but also unique on-chain products such as on-chain mining and stablecoin collateralized lending. Help users achieve periodic and stable value-added of assets.

The fifth is underwriting, distribution, and OTC business. Although Web3 fundraising can be directly through IDO and ICO, with the endorsement of securities firms, underwriting and distribution will have a larger market. In addition, there are a large number of token unlocks in the industry every month, and OTC business can avoid price fluctuations on the market. OTC business is more likely to facilitate transactions through securities firms with a trust.

3. Web3 brokerage will become a subdivided industry in the trading sector

Whether it is the traditional financial market or the cryptocurrency market, every time a bull market starts, the first thing to break 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:

One option is to use a buying agent. Web3 has always lacked an app similar to Oriental Fortune or Tonghuashun in the stock market, where users can simply place an order and purchase any stock with just one click. In the future, Web3 will introduce a series of buying agents that will allow users to buy any token without the need to learn blockchain operations or register with an exchange.

Currently, the PicWe platform offers this service. The platform is based on the AA Wallet, aggregated trading system, and SIS technology (a state proof service based on the Lightning Network). It provides liquidity between Cex and Dex, allowing users to buy any token without the need for exchange APIs or registration. The PicWe platform’s proxy buying service helps users “buy any token with just one click”. Additionally, user assets are securely locked on the blockchain. The platform’s Dapp and Tgbot are already online and in the beta testing phase.

Second is information tools. ETF news instantly boosted ETH by 10 points, while L2 tracks and ETH-related concepts (such as ETC) skyrocketed by nearly 20 points. Getting information first in Web3 means “getting on board earlier” with lower costs, lower risks, and higher returns.

The fastest Web3 off-chain data intelligence system on the Internet is undoubtedly the BubbleAI platform. Combining the team’s self-developed AI model analysis engine, we have created an “All in One” AIFi ecosystem that empowers global users with the most difficult and complex data in the fastest and simplest way. The Beta version of BubbleAI terminal has already been launched. Its core features include real-time signal aggregation, AI sentiment analysis, AI agent following, AI hot sector tracking, and AI strategy bot. Currently, the BubbleAI platform is conducting whitelist application activities, and the number of applicants has exceeded 20,000.

3. They are financial derivatives.

There are various types of financial derivatives, and the closest to brokerage services is undoubtedly copy trading services. Copy trading services can be divided into three types based on business categories: DeFi mining, copy trading (further divided into Cex copy trading and on-chain Smart Money tracking), and quantitative trading. Among them, DeFi mining focuses on “yield farming” or stablecoins, which is technically more of a Fi type. Copy trading has a larger volume and is expected to become a major part of Web3 brokerage services in the future.

There is one brokerage copy trading service worth mentioning. Logearn is the world’s first decentralized automated copy trading middleware, and it is an aggregated decentralized copy trading platform. The platform provides decentralized copy trading SaaS solutions that completely integrate copy trading data and processes from CEX, DEX, wallets, communities, and other scenarios, aggregating the liquidity of all copy trading in the industry. It allows users to conveniently enter Web3 for investment or trading.

4. It is an asset management tool.

Throughout, the cryptocurrency market has maintained high returns, and Web3 asset management projects have also been very popular. Asset management platforms can be classified into centralized, decentralized, and semi-centralized categories based on the permissions of asset holders, with different product forms and technical routes. Overall, Web3 asset management projects are uneven, often providing high returns in the short term but low profits or even losses in the long run. Only projects that have undergone a market test over a full cycle are considered excellent asset management projects.

The Enzyme project was launched in 2017, allowing managers to build their own investment portfolios and investors to choose specific investment managers for investment. After the launch of the V2 version, it supports nearly 200 assets with over 1,300 investment portfolios and manages nearly $1.7 billion in on-chain assets. However, due to the preference of users in this circle for short-term high returns, Enzyme, although a leading project in the decentralized asset management field, still has a small scale. This bull market may see the emergence of semi-centralized and on-chain high-quality asset management projects.

5. It is an underwriting, distribution and OTC business platform.

Platforms represented by Amber can provide non-cryptocurrency market users with channels 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 brokerages will work together to create a more convenient trading infrastructure, introduce a large number of outside users to hold crypto assets, provide more user friendly 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.

Disclaimer：

1. This article is reprinted from [白露会客厅]. All copyrights belong to the original author [北海，PicWe Co-founder]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
3. Translations of the article into other languages are done by the Gate Learn team. Unless mentioned, copying, distributing, or plagiarizing the translated articles is prohibited.