Encryption Trading Platform Crisis: The Game Between Ideal and Reality

In the cryptocurrency market, an apparently ordinary transaction has evolved into a thought-provoking event. Initially, it was just a normal market fluctuation, but as the situation developed, it gradually became an important topic concerning the ideals of decentralization, the survival of trading platforms, and the overall direction of the industry.

On March 26, a certain trading platform encountered a crisis triggered by Meme coins. The method of this incident was similar to previous large-scale manipulations: large funds gathered, exploiting loopholes in the rules to impact the platform.

This should have been a contest between the trading platform and the attackers. For the platform, a loss of $4 million is painful, but not fatal. However, when other major exchanges quickly launch related contracts, the situation begins to get complicated. These large exchanges, with their deep liquidity, have the ability to continuously apply pressure on the platform, which could lead to a vicious cycle similar to the Luna-UST incident.

Faced with this situation, the platform ultimately chose a controversial decision: to delist the relevant tokens after voting. This action is referred to by industry insiders as "pulling the plug," essentially acknowledging that the platform cannot bear greater losses.

Looking back at the entire event, we can see that the way this platform responded is actually no different from the usual operations of centralized exchanges (CEX). This may indicate that, following this platform, the entire on-chain ecosystem might gradually accept this "new normal". In other words, complete decentralization may no longer be the primary goal, but rather a more transparent governance mechanism.

The future development direction of decentralized exchanges (DEX) may be: while maintaining higher transparency than CEX, finding a balance between the ideals of encryption culture and capital efficiency to ensure sustainable development.

According to data from the platform, it has accounted for about 9% of the contract trading volume of a large exchange in the past two months. This data is sufficient to explain why other exchanges have reacted so fiercely, trying to stifle potential threats at the nascent stage.

Looking at recent industry hotspots, we can see that on-chain protocols are generally facing challenges. Adhering to the principle of decentralization has become increasingly difficult. For example, a certain prediction market platform admitted that large holders manipulated oracles to alter results, causing dissatisfaction within the community; meanwhile, the trading platform discussed in this article chose to "pull the plug" under pressure, which also drew criticism from well-known figures in the industry.

Objectively speaking, these criticisms have their validity. The choice of this trading platform indeed deviates from the absolute concept of decentralization, prioritizing capital efficiency and protocol security instead. There are viewpoints that suggest the level of decentralization of this platform may even be lower than that of some strictly regulated centralized exchanges.

However, we also need to recognize the problems that this platform faces, which many centralized exchanges have experienced during their development. Even the exchanges founded by those who now criticize this platform could have brought catastrophic consequences to the entire encryption industry if extreme measures had not been taken during the market turmoil on March 12, 2020.

The choice between decentralization and centralization is akin to a classic ethical dilemma. The pursuit of decentralization will inevitably sacrifice capital efficiency to some extent, while excessive centralization may affect the free flow of funds.

The organization structure of the platform is relatively complex, consisting of a consensus layer and two business layers. This complexity in architecture is a natural result of the platform's high level of control. In the sequence of derivatives trading platforms, the innovation of this platform lies not in the architecture itself, but in the use of "moderate centralization" methods, drawing on the experiences of other successful platforms, and combining coin listing and airdrop strategies to continuously incentivize market participation, successfully securing a foothold in the derivatives market dominated by centralized exchanges.

This approach is not a defense of the platform, but rather reflects the current state of decentralized trading platforms for derivatives. Achieving absolute decentralized governance makes it difficult to respond to black swan events and to react quickly. To respond efficiently, a certain degree of centralized control is inevitably required.

It is worth noting that the degree of centralization is also hierarchical. The centralization of the platform is mainly reflected in the changes to the protocol. The focus of this article is not to argue about the degree of centralization, but to emphasize that capital efficiency will naturally drive the next generation of on-chain protocols to develop in this direction—namely, to exchange slightly higher centralization for greater capital efficiency.

The uniqueness of this platform lies in its pursuit of the efficiency of centralized exchanges through on-chain structures, attracting liquidity with token economics, and ensuring security with a customized tech stack. However, the potential risk of this model lies in the sustainability of the token economics. The platform needs sufficient control to maintain the normal operation of protocol revenue, especially in the highly leveraged contract market, where this is particularly important.

Currently, among the 16 nodes of the platform, the platform foundation controls 5, but in terms of staking proportion, the foundation's total amount reaches 330 million platform tokens, accounting for 78.54% of all nodes, far exceeding the 2/3 majority. This highly centralized governance structure has raised concerns and criticisms within the industry.

Looking back at the security incidents in the past six months, we can see the platform's gradual compromise towards capital efficiency. Nevertheless, compared to certain projects, the platform has still tried to minimize controversial behaviors such as venture capital, airdrops, and internal liquidations, retaining a relatively normal product form and hoping to generate profit through transaction fees.

Considering the rigid demand for perpetual contract trading on the blockchain, this model is likely to be accepted by the market. However, what is more concerning is whether the mindset of the platform's founders and team will change after experiencing this crisis. Will they stick to their original philosophy, or will they further close off the rules and converge with traditional exchanges?

In other words, what we need to consider is: is the fully transparent protocol rules leading to a completely open market hunting a necessary growing pain that on-chain protocols must undergo, or will it result in a regression of the on-chain migration process?

Should we adhere to the concept of decentralization, or should we directly yield to capital inefficiency? In this increasingly complex world, the middle ground seems to be getting narrower. Do we choose a model of partial centralization, transparent rules, and intervention when necessary, or do we opt for a 100% centralization, black-box operations, and intervention at any time?

After the 2008 financial crisis, the U.S. government's direct bailout actions were seen as sacrificing taxpayer interests to save Wall Street, which led to the birth of Bitcoin. Today, the crisis of this platform seems to be a new version of this old script, with the roles now being the on-chain financial institutions that need to be saved.

After this crisis, several well-known industry figures criticized the platform, calling for adherence to the principles of decentralization. This also reflects the continuation of on-chain business competition. Interestingly, some individuals who once criticized each other are now on the same side regarding this issue.

In the chess game of the encryption world, once you participate, you must be prepared to become a pawn. Whether on-chain or off-chain, we need to find a balance between absolute ideals and relative bottom lines.