How to Build a "Decentralized Binance": The Most Detailed Overview of Trading Infrastructure on the Internet
As regulatory pressure increases, the demand for a "decentralized Binance" that can provide a user experience similar to centralized exchanges while eliminating the need for fund custody is growing. So how can we create a "decentralized Binance"? Let's explore this together.Author: TI Research
In this report, we will explore why Binance has become the leader among centralized exchanges in the crypto industry. We discuss how, with the evolution of technology, the realization of a "decentralized Binance" through decentralized order book exchanges has become possible. By providing detailed introductions to StarkEx, zkLink, StarkNet, zkSync, Arbitrum, and Cosmos, we analyze and compare their situations in terms of user experience, security, performance, and cost, guiding readers to gain a deeper understanding of these infrastructures.
Here are some key points from the report:
Why is a "Decentralized Binance" Needed?
Binance is currently the largest crypto exchange by trading volume in the blockchain space, with over 120 million registered users. As the leader among centralized exchanges, it offers a wide variety of assets and ample liquidity. Its trading experience and performance are also far ahead of its competitors.
However, in the blockchain industry, centralization is the "original sin." As a centralized exchange, Binance faces certain risks regarding asset security, business transparency, and regulation. This has heightened concerns among users, who are beginning to yearn for a crypto exchange that combines the user experience of CEX with the self-custody advantages of DEX—essentially establishing a fully decentralized Binance.
The Path to a "Decentralized Binance"
In the process of building a decentralized Binance, many attempts have been made.
- The pioneer of decentralized exchanges is Uniswap. It was first deployed on Ethereum and uses the AMM mechanism with a constant price formula and liquidity pools for trading. However, this mechanism suffers from issues such as low capital efficiency, slippage, and impermanent loss. This means that while achieving decentralization, it has to sacrifice some liquidity and trading experience.
- After the initial attempts with AMM, many high-performance Layer1 solutions began to emerge. The improvements they brought in trading performance made order book-based DEX possible. However, Layer1 solutions sacrificed the security and mature ecosystem of Ethereum while also being unable to support the massive user base of exchanges like Binance.
- With continuous technological advancements, Ethereum's scaling solutions, Layer2, have emerged. They help decentralized exchanges further enhance trading speed and reduce transaction costs. These Layer2 solutions retain Ethereum's security and inherit its mature ecosystem. However, general Layer2 networks face some limitations in high-frequency trading and lack seamless interoperability between blockchains outside of Ethereum.
- Recently, a new generation of application-specific, trading-centric order book infrastructure solutions has entered the crypto market. Each solution can improve the user trading experience by providing a high-performance and secure trading environment. They have further innovated on the foundations of Layer1 and Layer2, opening up possibilities for building a "decentralized Binance."
Overview of Trading Infrastructures
When analyzing the infrastructures for building a "decentralized Binance," we considered four main factors that impact trading:
- User Experience
- Security
- Performance
- Cost
We analyzed the hottest infrastructures currently available based on these four dimensions and examples of decentralized order book trading protocols.
StarkEx
StarkEx is a trading infrastructure specifically designed for certain applications. It operates as a Layer2 scaling engine for Ethereum mainnet, based on the STARK zero-knowledge proof technology, providing specific ZK-Rollup services for independent applications. StarkEx was officially launched on the Ethereum mainnet in 2020. Its services are currently used by many well-known decentralized derivatives trading protocols (such as dYdX v3, immutableX, and ApeX).
zkLink
zkLink is a transaction-centric, multi-chain middleware based on ZK-Rollup technology. Its main feature is its ability to connect multiple Layer1 and Layer2 blockchains, aggregating liquidity from different ecosystems, thus enabling trading and combinations of native DeFi assets across different chains. It achieves multi-chain functionality and extends classic ZK-Rollup through a "ZK-Rollup + oracle network" mechanism.
StarkNet
StarkNet, developed by StarkWare, is a general-purpose Layer2 scaling solution based on ZK-Rollup. StarkNet supports the deployment of arbitrary smart contracts, allowing developers to create various types of decentralized applications that can interoperate with each other. It uses Rollup based on STARK technology to execute transactions, offering high scalability and low transaction costs.
zkSync
zkSync is a series of general-purpose Layer2 Ethereum scaling protocols based on ZK-Rollup, primarily consisting of two products: zkSync 1.0 (later renamed zkSync Lite) and zkSync 2.0 (later renamed zkSync Era). zkSync Lite uses SNARK proof systems but is not EVM compatible, meaning it does not support smart contracts and only allows basic transactions like transfers. zkSync Era, on the other hand, achieves EVM compatibility based on zkSync Lite.
Arbitrum
Arbitrum is a set of Ethereum Layer2 scaling solutions based on Optimistic-Rollup, currently comprising two products: Arbitrum One (general) and Arbitrum Nova (dedicated to gaming/social applications). Among them, Arbitrum One is the main product, with most DeFi applications concentrated on it.
Cosmos
Cosmos is a Layer1 blockchain network based on the Tendermint consensus mechanism, featuring a mesh structure. Each blockchain in its network is an independent, fully functional PoS blockchain. Chains can communicate across chains via the IBC protocol, sharing security and liquidity. Additionally, Cosmos provides a custom blockchain development toolkit - Cosmos SDK, allowing developers to use existing modules for blockchain development tailored to different needs, offering a high degree of freedom.
Infrastructure Comparison
Application-Specific ZK-Rollup
Application-specific ZK-Rollup infrastructures, such as StarkEx and zkLink, have significant advantages in technical availability. Additionally, due to the use of ZK technology, they have certain advantages in transaction security compared to Cosmos networks and Optimistic solutions. However, application-specific infrastructures may face considerable limitations in functional development. In comparison, StarkEx's applications are currently deployed on Ethereum, providing better foundational security, while zkLink supports native multi-chain functionality, offering a richer source of trading assets and liquidity.
General-Purpose ZK-Rollup
The representatives of general-purpose ZK-Rollup infrastructures are StarkNet and zkSync. Both support Turing-complete programming languages, providing high flexibility in functional development and enabling the deployment of order book applications. However, as general Layer2 solutions, they may experience situations where many applications run simultaneously. Therefore, the issues currently faced by Ethereum, such as high gas fees and on-chain congestion, are also likely to be encountered by StarkNet and zkSync in the future.
Optimistic Rollup
The representative of Optimistic Rollup infrastructure, Arbitrum, excels in flexibility for functional development and compatibility with Ethereum. It is highly compatible with Ethereum and supports the Solidity language, making it developer-friendly and facilitating functional development. Compared to ZK-Rollup infrastructures, Arbitrum has some cost advantages as it avoids the expensive zero-knowledge proof computation fees; however, it lags behind in transaction finality time compared to ZK-Rollup. In terms of security, it is slightly inferior to ZK-Rollup infrastructures with multi-chain capabilities.
Cosmos Layer-1
As a technically mature Layer1 infrastructure, Cosmos has significant advantages in trading performance and cost. Its Tendermint consensus can provide faster transaction confirmation speeds for order book applications. Additionally, its two other core technologies, Cosmos SDK and IBC protocol, greatly enhance user trading experience. However, in terms of decentralization and security, Cosmos performs relatively average. Moreover, since the entire Cosmos ecosystem is still in its early stages compared to Ethereum, it has certain disadvantages in key indicators affecting trading experience, such as asset types and liquidity.
