Could exchanges decentralize themselves out of existence?

This is a segment from the Empire newsletter. To read full editions, subscribe.

---

The exchanges are decentralizing.

Kraken is positioning its upcoming Ethereum layer-2, Ink, as a venue built specifically to onboard new users to the DeFi space. Existing Kraken customers would form the bedrock of that brave new world.

Coinbase’s own blockchain, Base, meanwhile has carved out its existence by encouraging anyone to build anything and everything onchain — “literally anything under the sun,” as Ink founder Andrew Koller put it to Jason Yanowitz on today’s Empire podcast.

Rather than shaping a place to run your ice cream truck or dog walking service onchain, Ink is opting to focus more on specific DeFi use cases. 

“We want to take our decade-and-a-half experience of centralized order books and get those things onchain somehow, make it so that onchain users tap into that, and vice versa,” Koller said. 

That means good UX, less clicks and increased security. 

“Sequencer-level security so that people don’t even know that rugs exist, or don’t even know that drainer contracts exist. That would be an absolute dream come true, so I think the hyperfocus on the DeFi theme first is where we’re going to take ours.”

It could all lead to blurred lines between CeFi and DeFi. Perhaps offchain and onchain balances could be connected in some way, so that Kraken users could use their CEX balances as collateral in DeFi lending apps running on Ink, for example. 

We’ve seen the early effects of this convergence already. Coinbase began shifting all user USDC deposits over to Base earlier this year, pushing the network’s stablecoin supplies from under $1 billion to almost $4 billion today. 

And so begs the question: Could exchange chains grow so successful that they accidentally render their parent exchanges obsolete? 

Going by trading volumes, it’s not such a crazy thought. 

Base DEX volumes — which mostly come from Aerodrome and Uniswap — have actually now eclipsed Kraken’s, as shown on the chart above.

The 30-day moving average of Base DEXs (in blue) is currently about $873 million, compared to $630 million for Kraken (in purple), per CoinGecko data. 

Granted, reading too much into trading volumes on super-cheap chains like Base can be a bit silly, given how prevalent wash trading can be (one academic paper claims to have identified $27.5 billion in wash trading on Uniswap v2 and v3 Ethereum pools — where it’s much more expensive than Base).

User assets could be another way through. We probably won’t get to see how much cash and crypto Kraken custodies on behalf of its users until it potentially goes public. 

From SEC filings, we know that Coinbase safeguarded user assets worth over $273 billion at the end of June. 

Barring $4.2 billion in cash, practically all of it was digital assets, the equivalent of over 11% of all cryptocurrency in existence at the time. 

Base, meanwhile, had $7.2 billion economic value onchain — equal to 70% more than the Coinbase user cash, but less than 3% of the crypto kept on the exchange itself.

It’s not exactly possible to port the entirety of Coinbase user crypto over to Base, considering how much of it would be in bitcoin, ether and other layer-1 assets. 

Still, it’s not unrealistic to see the gap closing more rapidly from here. Especially now that Kraken is spurring a competitive and friendly rivalry. 

And if just one of them succeeds, it could make CEXs a Web2 relic, just like the rest of it.

---

Get the news in your inbox. Explore Blockworks newsletters:

• Blockworks Daily: The newsletter that helps thousands of investors understand crypto and the markets, by Byron Gilliam.
• Empire: Start your morning with the top news and analysis to inform your day in crypto.
• Forward Guidance: Reporting and analysis on the growing intersection of crypto and macroeconomics, policy and finance.
• 0xResearch: Alpha directly in your inbox. Market highlights, data, degen trade ideas, governance updates, token performance and more.
• Lightspeed: Built for Solana investors, developers and community members. The latest from one of crypto’s hottest networks.
• The Drop: For crypto collectors and traders, covering apps, games, memes and more.
• Supply Shock: Tracking Bitcoin’s rise from internet plaything worth less than a penny to global phenomenon disrupting money as we know it.