Is a “Decentralized Binance” on the Horizon? - A Complete Guide to Trading-Focused Order Book Protocols

In this report, we will start with Binance and explore why it has become the leader among centralized exchanges in the crypto industry. We will discuss how, with the iteration of updated technology, it has become possible to achieve a "decentralized Binance" through decentralized order book exchanges. By providing a detailed introduction of StarkEx, zkLink, StarkNet, zkSync, Arbitrum, and Cosmos, we will deeply analyze and compare their user experience, security, performance, and cost, guiding readers to gain a deeper understanding of these infrastructures.

Here are a few highlights from this report:

Why We Need a "Decentralized Binance"?

Binance, is the largest cryptocurrency exchange in terms of trading volume in the blockchain industry, boasting over 120 million registered users. As a centralized exchange, it offers a wide range of assets and ample liquidity. Its trading experience and performance are also ahead of its competitors.

However, in the blockchain industry, centralization is considered the "original sin." As a centralized exchange, Binance carries certain risks regarding asset security, business transparency, and regulation. This has intensified concerns among users, leading to a desire to create a crypto exchange that combines the user experience of CEX with the self-custody advantages of DEX. There is a growing demand for a decentralized version of Binance.

The Road to a "Decentralized Binance"

In the process of building a Decentralized Binance, there have been numerous attempts made.

• Uniswap is the first pioneering decentralized exchange, which was initially deployed on the Ethereum network. It utilized the automated market maker (AMM) mechanism, employing a constant product formula and liquidity pools for trading. However, this mechanism has issues like low capital efficiency, slippage, and impermanent loss. This means that it had to compromise liquidity and trading experience while aiming for decentralization.
• Following the initial attempts with AMMs, many high-performance Layer 1 solutions emerged. These solutions made it possible to implement order book-based decentralized exchanges (DEX) by improving trading performance. However, while enhancing performance, Layer 1 solutions sacrificed the security and mature ecosystem of Ethereum. Additionally, they were unable to support the massive user base of exchanges like Binance.
• With technological advancements, Layer 2 scaling solutions for Ethereum came into the show. They helped decentralized exchanges further enhance transaction speed and reduce fees. These Layer 2 solutions serve as scaling solutions for Ethereum, retaining its security and inheriting its mature ecosystem. However, generic Layer 2 networks have some limitations in high-frequency trading and lack seamless interoperability between blockchains outside of Ethereum.
• Recently, a new generation of application-specific, trade-centric order book infrastructure solutions has entered the crypto market. Each of these solutions aims to improve the trading experience by providing high-performance and secure trading environments. They build upon the foundations of Layer 1 and Layer 2 innovations, opening up possibilities for building a "Decentralized Binance."

Trading Infrastructure Overview

When selecting infrastructure to build a "Decentralized Binance," four main factors influencing trading should be considered:

1. User Experience
2. Security
3. Performance
4. Cost

Based on the four dimensions mentioned above and in conjunction with decentralized order book trading protocols, we have analyzed several of the hottest infrastructure solutions:

StarkEx

StarkEx is a trading infrastructure designed specifically for applications, utilizing StarkWare's STARK zero-knowledge proof technology. It operates as a Layer2 scaling engine on the Ethereum mainnet and offers targeted ZK-Rollup services for independent applications. StarkEx was officially launched on the Ethereum mainnet in 2020 and is currently utilized by prominent decentralized derivatives trading protocols such as dYdX v3, immutable X, and ApeX.

zkLink

zkLink is a trading-focused multi-chain middleware based on ZK-Rollup technology. Its main advantage is to offer a unified trading layer that is connected to multiple Layer1 blockchains and Layer2 networks, aggregating and unifying liquidity from various ecosystems and enabling the trading and composition of native DeFi assets across different chains. zkLink extends the classic ZK-Rollup and enables multi-chain functionality with a hybrid mechanism called "ZK-Rollup + Light Oracle Network".

StarkNet

StarkNet, developed by StarkWare, is a general-purpose Layer2 scaling solution based on ZK-Rollup technology. StarkNet supports the deployment of arbitrary smart contracts, enabling the creation of diverse dApps that can interact with one another. It utilizes Rollup based on STARK technology to execute transactions, providing high scalability and lower transaction costs.

zkSync

zkSync is a series of general-purpose Layer2 Ethereum scaling protocols based on ZK-Rollup technology. It comprises two main products: zkSync 1.0 (later renamed zkSync Lite) and zkSync 2.0 (later renamed zkSync Era).

zkSync Lite, the first product in the series, utilizes SNARK-proof technology but is not compatible with the Ethereum Virtual Machine (EVM). It supports basic transactions like transfers but does not support smart contracts. On the other hand, zkSync Era is built upon zkSync Lite and adds EVM compatibility, allowing for the execution of smart contracts.

Arbitrum

Arbitrum is a Layer2 scaling solution for Ethereum based on Optimistic Rollup technology. It currently consists of two products: Arbitrum One, designed for general purposes, and Arbitrum Nova, dedicated to gaming and social applications. Among the two, Arbitrum One is the primary product, and it attracts most of the DeFi applications.

Cosmos

Cosmos is a Layer1 blockchain network that operates on the Tendermint consensus mechanism and utilizes a mesh structure. Within this network, each blockchain functions as an independent and fully operational Proof-of-Stake (PoS) blockchain. Inter-chain communication between these blockchains is made possible through the Inter-Blockchain Communication (IBC) protocol, enabling the sharing of security and liquidity among different chains. Additionally, Cosmos offers the Cosmos SDK, a custom blockchain development toolkit that empowers developers to build tailored blockchains using existing modules and enjoy a high level of flexibility.

Comparison of Trading Infrastructures

Application-specific ZK-Rollups

App-specific ZK-Rollup infrastructures, such as StarkEx and zkLink, have clear advantages in usability (particularly for developers), and due to the use of ZK technology, they also have certain advantages in trading security compared to the Cosmos chains and Optimistic solutions. However, application-specific infrastructures can impose limitations on functionality development. StarkEx's applications are only deployed on Ethereum, while zkLink supports direct access to cross-chain liquidity, and the possibility to merge tokens across chains.

General-purpose ZK-Rollups

General-purpose ZK-Rollup infrastructures such as StarkNet and zkSync offer flexible functionality development and the deployment of order book applications. However, they lack multi-chain support and may have higher gas fees due to network congestion from other on-chain use cases.

Optimistic Rollups

Arbitrum offers excellent functionality development flexibility and compatibility with Ethereum. It also provides cost advantages compared to ZK-Rollups by eliminating expensive zero-knowledge proof computation fees. However, it lags behind in terms of time to finality compared to any ZK-Rollup, and the cross-chain security compared to a multi-chain ZK-Rollup.

Cosmos Layer-1s

Cosmos, a mature Layer1 infrastructure, excels in trading performance and cost. Its Tendermint consensus ensures fast transaction confirmations for order book applications. The Cosmos SDK and IBC protocol enhance the trading experience. However, decentralization and security aspects are average compared to Ethereum. Additionally, the Cosmos ecosystem is still in the early stages, impacting factors like asset variety and liquidity, and affecting trading experiences.

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