The evolution of encryption as a business: strategy, infrastructure and emerging opportunities
By Techub
Written by Michael Oved
Photo by Tia, Techub News
Earlier this year, I prepared a road map for a large marketer as he was preparing to inevitably expand to the encrypted market. The opportunities are wide and evolving. The list is not intended to be exhaustive, but rather serves as a useful reference for those trading institutions that seriously consider establishing or expanding encryption operations。
This is also an update of an article I wrote in 2018, when many of the agreements and conclusions mentioned were now outdated。
Classic policy: spot vs ETF arbitrage with exchange
The most basic strategy in the encrypted market has almost completely reproduced the traditional business model: connecting multiple exchanges (e.g. Coinbase, Binance, etc.) and arbitrating between different trading locations. The objective is to achieve price consistency between different markets through arbitrage and efficient allocation of funds between exchanges. The Prime Brokerage infrastructure plays a supporting role in providing day loans and facilitating quick settlement. The implementation level relies on existing infrastructure for low-delayed optimization, except for the API and hosting levels that are suitable for an encrypted exchange。
In spot and ETF arbitrage opportunities, marketers are usually involved as authorized participants (APs) in major products (e.g. iShares ETF). This role gives it the function of creating / redeeming, enabling AP to settle in cash or in kind (in-kind) under a newer mechanism. Market traders hedge ETFs through encrypted exchanges and related tools, carrying out transactions simultaneously in multiple trading places, products, currencies and jurisdictions, which are areas where they already have strong operational experience。
RFQ Access Web3 Product
The ReQuest for Quote, RFQ system is becoming a mainstream mode of direct interaction with retail users in Web3 for marketers. RFQ access takes a variety of forms, either by decentrizing the DEX, the front end of Web3 products, polymers, or directly embedded in the wallet interface. The requirements for access are relatively low and include, inter alia, Fireblocks infrastructure for access of assets to and from the counterparty, as well as API access rights that usually require permission。
Designed with RFQ core DEX including AirSwap and 0xMatcha are early and representative cases. In these systems, the counterparty negotiates prices under the chain, while the settlement is done through smart contracts. This model, while preserving the characteristics of traditional OTC bilateral transactions, eliminates the risk to the counterparty through atomized settlements. Market vendors respond in real time to requests for quotations, using signature messages and a chain of communication channels, and perform interaction while ensuring the efficiency, privacy and flexibility of large agency-level orders。
The RFQ model eliminates endogenous price inefficiencies compared to the automated M.A. model. As a result, many AMMs have consolidated RFQ offers into their original front-end, enabling users to compare the value of the chain-based mobile pool with the direct offer of a marketer. Platforms like UniswapX and Jupiter bring together their internal AMM and RFQ mobility, and when requesting quotations, users see a combination of both. In practice, RFQ often wins, so connecting through these interfaces and offering offers are equally important opportunities for market vendors。
A polymer like 1inch, which is a meta-level of existing DEX and RFQ infrastructure, is also directly connected to the market. They will launch a request for quotations to all DEX and marketers at the same time and present the best option to the user. The polymer is usually directly integrated into the wallet and has gained a wider distribution capability from the outset。
The wallet is constantly evolving into a full DeFi execution portal. Products such as Metamask, Phantom and Exodus have built-in Swap functions, capable of collating offers from both polymers and direct traders, equivalent to "polymer". The core issue here remains cost. As wallets control the flow of users, they want to internalize as much as possible, as this is at the heart of their business model。
Go to Multichain: From Encapsulating Assets to Intent Protocol to Harbor
IT IS IMPORTANT TO EMPHASIZE THE EVOLUTION OF MULTI-CHAIN INFRASTRUCTURE, AS MARKETERS CAN ALSO PROVIDE LIQUIDITY AND/OR ARBITRAGE AROUND THESE PROGRAMMES, AND THE INCLUSION OF BTC SHOULD BE CONSIDERED THE GREATEST OPPORTUNITY AT BOTH THE VOLUME AND PROFIT LEVELS. INITIALLY, "CROSSING THE CHAIN" MEANT ENCAPSULATING OR BRIDGING ASSETS, I.E. HOSTING ASSETS THROUGH SMART CONTRACTS IN ONE CHAIN AND CASTING THEIR MAPPING ASSETS IN ANOTHER CHAIN. THIS APPROACH HAS BEEN USED TO A LIMITED EXTENT, AS USERS PREFER TO HOLD ORIGINAL ASSETS RATHER THAN ENCAPSULATING TOKENS。
An agreement based on intention is a relatively new concept in the Web3 Executive Level. Users submit intended or generalized transaction targets, while marketers known as Solvers compete for these intentions by finding the best routes and/or prices. In essence, these solvers play the role of the RFQ responder, ultimately completing the settlement on the chain, often involving multiple chains. In many ways, AirSwap can be regarded as the earliest agreement of intent, and we also have a very deep practical appreciation of its strengths and limitations。
THORCHAIN is an important agreement that brings the original BTC into the cross-chain system by combining the AMM model with a limited number of signatures and multiple certifiers. The agreement resulted in a direct exchange between BTC and EVM-based assets without reliance on sealed tokens or bridges. This design provides a scalable framework for dealing in primary assets between isomer chains。
Finally, @Harbor_DEX consolidates and optimizes these many concepts and eventually provides a way for traders to offer offers directly to Web3 wallets for any asset in any chain, whether original or sealed. Harbor was introduced in the form of a cross-chain CLOB providing familiar API, price control for certainty, and original cross-chain settlement capability. It operates exclusively as a back-end infrastructure and integrates directly with wallets, without maintaining its own front end or interacting directly with retail users. Upon scaling up, Harbor may provide a single interface for marketers to offer seamless offers in all Web3 wallets and ecology。
The arbitrage between CeFi and DeFi
AMM IS STRUCTURALLY A LESS COST-EFFECTIVE MODEL THAN TRADITIONAL ORDER BOOKS. THIS INEFFICIENCY HAS GIVEN RISE TO A MEV EXTRACTION AND A RACE BETWEEN ROBOTS WHO ARE TRYING TO CAPTURE OPPORTUNITIES FOR ARBITRAGE BETWEEN THE FLOW POOL AND THE CENTRALIZED MARKET, OR TO ARBITRATE AMM ITSELF WITH SUFFICIENTLY LARGE ORDERS。
PRICE DIFFERENTIALS BETWEEN AMM AND THE CENTRALIZED EXCHANGE ARE OFTEN LARGE AND ARE EXTREMELY ATTRACTIVE OPPORTUNITIES FOR MANY PRESENT PARTICIPANTS. THE AMM POOL PRICES OFTEN DEVIATED, AND THE CHAMBER OF COMMERCE PULLED IT BACK TO A REASONABLE LEVEL, THEREBY IMMEDIATELY EARNING THE DIFFERENCE。
HOWEVER, THE IMPLEMENTATION OF SUCH STRATEGIES REQUIRES BOTH A PRICE INTERPRETATION DIFFERENT FROM THAT OF THE CLOB AND NODAL INFRASTRUCTURE SUPPORT. AMM OFFERS ARE NOT DISCRETE ORDER BOOK SLOTS, BUT CURVES ASSOCIATED WITH THE SIZE OF THE TRANSACTION, SO MARKETERS MUST DYNAMICALLY CALCULATE THE IMPLEMENTABLE SIZE AND ACTUAL TRANSACTION PRICE BEFORE ANALYSING THE TRANSACTION. IN ADDITION, SUCCESSFUL CHAIN ARBITRAGE RELIES ON EFFICIENT BLOCK CHAIN INFRASTRUCTURE, INCLUDING DIRECT NODES ACCESS, OPTIMAL TRADE DISSEMINATION, AND RELIABLE BLOCK-PACKING STRATEGIES TO REDUCE THE RISK OF RUNAWAYS OR TRADE FAILURES。
In practice, the greatest challenge is to "win the blocks" because there are often multiple arbitrators who have identified the same benefits. Transactions need to be not only fast enough, but also covert enough, usually broadcast through private relays or dedicated builders to avoid exposure to public mempool. The arbitrage between CeFi and DeFi can be a significant profit-making business with the right infrastructure and block chain systems。
Derivatives, sustainable contracts and options
The central derivatives market is rapidly evolving, represented by perps and options agreements, which reproduce leverage and hedge instruments in traditional markets. Among these agreements, Hyperliquid was particularly prominent, and its permanent contract design balanced supply and demand on both sides through market-determined interest rate mechanisms。
Hyperliquid was also the first HLP to introduce a pool-based treasury that allows users to participate passively in the distribution of profits and losses of active market vendors, while reducing the demand for capital to do business. In essence, the exchange's bond system is funded by deposit deposits, enabling users to share both the income from fund rates and the gains and losses of transactions. This design achieves an incentive alignment between liquidity providers, marketers and exchanges, representing an important innovation in the decentrization mechanism。
Another important development is Ethena, which generates synthetic dollars through derivatives. Ethena's model maintains stable assets and issues stable coins by simultaneously creating a spot-to-resistance hedge position. Each act of foundry or foreclosure by a user requires a real-time matchmaking by a marketer, thus creating a continuous trading volume and arbitrage opportunity。
The expansion to the futures and options area is a natural extension of the established capacity of the market. Core skills, such as spread management, arbitrage of financial rates, stock hedging and capital efficiency optimization, can be migrated directly into this new environment. With the appropriate hosting and enforcement infrastructure in place, marketers can operate in these locations as in traditional derivatives markets, capturing structural inefficiencies and emerging trade flows。
It's a token
When a new agreement is online, liquidity is usually provided immediately at the centralized exchange. Businesses often sign structured agreements with agreement foundations or vaults. Such arrangements usually exist in the form of `lending + options', whereby a marketer obtains a certain amount of currency lending and, at the same time, increases options that allow it to purchase it at a fixed-right price. For example, if the price of the token doubles after it is on the line, the marketer may exercise the option to purchase a portion of the borrowed token at a pre-agreed right-of-hand price, thus achieving significant gains。
Over time, this practice may evolve or fade away because of its lack of transparency and the benefits of doing business at the expense of diaspora and agreement foundations. In any case, however, the new online tokens will continue to require liquidity support, and the variant of this structure is expected to remain in some form。
In Harbor, we are exploring a model that is more conducive to stimulating alignment, with marketers being able to match directly with coin teams and to distribute liquidity through Web3 wallets rather than a centralized exchange. Such an approach would keep settlements chained, increase transparency and allow users to deal directly with professional mobility opponents, without relying on intermediaries。
In any way, there are still significant opportunities for institutional participants to work with the issuers of coins and design structured mobility programmes to promote this evolving area of encrypted market segmentation with professional market discipline and greater transparency。
Venture investments and new market entry
IN THE AREA OF ENCRYPTION, NEW MARKET AND STRUCTURAL OPPORTUNITIES EMERGE EVERY 6 TO 12 MONTHS, SUCH AS MINING, EXCHANGE, OTC, SMART CONTRACT CHAINS, ICO, DEX, REVENUE FARMING, STABILIZATION CURRENCY, RFQ, SUSTAINABLE CONTRACTS, AND, MOST RECENTLY, ETF / DAT. THIS CYCLE OF CONTINUOUS INVENTION AND REMODELLING HAS EXISTED SINCE THE BIRTH OF BITCOIN AND IS LIKELY TO CONTINUE WITH ECOLOGICAL MATURITY. PARTICIPANTS WHO TAKE THE LEAD IN THESE NEW AREAS TEND TO REAP THE BULK OF THE GAINS BECAUSE OF LOWER INITIAL COMPETITION AND ASYMMETRICAL ACCESS TO INFORMATION。
Many encrypted traders have dedicated venture capital teams not only for investment itself but also for advance insight into emerging market structures and liquidity needs. These investments create matching openings for up-to-date spaces for equity or tokens, as institutions can use their own infrastructure to drive growth in usage and key indicators. I think for institutions like Jump, Flow and Wintermute, VC investment itself constitutes an important source of revenue. In my view, the establishment of a strategic VC pool and the provision of capital market capacity, including, but not limited to, liquidity support, would contribute to the growth of early teams, thereby enhancing the value of VC investments. In Harbor, for example, there are four marketers in our equity structure; we involve them in the seed-wheeling phase and we complete early alignment, and we anticipate that they will be our long-term and important partners。
