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All centralized exchanges are launching their own blockchains. Well, obviously not all, but the biggest ones are.
Binance kicked things off at the beginning of 2022 by launching the BNB chain, its own blockchain that’s heavily criticized for being centralized.
Then Coinbase followed suit by launching Base earlier this year. If you’ve been a Web3 Academy reader for a few months, you know all about Base.
So now that the two biggest exchanges launched their own blockchains, others had to follow through.
Last week, Kraken expressed they’re seeking to launch their own Layer 2 blockchain as well – they’re looking for partners who can help them build it.
And on Tuesday this week, OKX jumped on the train too, announcing that they’ll build their own L2 using the Polygon CDK – a tool kit for those who want to build an L2.
Now, here’s the thing. I don’t think people understand how important this is.
Centralized exchanges having their own L2s is a total game changer for newbies entering the crypto & web3 space.
Let me explain.
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The Importance of CEXs Launching L2s 👀
You see, the journey onchain usually begins at a centralized exchange.
Platforms like Coinbase, Binance, Kraken and OKX are the first place where about 90% of people engage with crypto.
From there, when the user wants to explore the broader web3 ecosystem, they encounter A LOT of friction.
They need to learn how to set up a wallet, the difference between all of these blockchains and how networks work so they don’t send their funds to a wrong address.
All before they can even use any web3 apps. Here’s the typical onchain user flow of a newbie.
Use centralized exchange to exchange fiat into crypto (Coinbase or Binance)
Transfer this crypto into a web3 wallet (Metamask or Coinbase Wallet)
Connect wallet to dApps (Opensea, Parallel or Lens)
Sign transactions to buy an NFT, play a game or use web3 socials
By having their own blockchains, CEXs get to control this entire process and that leads to 2 things:
A better experience for the user.
CEXs keep user money and attention within their ecosystem.
Let’s expand on these benefits.
1. The New Web3 Onboarding Flow
In reality, the flow for users migrating onchain will be the same as before.
CEX → Web3 Wallet → Blockchain.
However, because the CEX now has control of all 3 components, they can better guide the user.
Coinbase → Coinbase Wallet → Base
OKX → OKX Wallet → OKX L2.
For example, users can download the Coinbase Wallet directly from the Coinbase app. Additionally, Coinbase is also advertising their Base blockchain to their CEX users, through campaigns like Onchain Summer.
Another great example is Binance, who just launched their own Web3 Wallet, which you can access straight from the Binance app.
This unlocks a whole different level of UX, as people can access web3 from the place where they interact with crypto in the first place.
Next up, I expect Kraken to also launch a web3 wallet, before their L2 is live as well.
But what’s in it for exchanges? How do CEXs benefit from having web3 wallets & their own blockchains?
2. Keeping Funds & Attention in their Ecosystem
Here’s an exchange’s worst nightmare: Users buying crypto & immediately transferring that crypto to an external wallet like MetaMask or Ledger.
In reality, that’s what most people do (and should do) to keep their funds safe. But for the CEX, that’s simply leaking value and they only benefit from the fees that you pay initially to buy the crypto, which is usually minimal.
By having a web3 wallet, they can charge a front-end fee for when you bridge or swap tokens. That’s an extra revenue stream.
And, if they build a blockchain that people use, they create another revenue stream.
Just look at Base for example… They’ve already made $5.5 million in a few months.
You can bet execs at Kraken and OKX have seen the chart above and realize the massive opportunity to build an L2 and sell blockspace.
But how about decentralization? Aren’t these blockchains pretty centralized? Don’t they go against the ethos of web3?
Centralized Layer 2s. Is That the Answer?
It’s true. All of the blockchains mentioned today are very centralized.
The BNB chain has about 50 validators and Base doesn’t even have a token.
But being decentralized isn’t the primary focus for emerging blockchains; user attraction is.
And that’s how it should be.
Here’s the deal. Decentralization doesn't matter without a user base.
For established blockchains like Ethereum and Bitcoin, focusing on decentralization makes sense because they already have users.
However, for new blockchains, the priority should be on providing a simple user experience.
Once they acquire a substantial user base, they can consider decentralizing.
Moreover, users on these less decentralized chains can easily transition to more decentralized ones if they choose.
So, ultimately, regardless of the level of decentralization, these new blockchains accelerate onchain adoption, which we should be celebrating.
I just hope that all of these CEXs can launch their blockchains before the bull market begins, so that once we start welcoming retail investors, we can easily help them explore the wider web3 ecosystem.
Speaking of the bull market, how are you planning to capitalize on the life changing opportunities that'll flow your way in the coming years?
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Thanks for reading. And remember, you're strong, you’re powerful, you’re alpha! ❤
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Disclaimer: This article is for informational purposes only and not financial advice. Conduct your own research and consult a financial advisor before making investment decisions or taking any action based on the content.
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