Centralized exchanges and the move onchain

Centralized exchanges (CEX) have long dominated the world of digital asset trading, as they offer a high degree of liquidity and a more familiar user experience for those new to crypto. CEXes have been able to do so because their interactions with customers were offchain, removing the barriers to entry to decentralized services with the efficiency of centralization. But changes in the global regulatory environment, sophistication and attitude of users, blockchain technology, and the rise of high-volume trading in altcoins and memecoins have moved more and more activity onchain. Decentralized exchanges (DEX) have seen a surge in activity, recording an all-time high volume ratio relative to CEXes. To counter this shift away from offchain activity, many CEXes are building out a robust onchain strategy, with Binance, Coinbase, and OKX leading the way.

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The benefits of going onchain

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Integrating onchain activities into a centralized exchange has several key benefits: the introduction of new monetization opportunities, the ability to expand internationally, and engaging new users and developers.

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New monetization opportunities 

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Trading fees have long been the primary monetization avenue for centralized exchanges. As they were the tool a majority of cryptocurrency buyers and traders used to acquire their tokens, CEXes could make a healthy profit on every trade. However, as more trading has moved onchain, along with other core activities such as decentralized finance, CEXes without an onchain strategy have been caught flat-footed. Onchain strategies offer a pathway to diversified revenue as they offer CEXes an opportunity to earn new types of fees. Onchain monetization comes from:

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• CEXes that offer a non-custodial wallet option can augment their existing trading options with DEX swaps embedded in the wallet. To execute those swaps, a CEX will typically charge a small fee. For example, Coinbase charges a 1% fee on every swap.
• CEXes can earn interest on the fiat reserves from issuing stablecoins. For example, Coinbase earned almost $250M USD in revenue in Q2 2024, a jump from 12% of revenue in Q1 to 16.5% in Q2.
• Building and running their own L2 allows CEX to earn sequencer fees as well as transaction fees. For example, Coinbase earns these additional fees for every transaction processed on their Layer 2 (L2) chain, Base. Those fees can be reinvested.

International expansion 

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Centralized exchanges are regulated businesses that must comply with national regulations to operate in different countries around the world. The process of receiving the appropriate licensing can be onerous and expensive, and regulators are known to change their stances, which poses risks to their ability to serve a country's population on an ongoing basis. 

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• Onchain trading, such as swaps, can be done in a non-custodial manner, so a CEX can facilitate the connection without ever touching or controlling a user’s funds. This difference allows them to offer more countries access to blockchain activities via their onchain products, opening new markets more quickly.
• OKX released a decentralized multi-chain wallet that allows people anywhere to access thousands of tokens and over a thousand apps from a single place. Doing so increased their ability to enter international markets where the centralized exchange was previously unable to work.

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New user and developer engagement

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For brands and companies to grow, they must be able to access new user bases. Incorporating an onchain strategy allows centralized exchanges to tap into the more ethos-based crypto-native users who do not favor centralized services or developers interested in building their businesses onchain. 

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• Offering onchain solutions to retail users allows CEXs to tap into a broader user base, allowing them access to a significantly broader set of tokens for trading as well as direct access to other defi activities. Coinbase now has several wallet products for people with different interests, including Coinbase Wallet, a traditional non-custodial offering that requires memorization of a seed phrase, and the Smart Wallet, a web-based wallet that uses passkeys for signing and other simpler onboarding techniques to get newer users onchain. 
• CEXes are also offering products for developers to help existing businesses enter Web3, as well as support developers in creating new crypto-native businesses. Coinbase, for example, offers a suite of solutions for developers, including APIs for incorporating wallets, onramps, data indexing, staking, and more into any product. In addition, Base offers entrepreneurs a chance to create an app in any vertical, such as DeFi, consumer, social, games, and more, that can more easily tap into the Coinbase audience than if done on other chains. 

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The key features of a CEX onchain strategy

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While every CEX will approach the onchain strategy differently, there are a few key features that most will include:

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• Multichain support: Most CEXes that now offer non-custodial wallets do so with multichain support in order to offer users as many tokens, DeFi protocols, and other decentralized applications (dapps) as possible. By creating a product that crosses many ecosystems, they can exponentially grow their potential user base.
• New revenue streams with an L2: As discussed above, building an L2 chain offers new revenue streams previously unavailable to CEXes. As the industry matures, it is critical that CEXes evolve as well to capture part of the new markets.
• Launch a stablecoin: Stablecoins are growing rapidly and offer significant revenue and user acquisition opportunities. 
• Offer access to Web3 applications: Even if there is not money to be made directly by helping people access dapps, allowing users to get them directly from their products or connect to a dapp with their non-custodial wallet allows CEXes to keep users inside of their brand and product universe so that they do participate in the profit-generating activities.

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Earlier this year, Bitso, a leading Latin American centralized exchange, recognized that their user base was beginning to gravitate to onchain trading and using non-custodial wallets. To accommodate this trend, Bitso began offering MPC wallets powered by Portal. These wallets offered a branded opportunity to give users direct access to onchain activities, including trading, swaps, and much more. Check out our case study for more information.