Analyze the quantitative trading dilemma of exchanges and speculate on the advantages of on-chain financial rules

Source: Lightning HSL

I have been thinking recently about why inscriptions are so popular? In particular, the cost of inscriptions built on the Bitcoin chain is so high and the user experience is so poor. Why do people still gamble on inscriptions on the Bitcoin chain?

In order to match the gameplay of simulating Bitcoin inscriptions, various EVM-compatible chains, or other highly programmable non-EVM-compatible chains, use more bizarre on-chain contract methods to implement inscriptions. Obviously they have a better way to achieve fair launch, but they have to use a strange way to construct the inscription, which is really strange.

We can cite many reasons to demonstrate, such as fair launch, gambling, pyramid schemes...

But I think there is one thing that needs special attention: on the chain.

The transparency of financial behavior and financial rules through being on the chain is a very big advantage. Being on the chain or not is just like being on an exchange or not.

These may not be easy to understand. Let me give a negative example of some bad behaviors that may occur on exchanges due to opaque financial rules and financial behaviors.

I was in2018 I have done quantitative procedures for transaction mining.

Trading mining is to brush up the trading volume on the exchange, and the exchange will airdrop platform tokens to you based on the trading volume. The quantitative procedure is to simply self-buy and sell a currency, that is, buy your own sell order, calculate the price of the platform currency obtained, and deduct the transaction fee, which is the profit.

In order to ensure that I was buying and selling myself, I found a very inactive junk currency trading pair. This exchange is a small exchange, because I can’t beat others when it comes to trading and mining on big and famous exchanges.

But my program was poorly designed and was exploited at night. The program bought all my assets into this garbage coin. I feel like the exchange owner saw through my algorithm and used my program to replace all my coins with this garbage coin. Of course I have no proof.

Because the exchange has backend data, it is like a god to all users. I have contacted many quantitative teams who all claim to have similar concerns, that is, they are afraid that the exchange will compete with them.

Many years ago, a person who engaged in traditional fund quantification told me that he lost money on the xx exchange1000w, that era1000wThere are many. He claimed that it was the money he lost after his quantitative program was discovered and exploited. He claimed that this person was probably the exchange, and only the platform had the data advantage to do this.

N years ago, I heard someone from an exchange ask me if I knew a top quantitative team and introduce him to him.

Because his exchange has a Russian quantitative team that has been winning money and treating the exchange as a cash machine. The platform can’t figure out how they do it, and it can’t place orders with them. Prevent them from making money. There is a high probability that this quantitative team is a combination of several accounts, and the exchange has downloaded all the transaction data of these accounts.

The exchange hired multiple quantitative teams to analyze the data to find out how this level of quantification was achieved.

Another quantitative team told me that they used the same quantitative strategy to run on Binance and FTX, but FTX lost money and Binance made money. They suspected that ftx was competing with quantitative programs to steal their money.

If you think about it simply, you will understand that no exchange is willing to use it as a cash machine and keep winning money in it. Even if the money you keep winning belongs to the users of the exchange, it will not work. The users always keep it. If you lose money, the exchange will gradually run out of business.

This is destined to be quantified on the exchange, generally:

1. Either it is an ally of the exchange and becomes a large liquidity provider, and the exchange takes a fancy to it. Your liquidity and fees.

2. Either it is small and the exchange does not want to keep an eye on you.

3. Either hide it and split it into n independent accounts to avoid being discovered by the exchange.

But there is indeed no evidence that the exchange is actually doing evil in the above-mentioned incident. I am just guessing and hearsay.

But the exchange itself cannot prove its innocence. At least so far, I have not heard of any exchange that can prove that it will not compete with the quantitative team.

But with the quantification of on-chain exchanges, this problem does not exist. Everyone’s rules are clear and transparent. There is no one who has a God's perspective.

Well, not entirely, because miners have the right to sort transactions, so they also have a certain one-sided advantage. Just like ETH mining pools, they can run the transaction and find that it can make money, and then copy the same transaction and package it first. This is MEV, the problem of maximum miner extractable value.

But even taking MEV into account, on-chain financial rules are for exchangesoffchainRunning financial activities on span> has an overwhelming advantage in terms of transparency.

This may be one of the reasons why this kind of game is still so popular even though the cost of issuing inscriptions on Bitcoin is so high and miners make so much money.

Perhaps this is also the reason why exchanges are now starting to build web3 wallets. The so-called web3 wallets are exchanges extending their business to the chain.

I think on-chain finance such as DeFi will definitely further squeeze the living space of exchanges.