Author: Chi Anh and Ryan Yoon, Tiger Research
Translated by: TechFlow
This report written by Tiger Research analyzes why major centralized exchanges (CEX) like Bybit, Binance, and Coinbase are entering the DeFi space and their strategies.
Summary
Strategic Differentiation: Binance provides retail-centric on-chain services aimed at lowering Web3 entry barriers. Bybit launched an independent platform ByReal to offer CEX-level liquidity on-chain. Coinbase adopts a dual-track model targeting retail and institutional users.
Why CEX Turns to On-chain: As early tokens increasingly debut on decentralized exchanges (DEX), centralized exchanges face listing delays due to regulatory reviews - losing trading volume and revenue. On-chain services enable them to participate in early token liquidity and retain users without formal listings.
The Future of CeDeFi: Platform boundaries are blurring. Exchange tokens are evolving from fee discount tools to core assets connecting centralized and decentralized ecosystems. Some DeFi protocols might be absorbed into larger CEX-dominated networks, accelerating the formation of an integrated hybrid market.
1. Unmissable Opportunity: CEX Turning On-chain
Binance's recent initiative, Binance Alpha, has become a market focus. Operated by the Binance team, Alpha serves as a DeFi-based listing platform, enabling retail users to access early tokens faster than traditional exchange channels. This significantly improves token accessibility and engagement, especially through mechanisms like Alpha Points, which facilitate targeted airdrops.
However, the model is not without controversy. Several tokens listed on Alpha experienced sharp price drops shortly after launch, sparking debates about the program's structure and intent. Despite mixed reviews, one trend is evident: centralized exchanges are no longer spectators in the DeFi ecosystem - they are now active participants.
This shift is not limited to Binance. Other major platforms are also moving on-chain. For example, Bybit recently announced ByReal, a DeFi platform based on Solana. Coinbase has also revealed plans to directly integrate on-chain services into its app. These developments indicate a broader structural transformation in the exchange industry.
The key question is: Why would centralized exchanges that have long relied on stable, revenue-generating business models enter the inherently volatile DeFi market? This report analyzes the strategic rationale behind this transformation and examines the market dynamics driving this evolution.
(Translation continues in the same manner for the rest of the text)By launching their own on-chain products, CEXs have created a compromise solution. Platforms like ByReal and Binance Alpha serve as semi-sandboxed environments: tokens can be traded without going through formal listing channels while remaining in a controlled and brand-safe environment. This allows exchanges to monetize user activities through exchange fees or token issuance mechanisms early on, while maintaining legal distance. The exchanges provide access channels without directly hosting or endorsing these assets.
This structure provides CEXs with a pathway to participate in token discovery while avoiding triggering regulatory responsibilities. They can capture liquidity, create revenue, and guide activities back to their own ecosystem—while waiting for formal listing review processes to catch up.
3.2 Keeping Users On-Chain and Preventing Churn
The second driving factor stems from user behavior. Although DeFi leads in token innovation and capital efficiency, mainstream users still find it difficult to access easily. Most users are reluctant to manually cross-chain transfer assets, manage wallets, approve smart contracts, or pay unpredictable gas fees. Despite these barriers, the most attractive opportunities (such as new token trading listings and yield strategies) are increasingly happening on-chain.
CEXs have identified this gap and responded by directly embedding DeFi access into their platforms. All CEX integrations mentioned above allow users to interact with on-chain liquidity through a familiar CEX interface. In many cases, exchanges completely abstract wallet management and gas costs, enabling users to access DeFi as easily as using a Web2 application.
This approach achieves two objectives. First, it prevents user churn. Traders who might have turned to DEXs can now remain within the CEX ecosystem even when using DeFi products. Second, it enhances platform defensibility. By controlling the access layer and gradually mastering the liquidity layer, CEXs are building network effects beyond spot trading.
Over time, this approach will convert into a platform's user lock-in effect. As users become more sophisticated, many will seek cross-chain routing, yield products, and trading strategies. If CEXs have their own DEX infrastructure, Launchpad layer, or even a dedicated chain (like Coinbase's Base), they can ensure users, developers, and liquidity remain firmly bound within their ecosystem. User activities will be tracked, monetized, and recycled without flowing to third-party protocols.
In practice, on-chain transformation enables CEXs to control the complete lifecycle of user funds: from fiat deposits to DeFi exploration, and ultimately to token listing and exit—all within a unified and revenue-generating system.
4. The Future Path of CeDeFi
Large centralized exchanges (CEXs) expanding onto the chain marks a crucial inflection point in the crypto industry's evolution. CEXs no longer view DeFi as an external phenomenon but are beginning to build their own infrastructure or at least ensure direct user-layer entry points.
4.1 Blurring Boundaries: The Rise of a New Trading Paradigm
As CEXs integrate on-chain services, the boundaries between "exchanges" and "protocols" are becoming increasingly blurred from the user's perspective. A user trading on-chain tokens via Bybit might not even realize whether they're interacting with a decentralized protocol or a centralized interface. This convergence could significantly reshape the industry's liquidity architecture, product design, and user processes.
Institutional behavior will also be a key observation point, though comprehensive capital inflow is unlikely to occur in the short term. Institutions remain cautious, primarily due to unresolved risks: regulatory uncertainty, smart contract vulnerabilities, token price manipulation, and opaque governance mechanisms.
Exchanges launching on-chain services cannot eliminate these structural risks. In fact, some institutions might view exchange-mediated DeFi access as a new intermediary risk layer. Realistically, early attempts will likely come from hedge funds and proprietary trading firms that will deploy small-scale capital for experimentation. More conservative participants like pension funds or insurance companies are expected to remain observant in the coming years. Even if they participate, they'll likely adopt extremely cautious allocation methods—typically not exceeding 1-3% of their investment portfolio.
In this context, predictions about "billions of dollars flowing in" seem overly optimistic. A more realistic prospect is gradual testing in the hundreds of millions. However, even these modest capital inflows could somewhat enhance market depth and mitigate volatility.
4.2 The Evolving Role of Exchange Tokens
As exchanges continue expanding their on-chain services, the functionality of native exchange tokens will also evolve. Holding a certain quantity of these tokens might offer users on-chain fee discounts or unlock yield opportunities through staking and liquidity incentives. These changes could introduce new utility for exchange tokens while also bringing new volatility.
Currently, Binance is the only major platform providing clear and continuous utility for its native token (BNB), which plays an active role across multiple services. Most other exchange tokens remain limited to basic fee discounts.
As CeDeFi infrastructure matures, this situation will change. Exchanges operating integrated on-chain and off-chain platforms will use their native tokens as connectors between these domains. Users might need to hold exchange tokens to participate in staking, Launchpools, or gain priority early access to newly listed projects—whether centralized or decentralized.
This functional expansion elevates exchange tokens beyond mere utility assets; they will become core assets in vertically integrated ecosystems. Exchanges with existing tokens might significantly enhance their token utility, while those without might consider launching new tokens to support DeFi-related services, especially platforms developing their own blockchain or differentiated DeFi layers.
In short, exchange tokens are evolving from simple fee tools into strategic assets that will play crucial roles in user retention, protocol integration, and cross-platform capital flow.
4.3 Ongoing Fusion: A New Competitive Landscape
CEXs' push to expand on-chain services is more than a defensive strategy; it represents an active bet on the future of the crypto ecosystem. Exchanges no longer view DeFi as a threat but as an adjacent domain that can be integrated or even absorbed.
The most likely scenario is fusion. Major exchanges will increasingly operate semi-decentralized networks, and independent DeFi protocols might find themselves dependent on these growing ecosystems or even integrated within them. This could ultimately lead to a reallocation of power and liquidity, with CEX-dominated platforms becoming gravitational centers of DeFi activity.
This trend might create a more unified market structure enabling free liquidity flow between centralized and decentralized environments. Users will be able to choose combinations of trust, transparency, and convenience according to their preferences. The competitive landscape is changing, and Bybit's launch of ByReal might be an early signal of this hybrid future gradually taking shape.
