Author: Chi Anh and Ryan Yoon, Tiger Research
Original Title: Why Are Centralized Exchanges Rushing into DeFi?
This report by Tiger Research analyzes why major centralized exchanges (CEX) like Bybit, Binance, and Coinbase are entering the DeFi space and their strategies.
Key Takeaways
Strategic Differentiation: Binance offers retail-centric on-chain services aimed at lowering Web3 entry barriers. Bybit launched ByReal, an independent platform to provide CEX-level liquidity on-chain. Coinbase adopts a dual-track approach targeting retail and institutional users.
Why CEX Turns to On-Chain: As more early tokens are initially launched 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 listing.
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 may 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 focal point. 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 that 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 plan'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 turning on-chain. For instance, 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 rationales behind this transformation and examines the market dynamics driving this evolution.
2. Current State of CEX Entering DeFi: What Are They Actually Building?
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Before analyzing the strategic motivations of centralized exchanges entering the DeFi space, we must first understand what they are actually building. While these efforts are often categorized under the broad trend of "CeDeFi" (Centralized-Decentralized Finance), implementation varies significantly across platforms.
Bybit, Coinbase, and Binance have each adopted different approaches - with differences in architecture, asset custody models, and user experience. Understanding these differences is crucial for assessing their respective strategies.
[The translation continues in the same manner for the rest of the text, maintaining the specified translation rules and preserving XML tags.]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 transfer assets across chains, manage wallets, approve smart contracts, or pay unpredictable gas fees. Despite these barriers, the most attractive opportunities (such as new token trading 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 goals. First, it prevents user churn. Traders who might have turned to DEXs can now remain in 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, revenue-generating system.
4. The Future Path of CeDeFi
Large centralized exchanges (CEXs) expanding on-chain marks a significant turning 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 are 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 do not 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 on the sidelines in the coming years. Even if they participate, they will likely adopt extremely cautious allocation methods—typically not exceeding 1-3% of their investment portfolio.
In this context, predictions about "billions of dollars in capital inflow" seem overly optimistic. A more realistic prospect is gradual testing in the hundreds of millions. However, even these modest capital flows could somewhat enhance market depth and mitigate volatility.
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