When starting a business, a great idea is worthless if no one is available or willing to invest the funds to make it bloom. In the hi-tech world, where creativity and competition mold our future via non-stop innovation, venture capital and private equity firms are the oxygen this fast-paced industry runs on. 

While a good idea may get you in the door, securing essential funding requires demonstrating capable leadership, a reasonable product-market fit, and a concise business strategy. That being said, fundraising in “traditional” tech is fairly structured and predictable with a higher tolerance for the patient, long-term approach. 

Crypto and web3 projects, on the other hand, view and conduct fundraising differently. Historically, some crypto and blockchain projects have attracted traditional Silicon Valley VCs like Andreessen Horowitz and Sequoia Capital to invest directly in exchange for equity or tokens. Many of these top VC firms have established subsidiary funds focused specifically on promising crypto and blockchain projects. 

However, VC investment tends to rise and fall in correlation with Bitcoin (BTC) and the broader crypto market. For example, VC investment in crypto hit an all-time high of nearly $12 billion in Q1 of 2022, following Bitcoin’s previous record-high price of $69,000 in November 2021. In fact, total VC funds raised in 2023 failed to eclipse 2022’s Q1, as the down market sent VCs running. 

Crypto’s bear market, defined by exchange collapses, hacks, and scams, coincided with the meteoric rise of AI. This further diverted VC attention away from web3 developments, even as the industry matured and started attracting more attention from traditional institutions. 

The blockchain industry has mostly been receptive to tech VC investment despite their stringent centralized operations and reluctance to invest during volatile periods. Due to crypto’s inherent volatility, inconsistent VC participation, lessons learned from the shady ICO era of 2017, and the industry’s hyper-competitive nature, IDO platforms emerged as an alternative funding route for early-stage projects. 

Launchpads became popular during the previous bull run as they provided a decentralized outlet for crypto communities to access a wide array of projects, letting them decide which ones are worthy of an investment. Driven by retail investors and growing crypto communities, launchpads like DAO Maker and Polkastarter supplied projects with valuable resources because they reflected the industry’s values while providing tools for projects and investors—including institutional players. 

As the industry weathered rough market conditions, causing token prices to freefall and projects to shut down, IDO platforms evolved with crypto. Multichain launchpads like ChainGPT and Seedify are now becoming the standard, enabling more projects to take part. 

Since regulatory scrutiny has thrown the industry a curveball, many launchpads have taken crucial steps to ensure they comply with any regional laws, including processes to protect investors. Launchpads are also transcending, simply providing a platform to help projects sell tokens. They are playing a more hands-on role with the projects they onboard, resembling incubators and accelerators common in mainstream tech. 

For example, Gems, a newly established launchpad, connects projects with its exclusive network of influential investors for post-launch support to accelerate growth. The platform boasts 4,000 investment “Leaders,” who gain exclusive access to thoroughly vetted projects while enabling a growing user community to also invest in high-potential startups. By carefully balancing the needs of investors and projects, Gems raised a combined $198 million for its first three project launches.   

Crypto developments are occurring at rapid rates, reshaping the industry before our eyes. Avenues for funding in this dynamic industry will likely continue to evolve as the industry matures, absorbs more users, and further penetrates traditional finance. Regardless, IDO launchpads will remain an invaluable infrastructure component, adapting innovative approaches to serving the industry while fostering communities and facilitating growth.

As we start to see renewed interest in crypto—with prices hovering near their all-time highs and prominent people and institutions discussing the industry—building a robust crypto exchange is essential.

Crypto traders’ standards for an exchange are higher than ever. They are looking for a sleek user experience, architecture that supports high throughput and low latency, and top-notch security. The latter is especially important given the industry is still recovering from the implosion of FTX and the domino effect it had on other businesses in the space. 

While centralized exchanges excel at building beautiful user interfaces and intuitive user experiences, they operate at speed by custodying users’ funds for them. As the industry has seen many times throughout crypto’s history, funds that the users themselves don’t control can be mismanaged by fraudulent actors. Additionally, CEXs possess the authority to limit access to accounts, such as freezing funds or halting withdrawals. As the crypto adage goes: Not your keys, not your coins. 

Decentralized exchanges, on the other hand, grant users complete control over their funds with self-custody. They leverage blockchain technology and smart contracts to execute trustless trade and settlement. However, this architecture can be clunky and complex for users to navigate. It comes with trade-offs in throughput and latency, the absence of advanced trading features (like advanced order types and conditions), and can also deal out significant fees to pay gas for settlement on a blockchain. 

A new crop of crypto entrepreneurs is thinking about exchange architecture differently. They are looking to combine aspects of a centralized and decentralized exchange with building on the best of both worlds. Enter hybrid crypto exchange. 

A better trading engine for a better crypto trader

CEXs from the last cycle, including Coinbase and Binance, built their businesses by copying the UI of broker platforms and mimicking the mechanics of broker platforms and the UI of fintech apps. They focused on user-friendly UI, robust mobile apps, competitive fees, and an extensive selection of coins and tokens. 

The centralized trading infrastructure offers high throughput and low latency, which is what the world demands for crypto trading. Going deeper, high throughput and low latency enable better liquidity, as market makers can reprice quicker. They also allow for more efficient margin usage, as a centralized risk engine enables the exchange to offer higher leverage. Centralization enables advanced trading features and logic, such as advanced order types and conditions. 

Aside from performance, it allows exchanges to have more control over compliance. CEXs control what customers have access to their platform and can manage the access of those users by implementing robust blockchain analysis, fincrime, and compliance programs. In the wake of FTX, lawmakers and enforcement agencies have been clamping down on the industry, dishing out huge fees and even jail time to businesses and entrepreneurs that are found to be skirting regulations. 

So, to sum up, that’s why the hybrid exchange model inherits the bright side of centralization. The trading architecture is kept centralized to a large extent. UX is also inherited from CEX because DEXs simply lack features, such as simple account creation, which eliminates the need for users to already have a wallet before interacting with the exchange. DEXes are also limited in their on- and off-ramps, fee abstraction, and advanced trading analytics. Especially as another batch of crypto traders enters the space during what appears to be the beginning of a bull run, a powerful feature set on top of a polished user experience is critical. 

It all sounds like a flawless victory for centralization so far. The question is, what do hybrid exchanges inherit from decentralized ones? The answer is simple: The essential feature that enables trust in crypto trading. And centralization has a dark side.  

Give users the keys

Hybrid exchanges still pull from DEX concepts by utilizing blockchain technology to secure funds. Users self-custody their funds, and trades are settled on the blockchain at various periods. Another crucial trait is the on-chain validation of the trading logic, which will prevent operator fraud. As such, trust is provable, and transparency is immutable. 

Operator fraud is one of the most significant risks in crypto. CEX’s control over funds is beneficial for compliance reasons; however, it grants the authority to limit access to accounts, such as freezing funds or halting withdrawals. The collapse of FTX certainly heightened concerns over an operator’s access to user funds. Yet, FTX wasn’t the first or only exchange to mishandle user funds and call into question the CEX model. One of the first-ever crypto exchanges, MtGox, completely shut down and filed for bankruptcy in early 2014 because of an undetected theft over many years that drained the exchange of more than 850,000 Bitcoin (BTC). In 2018, Canadian exchange QuadrigaCX went dark and was later revealed to be a Ponzi scheme, causing the loss of roughly $190 million in user funds. 

These continued instances highlight the importance of self-custody and trustless on-chain settlement, whereby users hold the keys to their own coins instead of trusting a centralized entity that isn’t fully transparent to retain their keys. 

Scaling tech for cutting costs

In the derivatives market, traders often transact in large volumes, which can accrue significant fees. There is no feeless trading. CEXs and DEXs charge fees for trading, but DEX users have an additional cost to settle all their trades on a blockchain. These fees fluctuate depending on the overall usage of the blockchain at any given period. Earlier this year, in March, Ethereum transaction costs skyrocketed to nearly a two-year high due to increased speculation in meme tokens.

The hybrid exchange approach simplifies the fee structure because trading is centralized and relies on layer-2 technology to boost scalability while keeping transaction fees low. Rollups are one such scalability solution that processes transactions on a separate network before bundling the transaction data into batches to submit and settle to the main chain. 

Now’s the time to go hybrid

Blending features from centralized and decentralized exchange architecture is an obvious choice in a market that’s becoming more mature and competitive. 

The speed, usability, and design of CEX help users of all levels of technical know-how trade crypto easily. And the security provided by implementing aspects of DEX will create an ecosystem of trust and reliability that gives users peace of mind. 

The hybrid crypto exchange is poised to be the winning business model in the next bull run, highlighting that it’s not always about reinventing the wheel as much as it’s about creatively putting the pieces together. It’s not a one-size-fits-all industry; it won’t have a one-size-fits-all solution.

Ruslan Fakhrutdinov

Ruslan Fakhrutdinov is an ex-McKinsey consultant and former Head of Crypto Operations at Revolut. Ruslan played a significant role in the development of numerous crypto products. He had P&L responsibility for one of the company’s largest and most profitable departments, which generated £220 million in gross profit in 2021. In 2023, Ruslan left the fintech giant to launch his own venture, X10, a hybrid crypto exchange.