Reference Articles: 《Gaming Tokens Dilemma: DEX or CEX?》《PvP》

Compiled by: Zen, PANews

Recently, there has been increasing discussion about whether gaming projects should list on decentralized exchanges (DEX) or centralized exchanges (CEX).

Today, the requirements for listing on CEX have become increasingly stringent and expensive. Even though many CEX claim that stricter requirements help filter out high-quality projects, the increased difficulty of listing ironically forces project teams to distort their roadmaps, focusing their attention on token generation events (TGE). As a result, listing on DEX and allowing the market to determine the pricing and distribution model of the supply has begun to receive more support and attention.

Issues with Listing on CEX

Perhaps the dilemma of all utility tokens begins with listing on exchanges.

CEX offers a more user-friendly interface and a more convenient operating process, resulting in a user base far larger than that of DEX. According to data from The Block, the trading volume ratio of the two has remained close to 9 to 1 for nearly a year. Therefore, project teams are eager to list on CEX to create better liquidity for their tokens, especially when listed on top CEX. The fully diluted valuation (FDV) of the token is guaranteed, and the project's valuation can be artificially adjusted.

Arthur Hayes, co-founder of BitMEX, believes that for most projects, they fail to create products or services worth purchasing to justify their extremely high FDV. Thus, the anchoring effect generated by excessively inflating FDV allows investment institutions (VC) and CEX to always profit. Even if the tokens of low-quality projects are heavily sold off, causing a price crash, their book valuation remains far higher than the actual value paid by VC; the higher the FDV, the more revenue and fees CEX earns, and they can acquire a large number of undistributed tokens.

With few exceptions, most projects need to allocate 10% to 20% of their tokens to qualify for listing on CEX, and existing projects need to spend hundreds of thousands of dollars to list on other exchanges after TGE to ensure trading. Many people buy tokens on exchanges primarily for short-term speculation; they do not care about the game itself or the actual utility of the tokens, but rather aim to earn short-term profits through buying and selling. This is devastating for the sustainability of gaming projects, as a large number of tokens flowing into exchanges are eventually sold off, leading to a loss of long-term support. In this case, if utility tokens that should be used in the game are concentrated on CEX, then no amount of disruptive innovation and practical systems will help.

Diminished Utility of Tokens

In Arthur Hayes's view, selling tokens to the exchanges is a one-time transaction, while the positive flywheel effect created by increasing user engagement will continue to yield returns.

In the market, adopting hedging strategies can increase trading volume, benefiting the liquidity of tokens, which is common in margin and futures trading. However, for utility tokens and P2E game tokens, this has a significant negative impact. Because hedging strategies allow many people to make money through financial means rather than through actual use of tokens or playing games, it weakens the real demand for tokens.

In South Korea, there was a game called ACE ARENAS that became very popular. Many people heard that they could earn a lot of money by playing this game, so they joined in, and the increase in token demand should have driven its value up. However, the token price did not rise, and the reason lies in the hedging strategies. Many people engaged in hedging or other financial operations instead of directly using tokens to increase demand, so the token price did not reflect the market demand for the game.

Moreover, users earn profits through low-risk financial operations on CEX, such as mining or staking, rather than using tokens in the game. This behavior does not increase the demand for tokens; instead, it undermines the long-term value of the tokens, especially in cases where CEX supports lending functions. Lending allows users to lend out tokens for profit, further accelerating the decline in token prices, leading to the so-called "death spiral."

DEX as a Viable Option

Arthur Hayes suggests that project teams should only conduct a small private seed round of financing before launching tokens to create a product for a very limited use case. At this point, since the product has not yet achieved true market fit, the FDV should be very low. This conveys two main messages to your users: this is a risky game; and the hope is to create wealth together with users. Additionally, considering the current market downturn, new coins often perform poorly upon listing, and under pressure, CEX begins to accept only so-called "high-quality" projects, making it difficult for very early-stage projects to meet their standards, thus making DEX a viable option.

Take Auki Labs, an investment project backed by the investment firm Maelstrom founded by Arthur Hayes, as an example. This decentralized machine perception network project first listed its Auki token on Uniswap V3 through the AUKI/ETH trading pair on Base, Coinbase's Layer-2 solution, on August 28. They then listed on MEXC on September 4. They estimate that they saved about $200,000 in listing fees through this method. As of October 10, the price of Auki's token has nearly doubled compared to the previous private sale price.

X user @louisregis posted on October 4, stating that he checked the performance of all recent gaming TGEs, and the best performer was the token $XBG of the player identity protocol XBorg. Its choice centered on DEX projects, with full unlock, no market makers, no manipulation, and transparency. XBORG provided numerous opportunities for participants in the public sale, with early participants achieving returns of about 4 to 5 times.

Of course, projects and their tokens listed on top CEX still generally have high potential evaluations. However, the current economic model of gaming tokens does need to change, especially the current unlocking model, which is very unfavorable to the gaming token ecosystem.

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