Written by: Tiger Research
Compiled by: White55, Mars Finance
Major global exchanges are launching their own public chains to explore new revenue sources, and Upbit and Bithumb are not without the possibility of joining this competition.
There are four possible scenarios. Layer2 based on OP Stack, KRW stablecoin infrastructure, leveraging the liquidity characteristics of the Korean market, and the tokenization of unlisted stocks. Each could serve as a differentiated approach reflecting the unique market environment in Korea.
Of course, regulatory restrictions and technical complexities remain significant obstacles. Achieving this in the short term is no easy task. However, in light of decreasing trading volumes and intensifying global competition, it is clear that these two exchanges must seek new growth drivers.
The curtain rises on the competition for exchange public chains.
Cryptocurrency exchanges are formally beginning to join the competition for blockchain infrastructure. With the introduction of Coinbase's Base, Kraken's Ink, and Robinhood's recent involvement, the competitive landscape is becoming more intense.
Behind this fierce competition is the limitation of the existing fee-based business model. Although the fee model of exchanges is the most stable and proven source of revenue in the cryptocurrency industry, it is highly dependent on market conditions due to its structural characteristics, necessitating revenue diversification. Additionally, it is noteworthy that exchanges previously competed in limited domains within their respective jurisdictions, but the competitive stage has now expanded to a global level. Meanwhile, decentralized exchanges (DEX) that once occupied over 25% of the market share are challenging the status of centralized exchanges.
Meanwhile, as the cryptocurrency industry integrates more rapidly into the traditional financial system, exchanges are quickly opening up derivative business opportunities that go beyond mere trading intermediaries and leverage blockchain infrastructure. Ultimately, these changes intertwine to accelerate the competition for exchange public chains in the future.
What if Upbit and Bithumb launch their own public chains?
In the context of global exchanges rushing to launch their own public chains, a natural question arises: 'Is it possible for Korean exchanges Upbit and Bithumb as well?' To assess this, it is necessary to examine the current status of these exchanges and their past attempts.
Korea occupies a unique position in the global cryptocurrency market. Based on fiat currency, KRW trading volume ranks second globally, just behind the USD, and sometimes even exceeds it. It is extremely rare for such a large trading volume to be generated by users from a single country. Thanks to this market environment, Upbit and Bithumb have grown into major companies with total assets exceeding 50 trillion KRW.
Source: The Block
However, this seemingly solid structure is also changing. Since trading volumes peaked in 2021, both exchanges have seen a downward trend in trading volume. This is because domestic users are shifting to global exchanges like Binance and Bybit or decentralized exchanges (DEX). This indicates that domestic exchanges can no longer rely solely on the environment of Korea's liquidity characteristics.
Exchanges have also recognized this change. Both Upbit and Bithumb have attempted to enter global markets by establishing overseas subsidiaries and diversifying their businesses. However, relying solely on the 'Korean exchange' brand in overseas markets has proven inadequate for ensuring differentiated competitiveness. Additionally, while they have launched various platform-based operations, most of them are far removed from the inherent competitive advantages of exchanges, resulting in limited success. Of course, regulatory sanctions may also have restricted business diversification.
But now, the winds of change are blowing. The pro-cryptocurrency policy of Trump's second administration has improved the global regulatory environment, allowing exchanges to more actively seek new growth strategies. In this context, the launch of public chains by Upbit and Bithumb is also a viable option worth considering.
If they launch public chains, different outcomes can be expected compared to the past. This is because they can directly leverage the inherent advantages of large user bases and abundant liquidity of the exchanges. Especially if combined with the unique characteristics of the Korean market, it is entirely possible to create differentiated value.
Expected scenario 1: Building Layer2 based on OP Stack
If these exchanges build their own chains, the likelihood of choosing Layer2 is higher than that of Layer1.
The primary reason is the complexity of development and the scale of resources required. Developing and operating Layer1 requires substantial resources. Even with the reduced entry barriers of Layer2 due to Rollup services, a considerable amount of specialized talent is still needed; the fact that Kraken's Ink project has invested around 40 developers illustrates this well. From the exchange's perspective, independently building and operating such infrastructure is inevitably burdensome. Moreover, their aim is to expand business on a platform based on infrastructure rather than focusing on constructing high-performance infrastructure itself.
Adding to this is the regulatory risk. Layer1 must issue native tokens, but under Korea's regulatory environment, token issuance is practically impossible, and there is a high likelihood of facing sanctions from authorities. Thus, Layer2 models that do not require the issuance of native tokens, like those adopted by Coinbase, will become the most realistic alternative.
Source: Optimism, Tiger Research
Although there are various Stacks for Layer2 development, the Optimism (OP) Stack is currently adopted by almost all global exchanges as a standard. Coinbase's Base and Kraken's Ink are built on this and have become reference models for exchange types. Robinhood exceptionably chose Arbitrum because its strategic objectives differ. Coinbase and Kraken pursue broad ecological expansion with interoperability as a priority, while Robinhood focuses on bringing its financial services on-chain, thus determining that the greater customization flexibility of Arbitrum is more suitable.
Upbit and Bithumb share similar goals with Coinbase. Both exchanges need to overcome the limitations of the existing fee-centric model and leverage their large user base to expand into on-chain services to create new revenue sources, for which openness and interoperability are key. Therefore, if Upbit and Bithumb launch their own chains, the most likely choice would be a Public Layer2 based on OP Stack.
Expected scenario 2: KRW stablecoin infrastructure
Another scenario for Upbit and Bithumb launching their own chains is to build dedicated infrastructure around KRW stablecoins.
Upbit's KRW stablecoin trademark, source: KIPRIS
In fact, both exchanges have shown positive trends in the stablecoin market. Upbit and Bithumb have each applied for trademarks related to stablecoins, especially Upbit, which has officially announced plans to enter the KRW stablecoin market in cooperation with Korea's leading easy payment service, Naver Pay. Considering the most likely scenario centered around Upbit, the reality is that Naver Pay issues a KRW-based stablecoin, while Upbit provides the blockchain infrastructure for it. This is because the (Virtual Asset User Protection Act) prohibits exchanges from trading virtual assets issued by themselves or related parties.
Source: Circle
In this case, the core lies in building dedicated infrastructure optimized for stablecoins. Functions such as daily payment and privacy protection can be added to achieve differentiated services, and a structure can be designed for using KRW stablecoins to pay gas fees. This is a model similar to USDC's Arc Network, aiming to construct an ecosystem where all transactions revolve around stablecoins. This structure provides users with a stable cost structure and creates actual demand for KRW stablecoins, laying the foundation for ongoing usage.
However, there are technical limitations. Optimism defaults to using Ethereum as gas fees and does not support customizable gas tokens. Therefore, in this case, a Layer2 based on customizable Arbitrum, or building Layer1 with KRW stablecoins as native tokens may be a more suitable choice.
Expected scenario 3: Strategy leveraging Korea's liquidity characteristics
One strategy that Upbit and Bithumb could try is to leverage Korea's liquidity characteristics. Currently, Korea has significant liquidity, ranking second globally based on fiat currency, but this liquidity remains within the internal systems of exchanges.
Source: LlamaRisk
Exchanges could issue wrapped tokens like upBTC and bbBTC based on custodial assets. Coinbase's cbBTC is a representative case. Although these wrapped tokens can also be used on other chains, if exchanges provide conveniences like one-click integration within their applications, users are unlikely to migrate externally and will likely remain on the chain built by the exchange. In this situation, project teams seeking to leverage rich liquidity would have reasons to choose that chain, activating the ecosystem and ensuring revenue based on the infrastructure for the exchange. Furthermore, it is expected that they could also utilize wrapped tokens to attempt additional business models like lending.
Expected scenario 4: Entering the tokenization market for unlisted stocks (Pre-IPO)
Another strategy that Upbit and Bithumb could choose is to enter the tokenization market for unlisted stocks. Upbit's operator, Dunamu, has long operated a trading platform for unlisted stocks through Securities Plus, accumulating experience, but this ultimately only remains a P2P trading model connecting buyers and sellers. Structural limitations exist, such as low transaction completion rates and limited liquidity.
Source: Ustockplus
If unlisted stocks are tokenized based on their own chains, the situation would be different. Tokenized stocks could be traded in real-time through liquidity pools or market makers, with ownership transfers automated and transparently handled via smart contracts. Beyond mere trading efficiency improvements, on-chain features such as automatic dividends, conditional trading, and programmable shareholder rights could enable the design of financial products that existing securities systems cannot achieve.
Recently, it is also noteworthy that Naver is advancing the acquisition of Dunamu's non-listed shares of Securities Plus. If Upbit provides the chain infrastructure, and Naver is responsible for platform operations and physical stock management, this could become a realistic division of labor in the regulatory environment. That is, entering the tokenization market by reducing institutional risks through the separation of trading infrastructure and securities management roles to compensate for the limitations of existing services.
Summary
We have explored various scenarios for Upbit and Bithumb launching their own blockchains. However, the reality is that they face numerous challenges. The biggest obstacle is regulation. Korea's proactive regulatory model makes it extremely difficult to introduce services that are not explicitly defined by law. Both exchanges have been designated as group enterprises, further intensifying the regulatory burden, and the lack of Web3-native leaders like Jesse Pollak from Base is also seen as a limiting factor. Additionally, the technical complexity and the minimal possibility of realizing independent blockchains in the short term are significant hurdles.
Nevertheless, they still have significant room for experimentation. Domestic trading volumes have been declining since peaking in 2021, and global competition is intensifying. The existing fee model has clear growth limitations, and previous attempts at revenue diversification have not yielded significant results. Sustained growth requires new drivers, and bold attempts like building their own blockchains might be one such avenue. This could be the most realistic business diversification strategy, fully utilizing each exchange's competitive advantages, including user base and liquidity.
