Cryptocurrencies exchanges are the widest platform to buy and sell coins and although exchanges constantly evolve and improve, there are challenges ahead and problems to solve.
At the moment, crypto exchanges are the key entry point for new and existing users. If we want to trade, we mostly rely on centralized exchanges. However, more and more decentralized variants start to pop up — many of them using atomic swap technology. Waves-NG consensus protocol is as well something to keep an eye on.
Still, we face several big problems that need to be solved. Encrybit, a pro crypto exchange platform aimed at creating meaningful trading solutions for traders who call themselves the ‘People’s Exchange’, has recently performed a survey among traders to find the issues traders face nowadays and how exchanges can improve themselves to satisfy both seasoned traders and newcomers.
There are actually several types of exchanges. Most people use centralised exchanges (1.0). It is believed 99% of all crypto trading volume flows through centralized exchanges.
Isn’t this strange behaviour? Most of the traders are in favor of decentralised technology. In addition, the majority of them have heard about the Mt. Gox hack. It’s the most publicised and largest hack to date, with unrecovered Bitcoins totaling 650,000. Another notable hack occurred on the Bitfinex platform more recently (120,000 BTC was stolen).
Crypto exchanges constitute a single point of failure. A decentralised exchange (2.0) is much better protected against hackers. Because data stored on-chain is immutable, it is less vulnerable to theft by hacks.
From the survey, we could understand people choose for centralised exchanges as it’s easier to use and understand (better UX) and a centralised exchange generally offers better liquidity. This brings us to the next problem.
The crypto market is not yet ready to absorb large orders without changing the value of the cryptocurrency. This happens due to the lack of liquidity, compared to traditional financial markets.
The Merkle (March 17, 2018 Guest post) mentions the liquidity problem smaller exchanges experience and how this impacts their functioning; “Apart from the trading activity, for a single exchange, its own unique liquidity is determined by its ability to keep reserves to draw on when running out of coins to sell. Smaller exchanges, with a daily trading volume of around 1k BTC, often face supply-and-demand issues or local price slippage and require the buyer to cover it, together with the gas — transaction cost of around 1–10% above the original price.”
Most traders try to buy-in a specific coin at a profitable price and store it in their wallet until they reach a certain profit level. This waiting game causes the market to be flooded with buy or sell orders when a coin reaches a profitable price, which accounts for the volatility and massive price swings that we see in crypto markets.
Their is no easy fix to this problem. Newly created ICOs promise liquidity to their investors as the investors hope to make money on it. It’s a dangerous promise. Even after getting listed, the coin will suffer from very low liquidity, especially when they are listed on a smaller exchange.
This puts the power into the hands of cryptocurrency exchanges with large liquidity. Exchanges are charging anywhere between $50,000 to $1 million to get tokens listed. Actually, the ones that are getting rich are nor traders, nor investors, but exchanges. It has always been like this. During the Gold Rush, the ones that actually got rich were the merchants who sold shovels and other mining related tools.
Actually, the ones that are getting rich are nor traders, nor investors, but exchanges.
The Encrybit survey reveals traders address trading fees as one of the three biggest issues with crypto exchanges. Many well-known crypto exchanges ask a fee between 0.25% to 3% whereas a decentralised exchange mostly requires no fee or a small fixed fee.
Why we pay fees? An exchange requires maintance and isn’t cheap to operate.
Personally, I hope to see more Hybrid exchanges as they combine the power of both centralised as decentralised exchanges such as fiat integration, decentralized security, user experience, transparency, and lower fixed fees.
According to Pugilist Ventures, “The holy grail for DEX adoption lies in fiat integration. However, this notion is contrary to the decentralized mantra of the blockchain ethos; especially when it involves commercial banks. Fortunately, the rise of various blockchain projects provide an opportunity to pick some a la carte features that may address this problem.”
Learn more about Encrybit, the project behind this survey, at Encrybit.io. They are focused on building the future of exchange: secure, agile, trading-friendliness, and sufficient liquidity. Ask questions in their chat.