Challenges Facing Crypto Exchanges & How to Solve Them
Following the advent of Bitcoin in 2009, the problem of exchanging the cryptocurrency naturally arose. In the early days, the purchase and sale of bitcoins took place mainly on forums and IRC channels, but then in March 2010 the first crypto exchange appeared where bitcoin was tradable against the dollar.
- Crypto Exchange Challenges
- Lack of Liquidity
- The Need to Integrate New Blockchains and the Custody Issue
- The Problem of Interaction with Fiat Money
- Existing Solutions to these Problems
- Solutions to the Challenges Faced by Crypto Exchanges
- Geo Protocol: The Basis for the Internet of Value
- A Matter of Time
In 2011, the first altcoin appeared, followed by many other altcoins (today there are about 2,000 of them and the number is growing). This further heightened the issue of trading cryptocurrencies, since there was an ever-increasing need to exchange these assets for one another.
Crypto Exchange Challenges
Today, hundreds of cryptocurrency exchanges are already operating around the world and their number is constantly increasing. However, many if not most of them face a number of problems. Let’s consider the main ones.
Lack of Liquidity
According to 36% of traders, this is one of the main problems faced by exchanges, especially new and smaller platforms. The healthy functioning of the market requires the presence of a sufficient number of both buyers and sellers who are ready to make commercial transactions for fair amounts.
There are several reasons why this problem occurs. One of them is the attractiveness of the exchange itself to potential traders, which includes many factors, ranging from commission level and withdrawal cost to security issues, as well as quality of user interface.
Another determining factor here is the jurisdiction in which the exchange is located, which affects the degree of regulation the relevant state regulatory bodies apply to it. The availability of the exchange to residents of certain countries and regions is also a contributor.
Another important factor affecting liquidity is the set of crypto assets and trading pairs that are available on a particular exchange.
It is no secret that some cryptocurrencies are more popular among users and traders than others. But this does not mean there is no place on exchanges for more exotic assets.
Sometimes the very presence or absence of some of these can be a decisive factor for a trader or investor when choosing an exchange.
On the other hand, not all trading pairs can generate sufficient liquidity and trading volumes.
This means that the exchanges have to constantly carry out market analysis and prospect assessment of its coins and token selection to decide what new coins should be included in the listing, and which can be delisted in order to increase the relevancy of the exchange itself.
The Need to Integrate New Blockchains and the Custody Issue
This problem here is partly related to the previous one of liquidity. In order to list a new coin, an exchange often has to integrate its system with the new coin’s blockchain: raise a node, open wallets, create an infrastructure for storing clients’ crypto assets, create a deposit/withdrawal system for the coin etc.
In addition, the exchange in this case acts as a custodian of someone else’s assets, which can have various consequences, from hacker attacks to losing access to customers’ funds.
This happened recently with the Canadian QuadrigaCX exchange, which lost access to $190 million due to the death of its founder, which in turn led to lawsuits and investigations against the exchange.
The Problem of Interaction with Fiat Money
Another problem for stock exchanges is interaction with fiat money. Often, even large stock exchanges cannot afford to provide direct deposit and withdrawal of fiat. This is primarily due to the regulatory restrictions of most jurisdictions, as well as the above mentioned custodian problem.
Thus, traders are forced to buy cryptocurrency somewhere else (using specialized exchangers or otherwise), and then bring it to an exchange. The same scheme has to be used for the withdrawal of cryptocurrency to fiat.
In addition, the lack of an adequate opportunity to deposit fiat, and most importantly, to obtain guarantees of its safety, severely limits the entry of large institutionalized investors into the crypto market.
All this inevitably imposes certain restrictions not only on the growth of the exchanges’ business, but also on the adoption of cryptocurrencies by the mainstream market as a whole, hence on the growth of the capitalization of the entire crypto sector.
Existing Solutions to these Problems
Of course, there is a number of solutions or rather attempts to solve the aforementioned problems.
To solve a liquidity problem, for example, exchanges could attract market makers and liquidity providers, resort to services of liquidity aggregator services, or projects like Omega One or Liquid Network from Blockstream, which are trying to connect different sources of liquidity.
The problem of integrating new blockchains is solved by each exchange individually and each time a new, which usually takes up enough time and money.
The associated custodian problem is more difficult to solve. More precisely, it is not so much solved as each exchange is forced to assume the risks of keeping clients’ funds and assets, as well as the costs of providing them, including developing and building an effective and reliable security system, which, while doing so, should not unduly interfere with the usability of basic services.
The problem of interaction with fiat money can also be partially solved, but much less often. This is confirmed by the fact that only a small part of the exchanges have this functionality.
And at the same time, the process of deposit-withdrawal of fiat currencies from these is associated with considerable overregulation, high commissions, is time-consuming, and has other restrictions.
Solutions to the Challenges Faced by Crypto Exchanges
All existing solutions are not universal. Each exchange has to solve the above mentioned problems from scratch every time and all by itself. Moreover, the results are not always effective.
Attempts to provide some kind of local solution (like Omega One) are limited by the fact that such solutions are also to some extent closed in themselves and not connected with the others.
In the case of Liquid Network, we also have a blockchain-based solution, and today it is limited to actually using only one real asset – BTC (however, they also state that other assets, including cryptocurrency and fiat, can be tokenized in their system).
But all these solutions are centralized, with a central entry point for everyone, and thus all participants depend on it, are forced to trust it, and so on.
But is there a universal solution that would effectively solve all the aforementioned problems? And could such an offering do so for the maximum number of interested parties?
Imagine that all (or at least most) exchanges were combined into a single network, which also included liquidity aggregators, OTC platforms, market makers, cryptocurrency exchangers and crypto gates, banking institutions, payment systems, crypto wallets, as well as blockchains themselves.
Moreover, they would enter not through a single central hub uniting all, but the same way as local area networks enter a single global decentralized internet, where everyone is equal and at the same time has access to all resources located in it.
Such an “Internet of Value” would have many advantages for exchanges (as well as for other participants), namely:
- Would serve as an accessible global liquidity pool;
- Would eliminate the need to integrate new blockchains, since they would already be integrated into it by default;
- Would provide easier interaction with fiat money, since exchangers, crypto gates, payment systems, and banking institutions would also be part of the global network.
In other words, such an Internet of Value would essentially solve the main problems of cryptocurrency exchanges, which were mentioned above. In addition, it would also provide a number of other advantages, both to the exchange itself and to its clients.
In fact, we are talking about networked liquidity – seamless flow of orders through a network of interconnected trading platforms.
Such a universal global network would provide a network effect for all its participants, i.e. the more participants that joined it, the greater benefit each of them will get. For market makers and trading platforms, this means an increase in the number of commercial opportunities, and for end-users – better prices and more choice.
In order for such a network (the Internet of Value) to become possible, a technology is needed that can allow for the simple and cheap integration of any participant, to be as decentralized and open as possible.
And such a technology already exists.
Geo Protocol: The Basis for the Internet of Value
GEO is a versatile, easily scalable, open-source protocol-level solution for creating a global value transfer network. For the Internet of Value, GEO Protocol is what TCP/IP is for the ordinary Internet of Information.
Being blockchain-agnostic and not based on a common distributed registry (off-chain), this solution allows one to easily and cheaply interconnect various local services and value exchange networks, including both traditional (banks, payment systems, stock exchanges, etc), and blockchain-based (cryptocurrencies and any associated networks and services).
GEO Protocol makes the integration of exchanges, market makers, and traders into a global network possible, providing the ability for them to interact with each other easily and cost effectively.
A Network with Shared Global Liquidity
Opportunity to interact with other participants over the network improving trade execution.
No need for integrating full nodes or wallets of new blockchains – an exchange receives access to any blockchain asset available in the GEO network.
With Financial Institutions and Custodian Services available in the network, an ability exists to interact with multiple fiat currencies.
Fast and secure multi-asset transactions make it possible to perform arbitrage with other exchanges connected to the GEO network.
For exchanges, the advantages of implementing GEO Protocol and connecting them to the GEO network, besides those listed above, are the following:
- Eliminating the need to look for and negotiate with institutionalized partners;
- Providing additional revenue streams and attracting new users;
- Reduction of material and time costs.
For traders of such exchanges, their integration into the GEO network has the following advantages:
- Access to new markets/trading pairs (in fact, grants access to all available ones);
- Easier arbitration;
- Possibility of easy fiat currency deposit and withdrawal;
- Commission optimization;
- Greater convenience and overall increase in transaction processing speed.
A Matter of Time
The emergence of crypto exchanges was an important milestone in the evolution of the cryptocurrency market, and also opened up new opportunities for traders and investors. However, crypto exchanges are still at an early stage of their development, struggling with many problems.
The answer to these and other challenges could be the emergence of the Internet of Value, whose goal is to interconnect various networks for creating, storing, transferring and exchanging value into a single global network like the Internet of Information, which we all already know well.
By joining such a global network, operators of crypto exchanges will be able not only to reduce their expenses and gain new revenue streams, but also to grant themselves and their customers access to a global liquidity pool.
Such a “network of value networks” has not been fully established yet, but its formation is started, and we can now see its future outlines. This is possible thanks to technologies such as GEO Protocol.
DisclaimerThe writer’s views are expressed as a personal opinion and are for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
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