Binance is at Stake

Changes in Crypto Exchanges

According to coinmarketcap, there are currently more than 1,500 digital tokens traded in the world. The number of exchanges is even larger, over 10,000. Exchanges are one of the core the most important links of the current blockchain industry. Only when transactions frictionlessly circulate, can blockchain projects achieve a closed loop of incentives and value measurement.

In crypto space, exchanges are the biggest capturers of value. Due to the user’s demand for liquidity, the exchange has a certain degree of network effects, which makes it an aggregator of capital. Based on its aggregated users and capital, it can provide greater liquidity, and more financial services with open financial protocols to stick to users.

At present, centralized exchanges are the main stream. However, they are often faced with various risks: being hacked to cause property damage, or it may be the supervision of self-theft that causes investors to lose their capital.

While decentralized exchanges are not favored by everyone. One reason is that the user operation experience is poor and the speed is slow; the other is high transaction costs and lack of transaction depth. And some mechanisms are outside the traditional financial regulatory system. Improving the regulatory infrastructure as soon as possible may be the top priority of exchanges and the entire cryptocurrency market. What kind of decentralized exchange in the future deserves our attention? It is necessary to consider not only the issue of landing, but also the advantages of decentralized exchanges, and the future trading trend of blockchain assets.

Traditional Financial Shadows in the Crypto World

The crypto market is a new thing born in traditional financial markets, to whom the regulators rely on traditional regulations on financial assets and financial risks when formulating regulatory rules. “Most of the digital currency industry licenses are just some breakthroughs made within the traditional license framework, and then a specific regulatory license applicable to the digital currency industry was formed”, according to a crypto incumbent. From this perspective, the regulatory policy will drive the crypto market closer to traditional finance from the top design.

Not only are the regulatory policies similar, in recent years, the role allocation of cryptocurrency market participants has increasingly shown the influence of traditional finance. In addition to the exchanges that currently hold the majority of the trading market share, professional roles such as professional brokerages, custodians, lending platforms, and dark pools have also made their debut.

However, the product design is where the crypto market borrows the most from traditional finance. Cryptocurrency exchanges “copy” from the traditional finance to play a variety of games such as futures, ETFs, and options. Taking ETFs as an example, MXC borrowed ETF from traditional finance to launch a cryptocurrency leveraged ETF. This is a trading product that achieves a certain multiple of the target daily asset return under the premise of a given target asset. For example, if the asset price increases by 1%, the net value of the corresponding 3x leveraged ETF product will rise or fall 3%. The essence of an investment leveraged ETF is similar to a leveraged purchase of a futures fund. At present, MXC has launched 3 times bullish or bearish leveraged ETFs on mainstream assets including BTC, ETH, BSV, BNB.

Derivative Innovation in Crypto Space

Take FTX as an example. Since founded in April 2019, it has successively launched a variety of new games in the crypto market exchange. From equity tokens to “TRUMP-2020 (TRUMP)”, FTX is trying to improve on the three major issues of existing futures exchanges’ margin, allocation mechanism, and liquidity, and launched innovative leveraged token transactions.

Improvements Would be Made by FTX

Margin

For most futures transactions, the subject matter of the transaction is margin. FTX uses stable currency as a general margin.

It turned out that if you want to trade BTC contracts, you need to deposit BTC margin; if you want to trade ETH contracts, you need to deposit ETH margin; if you want to long ETC / LTC trading pairs, you need to exchange ETC and LTC spot first, and then deposit them separately ETC, LTC margin. This allows users to increase the number of steps to adjust their positions, increase difficulty, and provide a poor experience.

FTX uses stablecoin for settlement, and all contracts use the same universal guaranteed money bag. This makes it quicker for users to calculate and adjust positions, and also facilitates the implementation of cross-currency arbitrage trading strategies.

Allocation mechanism

Most futures exchanges use a “user allocation” mechanism, which is caused by the special nature of the cryptocurrency market. In the traditional futures market, if the user ’s short positions are not settled in time, which further expands the loss and “wearings”, then the brokerage firm will advance the payment first, and the user will then need to make up for the loss. In other words, the user’s maximum loss is likely to exceed the initial margin. In the cryptocurrency market, because there are no national border restrictions on transactions, and naturally there is no concept of a brokerage firm, how to deal with the losses of users who carry positions has always been a difficult problem.

One solution is now commonly used, “the amount of the position is borne by all users, and the platform establishes a certain share of fund maintenance.” From the platform perspective, this is a reasonable and easy solution, but from the user perspective, the profit of the profitable party whenever delivery Will be eroded. The other is to try to avoid the occurrence of positions, which is exactly the idea of ​​FTX. First of all, it is necessary to close some positions in advance to reduce the risk rate before the liquidation account reaches the warning line. Then, when the market fluctuates violently, it will alleviate the overrun effect caused by the accumulation of huge positions. But in fact, this is a solution to the symptoms and not the root cause, because it is equivalent to the user being forced to preset many stop loss orders before the liquidation line. Secondly, the platform needs to strengthen the liquidity level. The solution given by FTX is to introduce Alameda Research as a market maker, and at the same time to take over the positions of the short positions in extreme market conditions. Thirdly, it is the “risk protection fund” mentioned by FTX, which is the same principle as the fund maintenance of the first idea.

Liquidity

FTX introduced Alameda Research to improve liquidity. Excluding factors such as subjective vicious competition or vicious competition among peers, the poor liquidity level is the objective reason for “futures pin”. Because the spot position does not have the concept of a “closeout”, the futures position has the concept of a “closeout” because of the margin system. This makes it possible for futures positions in the wrong direction to be closed one after the other, or even to go through them when the extreme market occurs, which causes the domino effect. For a time, the market does not have as many opponents to digest these losing positions, which promotes the extreme market. Continue to move and eventually form a “pin”.

In addition, FTX performs a weighted average every 5 seconds based on the latest transaction prices of mainstream exchanges in the market (such as Binance, Coinbase, etc.) to calculate the contract index price.

Leveraged Token Trading is the Biggest Highlight

Leverage tokens are ERC20 tokens, which represent specific position directions and leverage multiples in the corresponding contract. Users can add leverage or short positions without the use of margin. There is no concept of “out of stock”, they can trade on spot exchanges, and they can hedge across platforms.

Leverage tokens include both a large currency and a basket of altcoins. At present, FTX’s altcoin index leveraged tokens are divided into SHIT, MID, and ALT. The SHIT index consists of 58 small market value altcoins, the MID consists of 24 mid-market altcoins, and the ALT consists of 9 more mainstream altcoins. Users can buy leveraged tokens from these indices to make long (short) corresponding baskets of altcoins.

According to the position direction and leverage multiples of leveraged tokens, leveraged tokens can be divided into three types: Bull, Hedge, and Bear, which correspond to three times long, one time short, and three times short.

Let’s take a look at some examples. If you think the bull market is coming, and you want to increase your leverage to buy BTC, you only need to buy Bitcoin’s Bull leveraged tokens; you think that the low market value altcoins are going to be extinct, you can buy Shitcoin (SHIT) Bear leveraged tokens; you Afraid that US regulation will affect the price of USDT, and you do n’t want to cash in legal currency due to the large amount of funds or tedious operations, you can buy USDT’s Hedge leveraged tokens.

In this way, the complex leveraged operation is represented by the FTX exchange, and users only need to simply purchase leveraged tokens of different currencies and different classifications to quickly establish a diversified investment portfolio.

Conslusion

In the traditional financial market, the trading volume of derivatives compared to the spot is an order of magnitude spike, while in the cryptocurrency market, investors’ trading habits remain at the spot level. The reason is that cryptocurrencies are still in their early days, and professional and institutional investors have not yet entered the market in batches. But as cryptocurrencies move into the mainstream, there is no doubt that derivatives will become the fastest growing place in the trading field.

Therefore, no matter whether it is a futures contract or a leveraged token product, the idea of FTX is not a problem, but how to implement the strategy is a more difficult issue. Whether the value of the platform currency FTT is too high is another matter. In addition, many “innovative” gameplay of FTX is actually a normal translation of traditional finance. US stocks already have mature leveraged products, and commodities also have mature margin and allocation mechanisms. Therefore, it remains to be seen whether FTX can break through.

However, FTX’s recent operation of decorating multiple corners has caused considerable controversy. Is it reasonable to end the transaction yourself as the founder of the exchange? Does the exchange that integrates liquidity, matching, brokerage and other businesses have too much authority? Fundamentally, people’s concern is whether it is unfair to act as a referee and a player.