Carrying on with the series of common digital asset exchange issues and how to resolve them (see here the issue of scalability), we now turn our attention onto a key subject: digital asset exchange liquidity. 

Brief review: types of liquidity

Asset liquidity is usually understood as whether an asset can be readily sold and converted into a base asset without causing a material impact on the asset price [1]. This is different from market liquidity, a concept that takes into account additional factors such as the exchanges an asset is traded on, the heterogeneity of market participants, and so on.

Liquidity is one of the pillars that determines the quality of an exchange; its metrics and analytics can help understand under which conditions the exchanges’ users trade, it helps in assessing market makers and their performance, and it can help understand the success of one exchange over another. 

Volume doesn’t equal  liquidity

There are many metrics that can shed light on liquidity, but there are also some misconceptions. Volume, for example, is a flawed metric of digital asset exchange liquidity for several reasons. Firstly, and though it may serve as a proxy and be correlated with liquidity to a certain degree, it only tracks the amount of assets that change hands. Wash trading practices as well as token issuance may mislead investors into assuming an exchange has deep liquidity, when the reality is that they may be taking shortcuts on their way to attract retail investors. Exchanges have incentives to synthetically produce high volume transactions to appear liquid, but may actually have wide bid-ask spreads and shallow organic order-books. It is not easy spotting these exchanges either; case in point, according to the Blockchain Transparency Institute (BTI), aggregate exchange reported volumes in 2019 amounted to US$ +50 billion, a number that is reduced to US$ 4-5 billion after accounting for wash trading, a practice that over 90% demonstrated to perform. Since then “only 31% of the CoinMarketCap top 25 is being wash traded compared to over 90% just 1 year ago, a 3x improvement after a new rankings system has been implemented” [2]. Additionally, Bitwise research showed that only 5 out of 10 top exchanges have formal market surveillance tools in place that help detect market manipulations [3]. 

The main players that affect liquidity are institutional market makers. These have been steadily increasing in the digital asset industry since 2018, but they are still a small number compared to what the space needs in order to achieve true liquidity, so creating strong and robust partnerships is paramount for every aspiring exchange. Being able to abide by market makers requirements (such as progressive fees for algorithmic trading) and consistent bid/ask spreads is a necessity and a proxy for liquidity, as well.

How to spot high volume exchanges with bad liquidity?

Similar to BTI, many companies dedicate time and resources to analyze digital asset exchanges’ data feeds to spot wash trading mechanisms, as well as other deceiving practices. This is done with the intention to provide the real volume metric, derived out of suspicious activities. CryptoCompare, for example, developed an Exchange Ranking methodology that utilises a combination of 34 qualitative and quantitative metrics categorised into several balanced buckets. Each exchange grade is obtained from a broad due diligence check using qualitative data, followed by a market quality analysis that uses a combination of order book and transactional data. Bitwise Asset Management research also provided a number of indicators that can suggest suspicious activity and market manipulation [ibid]. 

Your liquidity solution: SCALABLE

As liquidity undoubtedly plays a crucial role in the success of an exchange, those who have access to deep (organic) liquidity will excel over those who don’t, both in the short and long term. Our white label exchange clients connect to the deepest pools in the industry; with an unparalleled heterogeneity of participants and a harmonious blend of experience between traditional and digital assets markets, every user can trade with minimal impact prices regarding its order size. We provide access to up to 10 percent of global spot liquidity across the industry’s deepest books from day one, and the opportunity to choose from over 1,000 trading pairs and 500 digital assets. 

 

 

References

[1] “The Impact of Liquidity for a Successful Exchange • Scalable.” Resources, Scalable Solutions, 30 Sept. 2020, scalablesolutions.io/es/blog-es/the-impact-of-liquidity-for-a-successful-exchange/. 

[2] 2020 Market Data Integrity Report. BTI Verified, 8 Sept. 2020, btiverified.com/crypto-market-data-report-2020/.

[3] “Bitwise Asset Management: Presentation to the U.S. Securities and Exchange Commission.” Bitwise Asset Management, Inc., 20 Mar. 2019. 

Sources

“Independent Initiatives That Analyze Crypto Exchanges Liquidity and Quality.” Empirica, 16 Dec. 2020, empirica.io/blog/independent-initiatives-that-analyze-crypto-exchanges-liquidity-and-quality/. 

With over 900 online digital asset exchanges out there [1], the conundrum of which one to select, either for trading activities or as an example of a great exchange, arises. Security, liquidity, scalability, user interface, and many other subjects must be taken into account in order to be as successful as one can be. Naturally, every exchange out there has an inherent bias to present itself as the most accomplished, but we know better than to trust blindly. Because of its complexity, the digital asset space will not simply point to the best direction, but it requires a do-your-own-research (DYOR) mentality. At Scalable we want to help every new (and established) actor carry out this process in the most efficient and comprehensive manner.

This month we will be developing a series of articles about exchanges, analyzing the challenges that current exchanges are facing and how Scalable can help you navigate through them [2]. 

The first one will be focused on digital asset exchange scalability issues, due to their inherent limitations; many are simply not built to scale. 

Blockchain and scalability

While decentralization consensus mechanisms offer some critical benefits such as fault tolerance, a strong guarantee of security, political neutrality, and authenticity, it comes at the cost of scalability. The number of transactions any given blockchain can process can never exceed that of a single node that is participating in the network. 

Because digital asset exchanges are composed of a variety of technical, business, support, and other aspects, it would be a fallacy to pinpoint the scalability issue to just one. Most alternate coins take pride in having low commissions, even though they are not yet of scale, but face the same inherent obstacles bitcoin is facing.

Why do exchanges need to scale?

As the digital asset space gains adoption in an exponential manner, exchanges that aim to be industry flagships must be able to cater for an increasing number of users. Experiencing scalability issues such as outages [3], trading, sending, and receiving along with API connectivity issues showcase the difficulties born out of unpreparedness. Thus, minimizing the operational constraints caused by magnified activity must be a major concern for exchanges. Consequently, it should be noted that, if not taken seriously, scalability issues will not only impact unrealized potential profits, but can actually unfold on serious *actual* losses through diminishing clients, security threats, and more.

Our solution for scalability obstacles

Unmatched speed. Our high-octane matching engine is one of the fastest, taking under 500 microseconds from receiving the notification of an incoming price movement to processing the order (tick-to-trade) for colocated traders [3]. 

Connectivity – Information. Having fast access to any needed information smoothens activity and mitigates scalability issues. Our platform features multiple, full-featured trading APIs across key trading functions, providing familiar access points for different trading styles such as FIX 4.4, FIX 5.0, WS, REST and Binary.

Support team. Even though some issues regarding scalability are recurrent, sometimes new ones arise, which require a constant, dedicated and capable support team to handle them. We provide 24x7x365 technical & business support.

Adaptability. As your exchange grows and your users demand more improvements and features, having compatibility with third-party services and distributed ledger products will prove to be more of a necessity than an extra. We already have a range of industry leading partners in the space and can add more third-party services according to client needs.

No outages. Our resilient, fault-tolerant architecture supports round-the-clock trading; a true 24/7 trading venue. Redundancy is hardwired into the system so our uptime exceeds 99.99 per cent. Our Software-as-a-Service exchange SLA’s offer proven and time-tested stability [4].

Conclusion

We are one of the few companies in the field that provide engines for multiple major digital asset exchanges. Among the venues partnered with us, such as Bitcoin.com, are in CoinMarketCap’s top 50 exchanges by volume.

Stay tuned as we’ll soon delve into other constraints that exchanges often face, such as liquidity, regulation, security, and usability, among others. 

Request a demo to see the technology for yourself.

 

 

 

 

 

 

References

[1] “List of All Crypto Exchanges: 1000+ Exchanges Listed.” Blockspot.io, 2020, blockspot.io/exchange/. Accessed January 9th, 2021.

[2] For an introduction to what is a white-label exchange, take a look at our previous blog entry: 

“What Is a White Label Exchange?” Resources, Scalable Solutions, 7 Jan. 2021, scalablesolutions.io/news/what-is-a-white-label-exchange/. 

[3] Wilson, Tom. Crypto Exchange Coinbase Hit by Connection, Latency Problems as Bitcoin Plummets. Thomson Reuters, 26 Nov. 2020, www.reuters.com/article/us-crypto-currencies-idUSKBN2861Y1. 

[4] For more information on outages and how they impact the performance and trustworthiness of an exchange, please visit our previous entry “The other side of Bitcoin’s ATH: Outages”.

Typical uses of tokenization

In October 2020 we introduced the concept of tokenization, the “process of issuing a blockchain digital tradable token that represents ownership rights in a real asset,” creating a bridge between real-world assets and their trading, storage and transfer in a digital world [1]. 

The asset classes that have the most to gain from tokenization are those characterized by highly complex inefficient processes, high market capitalization, low speed and high costs (such as real estate, art, etc.). Nevertheless, that does not mean that other asset classes can’t take advantage of the technology. With that being said, let’s talk about tokenizing equity.

Tokenized equity refers to the creation and issuance of digital tokens which represent equity shares in a corporation or organization. The biggest difference between conventional shares and this type of token is the way of recording the transactions in a decentralized, digitized infrastructure.

Why tokenize stocks?

Substantial benefits can be reaped from blockchain technology, and more specifically from tokenization [1]. Although equity can be categorized as having the most efficient processes within the traditional financial ecosystem, it can still take advantage of tokenization and what it has to offer. Take the traditional method for raising capital for example. A long list of regulatory requirements like book maintenance, adherence to exchanges rules, constant disclosure of financial, accounting, tax, and other business information must be met.

Tokenization benefits can be categorized into two main types. The “general” and the “particular” ones. General benefits are derived from the blockchain itself, such as immutability and transparency, accessibility, efficiency, decentralization, etc. In the case of equity, several particular benefits can be found:

• Among almost every aspect of issuing equity, dividend repayment can be automated and distributed among holders in a much faster and cost-efficient way.

• Because of its inherent decentralized characteristic, blockchain issued tokens don’t have time limitations on trading, so there would be no more “normal trading hours” defined by traditional exchanges, but 24/7 trading instead. The consequences of this are still unclear, given that liquidity can vary depending on time zones, but it may provide a smoother price movement and lower volatility.

• Similarly, there is no geographical limitation. A higher democratization of access can be derived from assets traded seamlessly throughout the world, provided each actor conducts due KYC/AML processes. Additionally, a higher access will be derived from tokenized private companies (SME), previously restricted to qualified investors and private equity companies.

• Tokenized different classes (Participation % dividends rights certificates, registered shares, etc.)

• Improved efficiency 
  • Built in governance. Custom rules like free or restricted transferability, lock-up & vesting periods can be coded into the equity tokens.
  • Remote interaction with shareholders can be established to send them corporate updates, organize votings and manage dividend transactions. 
  • Fewer intermediaries (like brokers, underwriting companies and others) result in lower fees for both the companies raising funds as well as for token (share) buyers.
  • Similarly, lack of need on transfer, clearing & settlement (among others) processes. 

• Liquidity. Born out of many of the previous points, deeper liquidity is a main benefit gained from tokenizing stocks. Having the capacity of tapping onto large secondary markets instead of finding private buyers, having unrestricted time and geographic access, and improved efficiency in the processes make an immense difference in the stock market.

 

A note on custody: Because tokenized stocks can so far be bought, sold and traded only on exchanges, you will not be able to withdraw to other exchanges or more secure, non-custodial wallets. This can be a problem if a hacker gets a hold of the exchange’s hot wallet tokens.

A note on trading: Trading tokenized stocks does not imply one can circumvent all the KYC procedures that today’s investors have to pass in traditional markets. All users who trade tokenized stocks must also pass through KYC and compliance. Until a certain level is attained (“KYC 2” in FTX, for example), you won’t be allowed to trade these assets.  Similarly, you cannot trade tokenized stocks from any of the banned jurisdictions.

Regulation and current tokenized equity

Equity tokenization is not necessarily new, but it certainly is not mainstream yet. Only a few exchanges have a handful of tokenized stocks available for trading. Part of the reason could be that equity tokens should have the same treatment as its underlying stock (a security), and many countries still don’t have established regulation on digital asset securities [2][3]. 

We consider this small cog in the wheel as a step in the inevitable mass adoption of tokenization in the stock market. Even regarded as such by the US SEC Chairman, who believes it will be possible for all stocks to be tokenized in the future [4]. 

SCALABLE Tokenization

In SCALABLE you can find a partner that can tokenize basically anything in a short time frame, with industry leading technology, and a team to tailor to your needs and support you through every step of the way. If you’re particularly interested in tokenizing equity, get in touch with us today. 

 

 

 

 

 

References

[1] “DeFi Apps: Asset Tokenization.” Resources, Scalable Solutions, 28 Oct. 2020, scalablesolutions.io/news/defi-apps-asset-tokenization/. 

[2] “SIX’s Digital Stock Exchange Planning Tokenized Versions of Nestle and Novartis.” Ledger Insights, 12 Aug. 2019, www.ledgerinsights.com/six-digital-stock-exchange-tokenized-nestle-novartis/.

[3] Stoner, Joshua. “Tokenized Stocks from Apple, Tesla, and Amazon Now Available through Bittrex Global.” Securities.io, 8 Dec. 2020, www.securities.io/tokenized-stocks-from-apple-tesla-and-amazon-now-available-through-bittrex-global/. 

[4] Riseshine, Judith. “SEC Chairman Predicts Blockchain Is the Future for All Stocks.” Market Realist, 5 Oct. 2020, marketrealist.com/p/sec-to-allow-tokenization-of-stocks/. 

Sources

Roth, J., Schär, F., & Schöpfer, A. (2019). The Tokenization of assets: using blockchains for equity crowdfunding. Available at SSRN 3443382.

Entering the digital asset world can be an exciting but intimidating journey. There is a lot of information and seemingly complex subjects that need to be grasped in order to avoid making certain mistakes. With all the stories going around about investors losing millions as they misplace keys or get locked out of their wallets, we decided to share the 5 most common mistakes in handling your cryptocurrency wallet. These have been selected based on their significance and how often the mistakes are encountered. 

1. Keys, keys, keys. Nowadays, it seems that the word keys is more used than “crypto” itself in the digital assets world. This is both because of its importance and its relative complexity. Far from being as intuitive and easy-to-use as a bank account, cryptocurrency wallets require a degree of research and understanding that can easily dissuade newcomers from entering the space. Losing access to funds or the funds themselves (due to hacking) are the most usual consequences of not storing your private keys (non-custodial wallet seed phrase) or your password (custodial) correctly [1]. Currently, over 3.7 million Bitcoin (out of the 18.5 million already minted) are lost, burned, or inaccessible. In the latest of several cases, a programmer lost his keys (and access) to over 7,000 Bitcoin, worth approximately US$ 220 million [2][3]. While you may not choose to go as far as the Winklevoss brothers did about storing their key, there are measures you can take to ensure that your investment is stored safely. Keeping several hard copies of seed phrases and/or passwords secure, as well as not sharing them with anyone (yes, we mean anyone), and limiting the exposure to hot wallets are good benchmark practices for the industry.

2. Storing cryptocurrency in custodial wallets. Despite having a strong, secured password for your custodial wallet, you should know that the displayed funds are actually in possession of the wallet provider all mixed together with other funds. Because of this, they may still be hacked and have nothing to do with your security measures. Having at least one non-custodial wallet for the safekeeping of funds that are not intended to be traded can be what separates you from those who end up losing everything.

3. Wrong transaction input. Just as immutability is one of blockchain’s most revolutionary benefits, it also means that errors are unforgivable. Not triple checking the inputs in a transaction can result in lost funds forever. Recipient’s address, coin/token and blockchain, and transactions’ gas limit and gas price (if decided to be customized) are inputs that can’t be under verified. Not checking details can have you paying a US$ 9,000 transaction fee for a US$ 120 transaction, or even US$ 47,000 fee for a US$ 194 transaction! [4][5]

4. Failing to understand the blockchain trilemma: As in many other aspects, there is a tradeoff in blockchain, and, by association, on the applications built upon it. Industry actors tend to agree that usually blockchains can maximize two out of three main characteristics (scalability, security and decentralization), and understanding the degree, risks and benefits of each one can help avoid unnecessary struggles. Assuming every blockchain has the same security would be a fallacy, and a costly one; while scalability focuses on the upside (how much the network can grow and sustain itself as it does), security focuses on preventing the downside. Therefore, deciding to transact on a blockchain because of its relative speed but that may have security breaches can ultimately defeat its purpose [6]. 

5. Other security considerations: Other not-so-obvious errors include using public Wi-Fi networks, falling for crypto scams, utilizing wallets with lots of functionalities (built in exchanges, staking, etc.) but with low security, among others. The reality is that you can never be too careful when it comes to keeping your wallet, and investments, safe. 

As a life concept, we always advocate for diversification. Diversification in the wallets and exchanges we use, on the type of assets we hold, and on the teams we trust with our funds [7]. Doing your own research on each participant you interact with (exchanges, wallets, etc.) can -and will- make the difference. As users and investors of digital asset wallets, you can take certain precautions in order to avoid the mistakes outlined above, but you cannot control everything.

In the same way, exchange and wallet operators have the responsibility to provide a safe place to transact, invest and store digital assets. Scalable and Lumi take this responsibility very seriously and are dedicated to providing the technology needed for secure, user-friendly white label wallets, without compromises. If you are looking for a strong team to help build a white label wallet, or are a user who thinks their wallet provider could use an upgrade, point them our way here. 

 

 

 

References

[1] For more information on custodial and non-custodial wallets, see our previous article:

“Custodial v Non-Custodial Wallets.” Resources, Scalable Solutions, 9 Nov. 2020, scalablesolutions.io/news/custodial-v-non-custodial-wallets/. 

[2] Phillips, Daniel. Lost Bitcoin: 3.7 Million Bitcoin Are Probably Gone Forever. Decrypt, 3 Jan. 2021, decrypt.co/37171/lost-bitcoin-3-7-million-bitcoin-are-probably-gone-forever. 

[3] Popper, Nathaniel. Lost Passwords Lock Millionaires Out of Their Bitcoin Fortunes. The New York Times, 12 Jan. 2021, www.nytimes.com/2021/01/12/technology/bitcoin-passwords-wallets-fortunes.html. 

[4] Godbole, Omkar. Someone Just Paid a $9,000 Fee for a $120 DeFi Transaction. CoinDesk, 5 Nov. 2020, www.coindesk.com/someone-just-paid-a-9000-fee-for-a-120-defi-transaction. 

[5] Gottsegen, Will. Someone Just Made a $47,000 Mistake With Bitcoin. Decrypt, 8 Dec. 2020, decrypt.co/48730/bitcoin-transaction-mistake-47k. 

[6] CertiK. “The Blockchain Trilemma: Decentralized, Scalable, and Secure?” Medium, CertiK, 4 Oct. 2019, medium.com/certik/the-blockchain-trilemma-decentralized-scalable-and-secure-e9d8c41a87b3. 

[7] Take Ripple’s team for instance, recently charged by the United States SEC for fraudulent actions:

“SEC Charges Ripple and Two Executives with Conducting $1.3 Billion Unregistered Securities Offering.” Sec.gov, 22 Dec. 2020, www.sec.gov/news/press-release/2020-338. 

Sources

iB. “How to Keep Your Cryptocurrency Safe: 10 Common Mistakes to Avoid.” Blocks Decoded, 18 June 2020, blocksdecoded.com/cryptocurrency-mistakes/. 

Orland, Richard. “6 Mistakes To Avoid When Sending Bitcoins from One Wallet To Another.” Opptrends, 7 Dec. 2020, www.opptrends.com/sending-bitcoins-from-one-wallet-to-another/. 

February 2021. Nearly three years after launching Gleec Coin, a digital currency created for real-world use to purchase services or products through a dedicated ecosystem, the Gleec platform is taking it one step further by introducing Gleec BTC, a digital asset exchange.

Utilizing Scalable Solutions’ white label software, Gleec BTC will profit from deep liquidity, battle-tested security and a modular approach to technology that will enable them to easily scale as needed. 

Daniel Dimitrov, CEO and co-founder of Gleec, commented:

 

“After listing Gleec Coin on exchanges that run on Scalable Solutions’ infrastructure and starting to actively trade on them, we realized the potential of the underlying exchange technology. We then decided to replace our existing exchange infrastructure for Scalable’s in order to provide our wide user base with the best trading experience in the market.”

 

Scalable Solutions, founded by Mark Berger, has a team of pioneers with decades of experience in both traditional financial markets and blockchain technology. Scalables’ turnkey solution has helped exchanges launch and grow to new heights by providing an industry-leading trading engine, a high number of transactions per second, the highest standards of security and a dedicated customer service team. 

Licensed in Estonia by the Agency of Economic Activities, Gleec BTC customers will be able to trade their Gleec Coin on the platform, as well as the trading pairs GLEEC/BTC, GLEEC/EUR and BTC/EUR, with the outlook of adding more in the future. The digital assets can also be easily accessed through a user-friendly mobile application, regardless of location. The app is ready to be downloaded, and the platform should be available to trade on Google’s Play and on the iOS App Store. 

Mark Berger of Scalable Solutions shared:

“We are looking forward to the full launch of Gleec BTC and working together to provide their clients with a seamless trading experience. It’s exciting to see the digital asset exchange industry grow, especially with providers, like Gleec, who are offering a wide range of services, from payment processing in crypto to Bitcoin ATMs, as well as allowing clients to easily access euro-to-BTC trading through their euro wallet.”

 

 

About Gleec BTC

Gleec BTC is a reliable exchange where you can safely buy, sell, trade and store your currencies. The exchange was designed to ensure great transparency, guaranteed security and easy traceability. The team is well-versed in this area and is always working to make sure that the sophisticated network runs smoothly. Gleec’s aim has always been to keep the user experience simple and to prioritize privacy, security and user control. Every step of the customer’s journey in the app ecosystem has been engineered with user experience as the first thing in mind. 

Along with the new exchange software, Gleec is also improving its range of products to result in a gain of utility for crypto. Gleec Coin, the exchange’s native currency, is expanding its market by listing also in other leading exchanges, such as Bittrex and Bithumb. Later this year, a prepaid Visa Card will be available for those who want to top-up their cards with Gleec Coin and Bitcoin (BTC). We are positive that the growth of Gleec’s platform will benefit the cryptocurrency community as a whole and increase the speed of mass adoption.

About Scalable Solutions AG

Scalable Solutions offers white-label technology to launch your own professional digital asset exchange and blockchain infrastructure to tokenize any asset and get everything running quickly — without complications.

With a built-in deep liquidity pool, battle-tested digital asset security through Scalable Vault technology, and 24/7 support from our Customer Success team, we ensure robust performance at all times.