Opinion | Why the Cryptocurrency Exchange Model Is Prime for Disruption

Ever since the discovery of blockchain technology, we’ve heard a lot about inefficient systems that it can fix. From the internet to advertising, healthcare, the voting system, and the supply chain; the list of things that aren’t working optimally is long and laden with overpromises. Blockchain is not a panacea for all the world’s ills, after all.

However, we’ve finally been gifted a revolutionary technology that allows for peer-to-peer transactions with no intermediaries, and the first thing we do is add intermediaries ourselves in the form of cryptocurrency exchanges. Reinserting an unnecessary middleman to pay commissions to. It seems it’s human nature to be resistant to change.

The Need for Cryptocurrency Exchanges

Of course, the very valid argument remains that there has been and perhaps will always be a strong use case for exchanges like Coinbase, Gemini, Kraken, or Binance.

Not only do they help to onboard new cryptocurrency investors and traders in a more user-friendly environment, but as we’ve seen from dApp statistics, decentralized exchanges simply aren’t there yet. IDEX regularly has under 1,000 users, for example, suffering from low liquidity, high latency, and a myriad of other issues.

So, while there may indeed be a place for middleman exchanges that charge less than a bank, get more fiat on-ramp, and onboard people to crypto, we still need cryptocurrency exchanges. What we don’t need is fake trading volume or every exchange using the same centuries-old commission-fee charging model.

The Commission-Fee Model Is Ready to Be Disrupted

It’s high time the industry looked into alternatives that stop preventing everyday retail traders from pursuing short-term trading and high-frequency, low profit margin strategies. If traders have to shell out part of their profits to the exchange in the form of commissions, their daily profit accumulations are eaten into.

Worse than that, the exchange becomes less liquid each time it siphons liquidity out of the pool in the form of commission fees.

The commission fee model has been in place for hundreds of years. Once again, we have a revolutionary technology that’s only now testing the boundaries of what we can do–and a centuries-old model with no thinking outside of the box.

OK, so some exchanges offer incentives for holding their token, or discounts on trading fees, but is that really keeping pace with such innovation? Why can’t we remove the commission fees entirely? What about trying a new approach that aligns the exchange’s interest with its traders and leads to everyone winning and not just the house?

Removing the Commissions

Arguably the most essential element of an exchange is liquidity. Yet, exchange after exchange willfully reduces its liquidity pool by charging fees. This is against the interests of the exchange’s traders as it doesn’t lend itself to highly liquid markets with tight bid-ask spreads.

It creates an “us versus them” situation and means that the house always wins–on every single trade. The model is unfair and needs to be changed.

Of course, the first question people ask is, if you remove the commissions, how do you make any money? Or, they automatically assume that the commissions are disguised in the form of other services, hidden costs, or higher than market prices.

But, it doesn’t have to be that way. When Ethereum provided the chance for companies to create their own tokens, it allowed them to create a trading ecosystem that doesn’t need to charge commissions on trades. All trading can be done in their own native token.

Account balances, profits and losses are carried out and denominated in the exchange’s native token. They can cover the operational costs of running the exchange by minting a small number of these tokens each year.

It’s an inflationary tokenomics model doesn’t come without a cost. There is the potential of a temporary drop in token price as new tokens are minted. However, if the exchange is liquid enough and attracting more and more traders with zero commission fees, that cost is offset by rising demand for the platform.

Since traders need to purchase the native token in order to trade on their favorite markets, this creates a constant demand for the token which counteracts the inflationary pressure created by minting new tokens.

Moreover, depending on how an exchange is designed, how and when to mint the tokens can be decided on and voted by community members. So, the people who will be affected by the slight inflationary effect on the price have control over it.

The Takeaway

Commission-free trading isn’t about trading being completely free, there has to be a cost somewhere. If everything were free, it would be impossible to sustain a functioning exchange. However, the cost is proportionately spread across all exchange users instead of penalizing the most active traders who, by definition, provide the most value to the exchange. This encourages traders to pursue more active trading strategies, creating liquidity that attracts more traders.

It’s a far fairer model and it aligns the exchange’s interests with its traders. They both have a vested interest in seeing the price of the token rise and keeping liquidity in the pool. The current cryptocurrency exchange model is ripe for disruption and once traders understand that there is a better way, we’ll start to see a paradigm shift.

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