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Centralized Crypto Trading: A Mugs Game Whose Time Has Passed!
A significant number of crypto trades happen on centralized crypto exchanges. Governing authorities of such exchanges, like Binance and Coinbase, use the rather dated Order Book trading system to settle trades. They mandate that traders place funds directly under their (the exchange operators’) control, taking away a lot of trading autonomy from those at the center of those transactions – the traders!
If you use an exchange that favors an Order Book system to conduct crypto trades, know that the inefficiencies inherent in such a system typically stack the odds against you. Understanding why that’s so may give crypto traders reason to pause and rethink where they wish to go from here.
Trading Against the OddsCentralized crypto exchanges use a 3rd-party (market maker) that monitors and manages pair trades, and secures the digital assets on behalf of traders using an Order Book. The Order Book trading system is one where the network displays the orders of all market participants, both buyers and sellers. The information tells participants how many units of a crypto someone (Seller) wishes to sell, and at what price; and it also shows how many Coins/Tokens someone else (Buyer) wishes to purchase, and how much they’re willing to pay for them.
According to the Order Book above, if someone wanted to buy 7 Ethereum units, they could purchase them for $11,981.34 – or at a price of $1,711.62 per coin. What are the odds that, if you are the seller, someone (a like-minded buyer?) may come along and place a Buy order that matches your Sell trade – 7 ETH at exactly $1,711.62 per coin, for a total trade value of $11,981.34?
The Order Book trading system is therefore an aspiration that buyers and sellers express about their ideal trade outcomes. Sure, with millions of trades transacted in a day, many of those “aspirations” do come to fruition. However, there’s no guarantee that, once you place your trade on the books, they’ll be executed.
Low Liquidity = Low OpportunitySo, what makes trading on centralized exchanges a mugs game for crypto traders? Well, the primary flaw on such exchanges is liquidity. Because the Order Book is set up to meet the “ideal” – meaning, trades will not happen if a sellers’ price isn’t met by buyers; and they won’t happen if a buyers’ price isn’t met by a seller.
Going back to our hypothetical Order Book, if there’s a buyer that wishes to buy 7 ETH at $1,710.50 per coin, for a total trade value of $11,973.50 ($92.16 less than you’re willing to sell), the Order Book will not settle the trade. If someone came along and bid $1,711.00 per coin, for 7 ETH (just $4.34 shy of your asking price), the trade wouldn’t happen. The order would get stale and die on the books.
With few ideal matches to settle, trades will more often stagnate and die. This leads to less liquidity in the market. And, then again, not all cryptocurrencies are highly liquid by nature. That fact adds to the liquidity crunch when the Order Book “does it’s thing” to automatically match the seller with the buyer.
So, in an ETH/USD trade, if there’s an open sell order in the book to sell (for example) 1 ETH for USD 2,000, that order will not be filled unless there’s a willing buyer for the same number of Ethereum for the exact same dollar value. On that particular day, if Bitcoin (BTC) is where most of the action is, not many traders might give ETH a second glance as a trading idea, which makes ETH less liquid than its competitor BTC.
Centralized cryptocurrency exchanges (CEX), where Order Books cause liquidity issues, don’t help either party to a trade. Neither buyers nor sellers are able to walk away with their trading strategies fulfilled. The result: Markets trade thinly, and that causes underlying instability in the price of digital assets.
So, is there a better alternative to using the centralized crypto exchanges’ Order Book system?
DEX – An Idea Whose Time Has Come!The short answer: Yes!
It’s called the Decentralized Cryptocurrency Exchange (DEX), and it’s part of a rapidly growing new-era financial model called De-centralized Financing (DeFi). Crypto trading protocols like UniMex offer digital asset traders a better alternative to using 3rd-party market makers to broker their trades. Deals within this protocol occur through smart contracts, which essentially eliminate any 3rd-party involvement in settling a trade. This feature not only eradicates barriers to liquidity; but it often reduces the time involved in matching, processing, and settling the trade.
The protocol uses automatic swaps, which means the transaction does not require the services of a broker or middleman. Because the trades happen peer-to-peer, they are more efficient and more effective than the Order Book system used in centralized crypto networks – another important factor that aids liquidity.
To date, cryptocurrency traders have largely had to risk their own capital when trading digital currencies. That’s because of the absence of the concept of margin trading – where traders may use leverage to limit the amount of personal capital exposed to a trade. Now, the new trading protocol offers traders the option to use Uniswap-based tokens to implement creative margin trading strategies to their advantage.
Margin traders may borrow ETH and ERC20 tokens from the platform, which they then use to establish their respective long/short positions. As a reward for lending their ETH assets to the platform, the network pays lenders a commission in the form of up to 0.4% of the margin fee – which makes it a great income stream for ETH investors who are long on the currency. This model of trading (on margin), which occurs entirely on-chain, is a novel and ground-breaking concept not available in centralized crypto exchanges, and neither is it implemented (yet!) in most other DEX platforms.
It is, however, available on Uniswap and PancakeSwap, and only days ago, both platforms saw the integration of the fresh UniMex update. The update, version 1.2, came on Uniswap first, on March 8th, bringing features like stop-loss, take profit, limit orders, commitment adding, as well as some minor UI updates. These same features appeared on PancakeSwap only two days later, on March 10th.
In the following weeks, even more updates can be expected. According to UniMex, these will bring stablecoin deposits and withdrawals, stablecoin trading pairs, and an increase of max leverage. The platform is expecting a lot of exposure, and due to its advanced features and uniqueness — that is likely exactly what is coming its way.
Bottom line: UniMex’s on-chain model is a direct-to-exchange method of trade settlements which eliminates 3rd-parties involvement in crypto trading. Unlike the outdated Order Book system, or other traditional hashed systems out there, it is more effective and efficient in creating liquidity through secure transactions. It’s an idea whose time has come!
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