Levelling The Playing Field For Small Crypto Exchanges Is Crucial For Industry Innovation

News, Opinion | April 1, 2020 By:

It’s no secret in the crypto space that the larger exchanges reign supreme. A glance at the 24 hour figures on the 14th  of February showed that 52% of all crypto trades on the top 100 exchanges took place on Binance, and only the top 28 had any trades at all (source: nomics).

This dominance is partly due to price disparity. As cryptocurrency prices are based on trading volume, they can vary massively depending on which exchange they are trading on. This means that smaller exchanges with smaller volumes will often have significantly different prices to the larger players.

And with most traders favouring the larger exchanges, it’s no wonder small exchanges feel like they’re fighting a losing battle, but should they give up?

From a market perspective, this may not be healthy. History has taught us that monopolies are the enemy of free market competition. If traders only have a few viable options for transacting, then those companies aren’t incentivised to provide better or more efficient services.

One need only look at the traditional financial markets to confirm this. The banking space remained much the same for decades until challenger banks came along. These new players provided a cheaper alternative which was more attuned to the needs of modern-day users, forcing banks to up their game by providing more diversified offerings and increasing their digital capabilities.

We can see similar innovations amongst small crypto exchanges. Take the arrival of non-custodial crypto exchanges for example. Rather than holding client funds, clients deposit coins into smart contracts with no private key. This massively reduces the risk of hacks, making them one of the most secure ways to trade crypto. Despite this, their trading volumes are dwindling and they aren’t expected to capture a significant portion of the centralized exchanges’ volume for the foreseeable future.

If these exchanges continue to have low trading volumes and, therefore, liquidity, how will they be able to come to the fore?

Once again, smaller exchanges can take inspiration from the traditional financial markets. In Forex, for example, trading venues need to turn to solutions such as smart order routing to get the best possible price for a currency pair. These companies can also utilise tactics like market making in order to increase liquidity on their own exchange.

There is no reason this can’t be applied to crypto. If smaller exchanges are facing liquidity issues, these solutions are essential in order to allow them to compete with the top of the industry and maintain the market innovation which comes with healthy competition.

This won’t just benefit the exchanges. If financial institutions start to see more professional and reliable systems in place for crypto trading, we could see cryptocurrencies rocket into the mainstream, and liquidity problems become a thing of the past.