Cryptocurrency and blockchain have been around for more than 10 years, as new technology, concepts and models continue to be developed and reconstructed. However, the most prominent, and perhaps most important application, is still in “Trading”. Because most retail customers cannot directly invest in primary markets, they turn to secondary markets, known as crypto exchanges.
For many exchanges, trading volume is a very simple performance indicator, because volume not only directly correlates to profit, but is also a marketing tactic to attract retail customers. Newer exchanges tend to fall into the trap of forging their trading volume to raise their market ranking and increase brand exposure. Many people think that an exchange with a large trading volume will attract more avid traders because they will have better market depth and liquidity, but that’s far from the truth.
If cryptocurrency aims to become a mainstream investment tool, liquidity is a key issue that needs to be addressed, aside from regulations, safety concerns and new models. Once the liquidity problem is solved, the whole digital asset ecosystem, especially exchanges, can progress rapidly.
The Problem with Depth and Liquidity in the Crypto Market
So, what is liquidity? To use an easier but maybe less accurate definition, liquidity reflects the market’s transaction scale. When you make a transaction on an exchange and open a sell order, you will notice that your pending order will be displayed on the exchange’s order book. This order book is a compilation of every customer’s order. When a bid is opened, it will be matched with an ask based on price. Of course, it’s much more complicated than this, but basically, the compilation of buy and sell orders (also referred to as depth) accurately represents the liquidity that customers care about.
The problem is, when a whale submits an ask of 100 BTC, small exchanges do not have the capacity to handle an order this size. This causes a drastic price fluctuation, such as a 5% slippage between the average strike price and market price. Versus when you submit an order on a big exchange, the slippage may only be around 1% or less. For example, in July, an ask of over 6000 BTC was opened on Binance, the market price only dropped around USD $300 after all BTC were sold. If we use the price of USD $10000/BTC to calculate, the slippage is only 3%, which shows that Binance has high liquidity. When we look at the secondary market however, there is an inconsistency with depth and liquidity among exchanges.
Another Solution: Aggregation Platforms and Dark Pools
The liquidity and market depth problem pushed forward the development of aggregation platforms, which combine the market depth of various large exchanges. When customers use these types of trading platforms, they receive the combined depth of these exchanges, which have more liquidity and a deeper order book than a single exchange has alone. However, these platforms often charge a high fee for their services.
Besides aggregated market platforms, there may be another solution, but first, we have to introduce another concept: Dark Pool. A dark pool allows large anonymous transactions to happen outside of the public market. Simply put, we can think of a dark pool as a trading platform made from a huge order book with high liquidity. Once clients connect to this dark pool, they can utilize a deeper order book, without worrying that their order will cause a big slippage. Transactions will also be made at a reasonable price, and not affected by poor liquidity.
Recently, a similar project, WOOTRADE launched during Shanghai blockchain week, held by Wanxiang Blockchain Labs. WOOTRADE, incubated by Kronos Research quantitative fund, focuses on providing a liquidity service, or more so a market depth service. WOOTRADE not only aggregates depth from larger exchanges, they also incorporate Kronos’s HFT liquidity flow, thus providing a deeper order book with a more competitive pricing.
WOOTRADE’s capability of providing such services largely correlates with the success of Kronos Research’s fund services. Kronos’s Co-Founder Mark Pimentel, graduated from CMU, started his career at Citadel Investment Group, and continued on at Knight Capital’s electronic market making group. His team operated the largest dark pool in the US and Europe during the time. Based on the solid background of their founders, Kronos effectively uses HFT and CTA strategies in their fund. Kronos’s high transaction volume and flow also acts as one of WOOTRADE dark pool’s liquidity provider. In addition, since Kronos is a quantitative fund, they are able to take more risks than traditional market makers can.
Kronos’s Co-founder Jack Tan says, “As a quant fund, Kronos has a very strong partnership with many of the largest digital asset exchanges, and our huge transaction volume is the key to our profits. From a market standpoint, exchanges, wallets, OTCs, large traders, and even other quant teams, have all expressed a need for this liquidity service. We trade over millions of BTC per month, and that volume is added into WOOTRADE, and provided for every connected exchange. We also aim to work with DEX and other decentralized projects to realize a totally fair and transparent ecosystem in the near future.”