Your Cryptocurrency Newsletter for 08 September, 2020

If you are interested in cryptocurrencies, this newsletter is for you. [Feedbinary Newsletter]  [Learn more about RevenueStripe...](   [Learn more about RevenueStripe...]( [img]( [FeedBinary Newsletter]( [How To Provide Liquidity To Cryptocurrency Exchange]( Liquidity is one of the most important factors in a cryptocurrency exchange or brokerage’s long term success. A trading venue’s liquidity represents how easily a trader can use the platform to exchange one asset for another. If a trader sends a market order to buy or sell an asset and the venue can’t find enough buy or sell orders to complete the transaction at a reasonable price, the venue is likely struggling with low liquidity and the trader is likely to take their future business elsewhere. Venues that provide adequate liquidity and competitive market pricing tend to experience a rewarding cycle, with traders who find their liquidity needs met, returning for more transactions, which provides liquidity to other traders acting as counterparties. Liquidity can also help lessen the effects of individual transactions on an asset’s marketplace conditions. A venue struggling with low liquidity for a given asset will see a large portion of its order book eaten up by a single transaction. This means that the order will crawl higher up the order book and incur a higher average price The orders left standing are less likely to accurately represent the asset’s price averaged across many venues. A venue with high liquidity, however, can withstand a flurry of quick transactions before consuming a large portion of its order book, leading to better fills and happier customers. Liquidity is essential for success, both in crypto exchanges and in far older and traditional financial markets. That’s why institutional venues such as the New York Stock Exchange often partner with in-house liquidity providers. Those providers act as market makers, playing a major role in defining an asset’s short term market value by readily providing liquidity when the buy/sell orders that traders send to them are executed. Liquidity can be a little harder to come by for venue builders in the much younger world of crypto — but that doesn’t mean venue operators are out of options. As crypto finance becomes more and more sophisticated, venue operators are finding ways to provide traders with the liquidity they crave. Three promising options are third-party market makers, cross-exchange market making and liquidity mining. Different liquidity solutions can tie up different amounts of capital and operational capacity, so there is no one-size-fits-all strategy. Third-party market makers Crypto market maker agreements essentially replicate the in-house liquidity solutions that are popular in institutional finance venues. A venue makes the agreement with an outside liquidity provider — most commonly a hedge fund. These providers usually trade in many different venues at once and can source the liquidity they need for one venue by executing trades at other venues. Unlike market takers, who are willing to pay more than they’d prefer to obtain an asset because they value holding the asset itself, market makers are willing to buy or sell any asset as long as they can capture a marginal profit by hedging their trade on another venue and maintain their desired inventory levels. To stabilize a long-term partnership, market makers and trading venues will often agree on a certain profit level that makers can expect to generate each month. If the maker’s profit falls below that amount, the venue agrees to pay the difference. Venues may add extra incentives in the agreement. For example, some makers will agree to provide loss leader pricing, which quotes the lowest price found across multiple exchanges in order to attract traders from other venues. Trading platforms also sometimes offer makers increased margin levels. Venues regularly review their market makers’ balance sheets to ensure the maker’s creditworthiness. This review process helps venues decide which accounts will be allowed to temporarily trade to negative account balances. Approved market makers can settle their obligations daily and, under some circumstances, weekly, which may mean that the trading venues’ short term liabilities will temporarily exceed the assets under their management until settlement occurs. Market makers with increased margin levels can lend out inventory and/or arbitrage for other opportunities within settlement windows to increase their returns. Market makers or exchanges that enter a formal liquidity environment may also have specific requirements when it comes to technical integration between the venue and the liquidity provider. Makers who represent a financial institution often prefer to interact with exchanges via Financial Information Exchange, or FIX API, a standardized communication protocol for financial data. This protocol is fast, efficient and optimal for co-located servers. Some less institutional traders may prefer to use a WebSocket protocol, which is mostly targeted at retail investors. This method is still viable for high-frequency trading but is often slower than FIX and can handle fewer requests per minute due to rate limit restrictions. Cross-exchange market making In this strategy, traders can still turn to a market maker — but the maker is the venue operator rather than a third party. Thanks to cross-exchange transactions, the venue can source liquidity without risking significant losses. Venue operators serve as market makers at their own venues the “maker exchange” and simultaneously act as market takers at one or more other venues the “taker exchange.” Those external taker exchanges also known as source exchanges have their own liquidity providers, who set bid and offer prices for other market participants to take. Operators on the maker exchange use those bid and offer prices to set market-making conditions at their own venue, oftentimes with a markup to the source exchange. In the example above, the venue operator will buy an asset sold on the maker exchange for $98, the lowest price available, while simultaneously selling that asset on the taker exchange for $99. Their inventory levels remain the same, and they not only haven’t lost capital but have actually made a small profit of $1. Likewise, the operator can sell an asset for the best offer they encounter on the maker exchange — $101 — while simultaneously recovering that inventory without losing any capital by repurchasing it on the taker exchange for $100. The exchange operator can continue this process repeatedly to generate revenue. Cross-exchange market making lets venue operators source liquidity without paying a third party to do it for them, but this strategy comes with capital efficiency issues. The market maker service providers we discussed in the prior section often have lines of credit at multiple venues, letting them trade on margin rather than collateralizing the full amount of asset inventory they post for each trade. A venue operator practicing cross-exchange market making without access to credit has to keep significant inventory in their taker exchanges, making it difficult to use that capital for any other profit-generating purpose or for frequently necessary rebalancing across trading venues. Liquidity mining Market making was an important service in traditional financial venues before crypto even existed, and cross-exchange market making between different crypto venues is a logical extension of this traditional finance concept. Liquidity mining, however, is a strategy with much closer ties to crypto itself as an asset class. Cryptocurrency has gained (and continues to gain) traction because of its uniquely decentralized structure. That decentralization is deeply tied to community participation. Many blockchain protocols, for example, reward individual participants for staking coins or running nodes. When structured properly, these rewards incentivize the distribution of computing power across a wide network of independent participants, which, in turn, makes the protocol itself more decentralized and thus more resilient. Liquidity mining extends the blockchain tradition of turning to the community for decentralized support of important crypto functions. Venues that turn to liquidity mining eschew any singular market-making source whether it’s a partnership with a professional market-making firm or their own cross-exchange market-making algorithm. Instead, they distribute open-source software to any participant who wants to download it. These newly enlisted liquidity miners connect their crypto wallets and set parameters for the software to automatically execute market-making trades on participating exchanges. A pool of rewards is algorithmically generated and distributed among miners, with miners who tolerate more risk receiving greater rewards. Final thoughts There is no one-size-fits-all liquidity solution, and every strategy features drawbacks and inefficiencies. Liquidity mining is a theoretically promising strategy that’s now being implemented on-the-ground in a handful of crypto venues, but it still has a long way to go before it’s proven scalable for mainstream trading. Cross-exchange market making not only creates capital inefficiencies but can also drive traders away due to the venue’s conflicted interests: Though venue operators execute the strategy to provide liquidity, they do so by trading against and sometimes profiting off of exchange clients. Market-making agreements have put off some crypto enthusiasts who prefer a decentralized approach and a definitive movement away from the world of traditional finance, but for many exchange operators, these agreements are realistically by far the most effective liquidity solution, providing access to credit lines and highly liquid non-crypto venues. [Read Full Newsletter]( [Read Full Story]( ------------------ [Is Chainlink Dealing With Market Pressure Better Than Bitcoin?]( As is often the case in the digital asset market, an altcoin may perform extremely well over the course of a bull rally. In fact, it may even outperform Bitcoin, which is why in the eyes of many, such tokens might even look like the real thing. However, many of these would soon crumble under pressure whenever the market’s bears got a grip on the market. Chainlink has been looking to change that narrative with its present-day price performance. Chainlink demonstrated its strength during its recent bullish rally. Now, against all odds, the crypto-asset seemed to be showing resilience amidst a bearish storm. After the bloodbath between 2-3 September, most of the market’s cryptos hit a local bottom. While Bitcoin went briefly under $10,000, LINK dropped down to $9.22 as well. However, over the past couple of days, LINK has been exhibited an admirable intent to recover on the charts. When comparing the price performances of Bitcoin and Chainlink, it can be identified that Bitcoin has been struggling to breach its 50-Moving Average to reduce the apparent selling pressure. In comparison, LINK has held a position above the 50-MA for the past 24-hours. Out of all the top altcoins, LINK is the only one above its 50-MA right now, with the crypto leading the charge to break the bearish deadlock on the market. One of the major reasons for its reduced dependency on Bitcoin has been its minimal correlation. During the bull rally, many speculators suggested that the correlation would rise during a period of correction. However, LINK is presently defying the odds, using that same metric as an advantage to rally back on the charts. On-chain activity supports LINK’s incline Moving the spotlight away from the price, another important sign of the strength in LINK’s rally is its on-chain data. Intotheblock’s data revealed that without noting a negative impact from the price drop, active addresses in LINK’s ecosystem registered an incline over the past week, a finding that points to the presence of credible trading volume. New addresses haven’t seen much of a change, but the increase in active addresses is a real positive. Bear in mind, however, that it is still not as high as it was during LINK’s peak, but in the current bearish market, it is doing fairly well. There is no doubt such metrics will further improve LINK’s credibility in the market. LINK may undergo further corrections as well, especially in light of the fact that this was the token’s first collapse since March 2020. Alas, from the way of things, it seems like it will not crumble like previous altcoin projects. [Read More News]( [Read Full Story]( ------------------ [How Polkadot Surged From Nowhere Into the Top 10 Cryptocurrencies]( Polkadot’s cryptocurrency DOT has come from nowhere to gain a coveted slot on the leaderboard. What’s its secret sauce? Blockchain interoperability project Polkadot wasn’t even in the top 100 cryptocurrency rankings three weeks ago; now it sits at number seven, with a market capitalization of over $3.7 billion. It’s a meteoric rise, and it’s at least partly down to something called “redenomination.”On August 21, after a community vote, DOT was redenominated—meaning that the circulating supply of the token was inflated by 10 times. The process is similar to a stock split, which can see the value of a stock rise substantially after the event, as small investors perceive it as becoming more affordable. In the cryptocurrency space, however, it’s unheard of. Essentially, Polkadot’s redenomination saw one old DOT divided into 100 new ones. Consequently, the total supply increased from 10 million tokens at Genesis to 1 billion. The split doesn’t change the value of investors’ total holdings of the company. However, it has led to speculation that the event was at least partly responsible for the rise in the token’s fortunes. Token splits are the new stock splits The primary motive of a stock split is to make shares seem more affordable to small investors, increasing liquidity in the stock. And the Polkadot community’s reasoning for redenomination has followed similar lines. The decision to devalue DOT was taken to make the token easier to calculate and therefore buy—“more ergonomic,” in the words of the platform’s creator Gavin Wood. In addition, the early decision limiting Polkadot’s initial supply at 10 billion was ostensibly an arbitrary one.  The process required a community referendum, which took place in July, with 86% of the community in agreement. The team chose an auspicious date to redenominate its token. Electric vehicle manufacturer Tesla performed a stock split on the same day and saw its share price rally 12% when trading resumed 10 days later. DOT saw even more dramatic gains. The token rose from $2.92 prior to the devaluation, to a recent high of $6.84 on September 1. It currently stands at $4.37—having taken a pounding along with the rest of the crypto market in recent days. But analysts told Decrypt that devaluation isn’t the only factor behind DOT’s rapid rise.  Thomas Kuhn, a Macro Analyst at research consultancy Quantum Economics, gave three reasons: the project has a decent war chest to start with, so they could fund a strong team; Polkadot is a fairly recent project—compared to Ethereum, for example, which is faced with upgrading a legacy platform, and, in addition, DOT is a relatively new asset. “Holders have not been holding for years waiting to abandon ship on the first increase in price,” he explained. Polkadot’s three-year journey DOT isn’t exactly a new token, though. The project launched in 2017 and has been in development for over three years. In recent months, as well as the redenomination, there have been several major changes, not least the launch of the Polkadot mainet in May. In fact, arguably, the most pivotal event in the project’s history was another community vote to allow holders to transfer their tokens. Prior to that, transferring tokens had been very difficult, and was only possible via so-called “over-the-counter” exchanges, and IOUs. The transferability vote finally enabled exchanges to list DOT. Binance and Kraken swiftly did so—in fact, they acted a little too swiftly and were accused by the Polkadot community of jumping the gun, listing the token on August 18, three days before the agreed-upon redenomination.  With transferability enabled, DOT’s market capitalization leaped, catapulting it into the top ten cryptocurrencies even prior to its redenomination. After redenomination, it reached the top five, before falling back to its current position in the seventh spot. The market capitalization of a token is determined by multiplying its price with the circulating supply. But while redenomination increases the circulating supply of a token, its market capitalization remains unchanged. Thus, a DOT investor who previously had only one token will now have 100. But while the number of their outstanding shares will have increased, the total value will be the same. The prognosis for Polkadot Notably, DOTs traded volumes also surged in recent weeks, topping $1.4 billion on August 27. It’s fair to say that transformability and redenomination have caused quite a bit of confusion. But most importantly, it hasn’t dampened enthusiasm in the project. “It’s a reflection of the superb job the Foundation has done community building around the globe,” said Corey Miller, who heads up growth at dYdX exchange and is a partner at Genesis Block Capital. “The results of that have led to increased developer awareness and adoption.” The Polkadot community’s ambition to build an ecosystem to rival Ethereum is now firmly in the frame. [Read Full Newsletter]( [Read Full Story]( ------------------ You Might Like     [Learn more about RevenueStripe...]( ------------------ Connect with TheFeedBinary on Facebook and Twitter [fb](  [tw]( ------------------ You received this email because you operate or create content for a website/service and based on your website it seemed like this could be important information to you and your users. FeedBinary daily newsletter is managed by [Postbox Consultancy Services Pvt. 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