What is an ‘Exchange’?
What really is an exchange? Simply put; it’s an institution, organization, or association which hosts a market where stocks, bonds, options and futures, commodities, and other financial instruments are traded. While traditional exchanges limit buyers and sellers to trading during business hours, cryptocurrency exchanges operate around the clock. Exchanges also impose rules and regulations on the firms and brokers that are involved with them. If an exchange trades a particular company or coin, investors refer to the coin as being “listed”. The core function of an exchange is to ensure fair and orderly trading and the efficient dissemination of price information for any trading on that exchange. In short, exchanges give companies, governments, and other groups or individuals a platform from which to trade securities, commodities, or otherwise defined cryptocurrencies to the investing public.
A cryptocurrency exchange serves as a platform for investors seeking to exchange one type of currency for another. This setup enables one to trade fiat for cryptocurrency, or simply one cryptocurrency in exchange for another. Additionally, users always trade in a “pair”, e.g. USD/BTC (US Dollar for Bitcoin), but while exchanging cryptocurrencies for each other, this trade is usually against Bitcoin or Ethereum. Of course, most online exchanges exact a fee for each transaction made, an expensive proposition given that these small payments quickly stack up over multiple trades.
When non-investors hear about buying and selling cryptocurrencies, they typically view such transactions as being on par with retail purchases (and at a certain predetermined price). However, exchanges do not actually sell or buy anything themselves, they merely offer a platform for investors to trade with each other. They only make money by collecting on the trading fees mentioned above.
Several different types of exchanges exist, the most common being the traditional online middleman service. Depending on the exchange, investors may trade fiat or altcoins for any other listed asset. Although it’s also possible to exchange cryptocurrencies directly via peer-to-peer exchanges, most traders prefer online platforms that list current market prices. Since these platforms are fairly intuitive to new investors, those with well-designed dashboards remain exceedingly popular. At present, Coinbase is one of the most popular online exchanges in existence, with over 13 million users worldwide.
Nonetheless, centralized exchanges also present several unique challenges:
Several exchanges offer leverage trading; the ability to trade with more money than one has on deposit. This option serves as a red flag for traders who recognize the dangers associated with borrowed-money investments. Yes, an investor can make money pretty fast, but they can lose it even quicker and end up owing the platform money. Unfortunately, as this service attracts many traders to these platforms, it has become somewhat integral to their growth. While it may work for some, it will certainly not work for everyone.
Swamping by Whales
When browsing through exchanges, viewers will notice what are called pairs, indicated by the abbreviations of one currency next to another (ABC/XYZ). Such pairings inform investors that they can buy or sell one currency (ABC) for another (XYZ). To fully execute such a trade, the investor places an order, otherwise known as instructions for the trade transaction. One way that whales use exchanges to move markets is by setting up buy & sell walls. A wall is basically a large order — for a buy or a sell — placed by someone usually seeking to dump or buy coins at their preferred price.
Investors trading on smaller centralized exchanges can be subject to what is called arbitral trading; the profit-taking that occurs when exchanges fail to reflect market changes quickly. As one exchange explains,
If the prices for specific cryptocurrencies shift severely on the large exchanges, it leads to the same price shifts on the smaller exchange platforms. In the mentioned cases, the experienced crypto-assets owners on smaller exchanges modify their orders according to the price movements. The arbitral traders playing the role of the ‘invisible market hand’ buy out those orders, which have not been modified according to the price movements on time. Having quickly transferred the cryptocurrencies, which have been bought at a favorable rate, to the other exchanges to sell them for the fiat money (seldom – for another cryptocurrency), these traders take their funds back to the primary exchange more or less profiting. (exmo.com)
Liquidity is the extent to which a specific cryptocurrency can be quickly bought or sold without affecting the general stability of its price. When cryptocurrency cannot be converted into cash very easily, it’s said to be illiquid or non-liquid. For instance, investors who participate in low-volume exchanges must sometimes contend with slow transaction times (waiting to buy or sell). In addition, they’re also subject to non-competitive pricing, large market swings, and an incomplete view of the market. A recent survey of cryptocurrency traders revealed more than a third to be concerned about non-liquidity on exchanges.
In addition, centralized cryptocurrency exchanges frequently suffer network security breaches. Despite growing awareness about this risk, major exchanges have been suffering at least one hack per month for the past year. And with hacking on the rise, cryptocurrency investors are taking precautions to limit their susceptibility to a network security breach. Moreover, they have become much more diligent about determining which exchange(s) they will use. In the near future, these investors will likely transition to decentralized exchanges, as they’re inherently more secure.
Thus enter X-CHANGE.
The XTRABYTES™ X-CHANGE: A New Trading Ecosystem
“X-CHANGE will be the XTRABYTES™ decentralized cryptocurrency exchange. Built directly into the wallet, X-CHANGE will allow users to have a trusted, decentralized, and totally secure p2p exchange at their fingertips. To provide proof-of-concept the first tradable pairing within X-CHANGE will be XBY/XFUEL.”
If XTRABYTES™ succeeds, it aims to become the fastest and most secure exchange on the market, and thus the perfect candidate to provide a better-decentralized exchange for the future. With our own X-CHANGE, one of the first modules to go live on the platform, we aim to do just that. It is the infinite scalability and state-of-the-art quantum-proof SHA-512 encryption protocol, with the plan to add a fiat gateway in the future, that makes X-CHANGE the perfect candidate and prime contender to build the next Coinbase of decentralized exchanges.