What will it take for the next generation of crypto exchanges to succeed?

My journey with cryptocurrency began when I was a student, but only really took off when a friend offered to pay me $100 worth of Bitcoin (0.055BTC at the time). Having to set up a wallet from scratch and create an account on Quoinex only to find that they didn’t have Bitcoin pairings for NEO and QTUM highlighted the limitations of exchanges at the time.

The need to use another exchange, Bittrex, to trade my Bitcoin for NEO and QTUM seemed inefficient and inconvenient, and it was around this time that Binance was having its Initial Coin Offering (ICO).

Source: Binance

I saw Binance as part of a new generation of exchanges that were much faster, able to handle a larger load, and far more secure. They listed new coins faster than most other centralised exchanges, paid GAS to NEO token holders, and had low trading fees. Times have changed however, and Binance has begun to charge hefty fees to list tokens (up to $5m USD), slowing down their listing process significantly. Binance has also been vulnerable to hacking attempts.

The Next Generation of Exchanges

It is evident that the next generation of cryptocurrency exchanges will take on a different form. A sentiment shared by leading figures such as Vitalik Buterin, the founder of Ethereum, who recently mentioned that “I definitely hope centralized exchanges go burn in hell as much as possible,” and Da Hongfei, the founder of NEO, who also stated that “Centralised Exchanges Will Die”.

“Centralised Exchanges Will Die” — Da Hongfei’s slides at Token 2049

Future exchanges will have to address the following issues in order to remedy the pains current exchanges and projects have within the current blockchain ecosystem:

a) 100% Decentralised

Photo by Francisco Gomes on Unsplash

The ethos of cryptocurrency lies in the first sentence of the Bitcoin whitepaper:

“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”

An exchange of the future should not be vulnerable to single point of failure or susceptible to the exchange’s desecration. It should allow users to connect directly from their existing wallets so that funds are always in their control and facilitate the peer-to-peer transfer of value without going through any external institution. These are the fundamentals of decentralisation.

b) Token Listings Should Cost Next To Nothing

“A piggy bank on a white surface” by Fabian Blank on Unsplash

The monopoly that current exchanges have over listed projects only emphasises the divide in the cryptocurrency community. Projects should not have to raise more funds than necessary to spend on listing, and the project’s supporters should not have to wait months for tokens to be listed.

c) Allows Trading Across Blockchains

Photo by Pietro Jeng on Unsplash

In order to participate in ICOs, we now have to manage accounts on a multiple of cryptocurrency exchanges.

Although the idea of cryptocurrency is the decentralisation of your assets, it should not be done by spreading your assets across multiple exchanges.

The shortcomings of ICOs in their current form are apparent as some tokens are only listed on certain exchanges. Although decentralised exchanges address this issue by listing all tokens on a certain blockchain, the majority of DEXs are blockchain specific, existing solely on a single blockchain.

For a DEX to compete head to head with current cryptocurrency exchanges, it must be blockchain agnostic, allowing trading across different tokens across multiple blockchains.

d) Dead Simple To Use

“Lights in the windows of an office building in Moscow” by Mike Kononov on Unsplash

Ease of use is a key factor in user retention for complex financial products like exchanges. Many early cryptocurrency exchanges put little emphasis on their user experiences. This resulted in final products that were far too complex for basic traders to understand. The next generation of exchanges will have to focus heavily on user interface and experience, all the while keeping them familiar to the average trader.

e) Volume and Liquidity

Photo by Mark Finn on Unsplash

Traders are attracted to exchanges with thick order books and are less partial to those without them. If there is low volume and liquidity of different pairings on an exchange, trading is discouraged as traders make a loss on the spread when performing a taker offer.

To draw market makers to their platforms, exchanges need more complex APIs and attractive maker fees. Market makers encourage trading by adding volume and playing both sides of the market, making it more attractive for organic traders.

Photo by Andre Francois on Unsplash

10 years have passed since the advent of cryptocurrency, and there is much to be done in building the next generation of exchanges. We built Switcheo to be the first DEX built on the NEO blockchain, but this is just the beginning. By expanding our DEX onto other blockchains, starting with QTUM and Ethereum by the end of third quarter of 2018, we want Switcheo to facilitate the transfer of trustless value across various blockchains.

We recently launched V2 of the Switcheo exchange that opened up our trading API, introduced a mobile UI and instant confirmation using an off-chain matching engine. We hope this brings us another step closer to building the next generation of exchanges.

Also seen on e27.