Even in a bear market, there can be success stories, but it’s also a time when many projects struggle or fail. Is it worth listing a token or waiting for a change in market sentiment? There are some aspects to consider when making a decision…
Critical aspects of token liquidity on DeFi platforms are: market depth and slippage. In our recent report prepared by Empirica Liquidity Lab: “Token Liquidity Ranking on Uniswap V3”, we calculate these metrics for 500 most liquid tokens.
The world of decentralized finance (DeFi) is evolving at an astonishing pace, and our company is at the forefront of this revolution. On the occasion of International DeFi Day 2023, Empirica’s co-founder Piotr Stawinski delivered an enlightening presentation titled “Building Token Liquidity on Decentralized Exchanges”.
Volume is flawed metric of crypto exchanges liquidity. Because of wash trading practices of many crypto exchanges as well as token issuers, using trading volume as a basis of comparison is misleading. Many exchanges have problems attracting professional market makers and are trying to make shortcuts on the way to attract retail investors. Moreover attracting professional investors requires investments in crypto exchanges system development with stable and performant APIs so they could connect their algorithmic trading systems.]
There are more and more independent initiatives that are taking a closer look at what constitutes a high quality crypto exchange. Three major ones are Blockchain Transparency Institute, CryptoCompare Benchmark and Cointelligence Report. I also take a quick look at the Bitwise report for SEC from March 2019.
Blockchain Transparency Institute
BTI concentrates on analyzing crypto exchanges data feeds to spot wash trading mechanisms and provide the real volume metric which is cleaned out of suspicious activities.
BTI identified 17 of the CoinMarketCap Top 25 crypto exchanges to be over 99% wash traded. This one number alone shows the magnitude of the problem, as well as how volume is a false measure.
According to BTI Report crypto exchanges which are faking their volumes use a variety of different tactics to try and swindle investors. These tactics include buying twitter followers and likes, filling up fake order books, mirror wash trading the largest exchanges with real volume, and trying to disguise their wash trading using various bot settings to not affect price. On many of these exchanges trading high volumes closing the spread would make the volume plummet as the trading bots had no room to wash trade with themselves. Welcome to the wild wild west of no regulation and surveillance.
BTI finds that “all crypto exchanges combined are currently reporting around $50 Billion in daily volume on CMC. After removing all the wash traded volume via our algorithms the accurate number is around $4-5 Billion. About 88-92% of daily trading volume is fabricated depending on the day. Bitcoin’s daily trading volume is about 92% fabricated, which is in line with the space as a whole when comparing our findings to top data sites reporting wash traded volumes.”
And further “On our list of the top 40 largest exchanges with actual volume, Bitcoin’s volume is about 65% fabricated. Almost all of this fabricated volume comes from OKEx, Bibox, HitBTC, and Huobi. Of the top 25 tokens by market cap, Tron and Ethereum Classic are the highest wash traded tokens on our list at 85% fake volume each and coming in at #24 and #25 of the most wash traded tokens.”
Top 10 cryptocurrency exchanges according to real (not wash traded) volume by BTI
CryptoCompare’s Exchange Ranking methodology utilises a combination of 34 qualitative and quantitative metrics to assign a grade to over 100 active crypto exchanges. Metrics were categorised into several buckets ensuring that no one metric overly influences the overall exchange ranking. Each crypto exchange grade is derived from a broad due diligence check using qualitative data, followed by a market quality analysis that uses a combination of order book and transactional data.
Due diligence check comprises of 6 main categories that attempt to qualitatively rate each exchange on the basis of:
- Legal and regulatory metrics
- Calibre of investment
- Team and company quality
- Quality of data provision
- Trade surveillance
Although at Empirica we believe in numbers, I like the qualitative approach, as it’s also possible to prove a correlation of metric like number of employees and business size of the exchange, therefore proving this way it’s quality.
Another important factor is Market Quality. Crypto compare measures the market quality of each exchange using a combination of 5 metrics (derived from trade and order book data) that aim to measure the:
- Cost to trade,
- Market stability,
- Behaviour towards sentiment
- “Natural” trading behaviour
Exchanges were rated based on a combination of 9 of the most liquid BTC and ETH markets.
It’s worth taking a closer look how CryptoCompare report approaches Spread and Liquidity metrics:
“Generally, those exchanges which offer incentives to provide liquidity through either low or negative maker fees will achieve the tightest spreads. Due to the spread being calculated using the best bid and offer, it is misleading to use it as a sole gauge of liquidity and therefore as the market cost to trade; it must be used in conjunction with a depth
measurement to find the likely transaction price for any given size of transaction.”
Good point. And liquidity:
“Market depth is the total volume of orders in the order book. It provides an idea of how much it is possible to trade on crypto exchange, and how much the price is likely to move if large amounts are traded. An exchange with greater average depth is likely to be more stable (i.e flash crashes are much less likely) and allows trading of greater amounts at better prices.
We consider the depth up to 1% either side of the mid price.
Depth = E(depthUp+depthDown)/2
Where depthUp is the total volume that would be required to move the price by 1% upwards from the mid price, and
depthDown is the total volume that would be required to move the price by 1% downwards from the mid price.”
Top 10 crypto exchanges according CryptoCompare quality benchmark:
Cointelligence Rating System
Cointelligence is the most qualitative rating of crypto exchanges from the above. The methodology of the team was to manaully open accounts on all analyzed crypto exchanges and check from the user perspective the core aspects of beeing an exchange customer. The aspects cover:
Usability – covers KYC process, the quality of exchange website, extent of features and how easy it is to get a human answer from support staff.
Performance – functionalities and historical robustness of exchange matching engine, fees height, trading instruments like futures contracts and margin trading.
Team – analysis of the available information about management team behind the crypto exchange, especially business and technical experience of C-level staff, including person responsible for exchange’s security
Risk – information on past hacks, insurance status, account security layers but also regulatory status of cryptocurrency exchange. Based on the geographical location of the exchange headquarters and registration any potential run-ins with the local law or any sign of authorities involvement.
This way Contelligence analyzed 85 crypto exchanges, but only 15 is rated with good quality mark, lead by Liquid and Gemini.
Top 10 cryptocurrency exchanges by Cointelligence by qualitative criteria
- Liquid (Quoine)
- Gibraltar Blockchain Exchange
Bitwise report for SEC
Bitwise analysis is based on detecting wash trading patterns in public marked data published by crypto exchanges. Out of 81 exchanges they have analyzed in March 2019 only 10 were identified as be free of wash trading practices. These exchanges are:
Bitwise identified that only 4,5% (about $275M daily) of officially reported volume (eg by the public sources like coinmarketcap) is the actual volume. The rest is wash traded.
The Bitcoin market is more orderly and efficient than is commonly understood. The 10 exchanges trade as a uniform, highly connected market. They form a singular price. Average deviations from the aggregate price for the ten exchanges is well within the expected arbitrage band when you account for exchange-level fees (~30 basis points), volatility and hedging costs. Arbitrage is operating well. Sustained deviations (defined as deviations >1% that last more than 100 seconds) appear as single white lines on the graph below. The graph demonstrates that the ten exchanges trade at a single unified price.
So although the message about the amount of wash traded volume is alarming, the report shows that the real crypto market is quite concentrated, ordered, efficient and well performing. The rest is just noise.
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The ever-evolving Ethereum Blockchain brought to Cryptocurrency and ICO investors a new gift, the ERC223, a new standard for tokens created on Ethereum. Until now, the newly created tokens on Ethereum public Blockchain should have followed the ERC20 convention. This, by all means, was a huge success and relief for both token owners and investors of that token. ERC20 makes sure the behavior of the token on Ethereum is standard with a defined typical list of rules. The ERC223 is an improvement of the ERC20 protocol and is backward compatible with ERC20, meaning every wallet and software that supports ERC20 works with ERC223. So to get a better picture of this improvement, maybe it’s better to break down how these tokens are created, and let’s start with the ERC20 tokens.
ERC20 and how do such tokens are created?
ERC20 protocol allows token owners and developers to create a token that complies with common, essential behavioral rules. The standard is popular now, especially among ICO investors and their communities. Thanks to ERC20, investors can be certain that the following statement can be true if the token is ERC20:
- Technically tokens can be accepted by almost all exchanges
- Tokens are transferable, and all Ether wallets will automatically store the newly created tokens
- Transactions using that token are done smoothly
A token is in compliance with ERC20 if the developer of the token contract implements the following interfaces:
- The token name with the function returns the name of the token.
- The token symbol with function symbol, it returns the symbol that the token will use.
- The token decimal places a function that returns the unit8 decimals the token uses.
- How much the owner wants to start off with: function balanceOf, it returns the account balance.
- The number of tokens in circulation: function totalSupply, it returns the total token supply.
- The transfer value: function transfer (address _to, unit256 _value), this function is in charge of the transfer events. the function should revert a transaction if the sending account _from does not have sufficient balance.
- The transfer from: function transferFrom, this function is used for withdrawal workflow, it allows contracts on the Blockchain to transfer tokens on the token holder’s behalf.
- The crediting permission function allowance (address _owner, address _spender), it returns the amount which the buyer (_spender) is allowed to withdraw from the owner (_owner).
- The events: with function transfer (address indexed _from, address indexed _to, unit256 _value) its triggered when a token has been successfully transferred and function approval (address indexed _owner, address indexed _spender, unit 256 _value) this must trigger on any successful call.
What did ERC223 add to ERC20, and what are the advantages?
Initially, the idea of ERC223 came to play when the number of lost tokens on Ethereum Blockchain went skyrocketing, this was due to the lack of possibility to handle incoming transactions. Ethereum Blockchain is a leading network for a number of lost tokens. The top 8 ERC20 contracts with losses will come up to approximately 3 million USD worth of tokens. how does this happen? once an ERC20 token is sent to a contract that is not designed to work with that ERC20 token, the contract will not reject the tokens because the contract does not recognize an incoming transaction. Consequently, the token will get stuck in that contract balance. ERC223 will allow users to only send their tokens to either wallet or contracts with the same transfer function, preventing the token’s loss. ERC223 introduces the function transfer (address _to, unit _value, bytes _data). This function transfers tokens by invoking the function tokenFallback in _to, only if _to is a contract. This will allow the smart contract to handle sent tokens actively. Whereas when an ERC20 token is transferred, the token contract is not notifying the receiver that the transfer has occurred, to that end, the address receiver has no possibility to handle the incoming transaction and, therefore, no way to reject not supported tokens.
A seamless token transfer is another advantage of ERC223 over ERC20. An ERC20 transaction between a regular (not a contract) and a contract are two different transactions. These two functions need to be triggered, first, the approve function on the token contract and later the transferForm on the other contract (the receiver). ERC223 has addressed this more efficiently by allowing to use of the same transfer function. ERC223 could be sent by only calling the transfer function on the token contract with no if the receiver is a regular wallet address or a contract. Due to this shortcut, another advantage that ERC223 has is the gas cost, ERC233 consumes almost half as much as an ERC token.
So as discussed above, ERC223 advantages over ERC20 come down to the following points:
- provides a possibility to prevent accidentally losing tokens
- Allows users to transfer tokens anywhere (owned address or contract) using one function
- allows contract developers to manage incoming transactions, contract developers could implement contracts in a way that only works with some specific incoming tokens and handle them in a specific way which could also each token could be handled in a specific way.
- ERC223 consumes almost half gas as ERC20
Currently is not possible to upgrade the existing ERC20 token contract to ERC223, but if you are planning to create your own, maybe it’s a good idea to go with ERC223.
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