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Independent initiatives that analyze crypto exchanges liquidity and quality

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.

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.

 

Read more about our tool for measuring crypto exchange quality – Liquidity Analytics Dashboard

 

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 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

  1. Binance 
  2. Kucoin
  3. Liquid
  4. Huobi
  5. Coinbase
  6. OKEx
  7. Bitfinex
  8. Upbit
  9. Kraken
  10. Bitstamp

CryptoCompare

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:

  • Geography
  • 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, 
  • Liquidity, 
  • 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:

  1. Coinbase 
  2. Poloniex 
  3. Bitstamp 
  4. bitFlyer 
  5. Liquid
  6.  itBit 
  7. Kraken 
  8. Binance 
  9. Gemini 
  10. Bithumb 

 

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 

  1. Liquid (Quoine)
  2. Gemini
  3. Binance
  4. Bitstamp
  5. Gibraltar Blockchain Exchange
  6. OKEx
  7. Bittrex
  8. itBit
  9. Kraken
  10. ABCC

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:

  1. Binance
  2. Bitfinex
  3. Kraken
  4. Bitstamp
  5. Coinbase
  6. bitFlyer
  7. Gemini
  8. itBit
  9. Bitrex
  10. Poloniex

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.

 

 

Read more about our tool for measuring crypto exchange quality – Liquidity Analytics Dashboard

 

 

Ripple

How does Ripple Work?

The Ripple protocol builds upon – and in some ways improves on – other digital currencies. Like other digital currencies, the Ripple protocol enables peer-to-peer transaction settlement through a decentralized network of interconnected computers. This eliminates several of the fees and counterparty risk involved in interbank fund transfers.

However, in contrast to other digital currencies, the Ripple protocol is completely currency agnostic and users are not required to convert local currency into Ripple’s native currency (XRP or “ripples”). Additionally, rather than attempt to circumvent traditional financial institutions, Ripple relies on financial institutions to function as gateways into and out of the Ripple network, and market makers to provide liquidity for FX conversion by posting bids/asks for each currency pair. Ripple routes each transaction to the trader(s) with the best price in the network.

Thus, in the same transaction discussed above, the U.S. importer’s bank would directly plug into Ripple and initiate a USD to EUR transaction. Market makers will compete for the transaction by posting bid/ask for EUR/USD. Ripple will ensure the market maker posting the cheapest offer fulfills the transaction. This market maker will thus, buy USD from U.S. Bank and sell Euros to the EU Bank.

The illustrative example points to several potential advantages of using the Ripple Protocol for interbank transfers.

  • First, because, users are not required to convert to XRP in order to transact on the Protocol, the sender of the funds only needs to worry about one fee, which is the FX spread. This spread, moreover, is minimized given Ripple’s algorithm to route transactions to the lowest spread on the network.
  • Second, because Ripple is not intended to be directly customer interfacing, banks continue to control their customers’ experience. Thus, banks could ultimately decide how much of the cost savings to pass on to their customers.
  • Third, transactions on the Ripple network typically settle within a few seconds. This enables banks to grant their customers faster access to their funds, improving their overall customer experience, and improving working capital for businesses.
  • Fourth, since customers continue to interface directly with their bank to access Ripple, KYC/AML and compliance requirements around customer interaction are already in place and can largely remain the same

Key Features of the Protocol

Below are key features of Ripple protocol, which further highlight how it differs from other interbank transfer systems and digital currency protocols:

  1. Consensus: the Driver of Real-Time Settlement

The Ripple network is a shared public ledger administered collectively by a network of servers. This ledger tracks the accounts and balances of Ripple users. Within the Ripple Network, all transactions are authorized and settled through a process called consensus. This process entails a supermajority of Ripple servers mutually agreeing that a transaction within the network is valid before updating the ledger.

Ripple servers use public/private key cryptography to verify whether transactions are valid or not. Each transaction that gets submitted is signed with a unique digital signature, analogous to how people sign paper checks with a unique signature in traditional banking. Ripple servers mathematically verify that the correct signature appears – the signature of the owner of the funds – before including transactions in a new ledger.

Consensus must be reached among a supermajority of connected computers in order to make changes to the ledger. This is what is known as an atomic process – either a transaction is completely verified, or not.

This process is what enables the Ripple Network to offer users real-time settlement (typically between 3 to 6 seconds) and bypass the need of a central operator, which as explained above, circumvents layers of fees that financial institutions, business and/or consumer bear for traditional payments. In other words, the process of consensus is what enables fast, secure and decentralized settlement on the Ripple network. This distinguishes Ripple from other digital currency protocols, such as Bitcoin, which rely on a process called proof of work (i.e. mining) to validate transactions on the block chain. Unlike Bitcoin, Ripple does not rely on mining to reach consensus, so it does not consume the large amounts of energy that Bitcoin does, nor is the network’s security related to the amount of processing power devoted to it.

  1. Currency-Agnostic: a Key Differentiator from Other Digital Currencies

The Ripple protocol also has a native currency called XRP (sometimes pronounced “ripples”) that exists within the network. This is similar to other digital currency protocols, which enable the creation and distribution of a native digital currency. Like other currencies, XRP is known as a crypto currency, or a currency that is verifiable using mathematical properties. These crypto currencies are digital assets, which can be transferred within the network.

Unlike other digital currency protocols, however, Ripple provides users complete currency choice and does not require users to transact in XRP. Instead, XRP is there to provide two key functions: to prevent abuse of the system and to act as a bridge currency for market makers providing liquidity within the network (more on both of these features below). Thus, users can hold balances in one currency and transact in another currency without converting to XRPs in the process.

  1. FX In-Stream: Lowering the Cost of FX through Market Maker Competition

Cross currency payments have historically been an area with very healthy margins. The FX component of an international wire transfer can frequently bear a 2% – 4% fee to exchange even the most liquid G10 currencies. Retail remittance pricing is even higher, often at a 5% -10% spread to institutional foreign exchange market pricing.

Ripple has the potential to meaningfully bring down these costs by making payment FX rates competitive on a per transaction basis.

The Ripple network translates currencies by routing orders through market makers competing to earn bid/ask spread. These markets makers are important sources of liquidity within the network and are primarily financial institutions with a business in currency or securities market making (i.e. banks, hedge funds, quantitative trading shops). Market makers compete for business within the Ripple network, posting orders to buy and sell different currency pairs to facilitate payments.

The Ripple Protocol is designed to route every transaction to the cheapest price available in the market. Thus, the only way an order gets filled is if it is posting the best price for a specific currency pair at the particular time the transaction is executed. As a result, the protocol can lower one of the highest financial and operational costs for financial services companies moving funds across national boundaries.

  1. Pathfinding Ripple’s Pathfinding Algorithm further improves on market maker pricing by searching for the cheapest path for payments to move across the network.

In liquid currency crosses, the cheapest path will often be a direct “one hop” path through one market maker, for example directly from USD to EUR. However, the Ripple pathfinding feature will seek the cheapest path even if it is a more complex route through several intermediary currencies.

In the example below, the sender of a payment holds EUR, and the recipient wants to be paid in KRW. Since there may not be a tight market in EUR/KRW, the payment is routed through several order books to improve the price. Unlike in traditional markets, users are not exposed to legging risk. Ripple executes multi-hop paths as a single atomic transaction. The entire transaction either completes or it never happens – there is no way for a payment to get “stuck” en route. Since Ripple transactions are just updates to a distributed ledger, multiple legs can be executed at the same instant as they are all included in the same ledger update. There is no counterparty risk to intermediaries.

Ripple Currency (XRP): Overview

The Ripple protocol has a native currency called XRP (sometimes referred to as “ripples”), which performs several key functions within the network. XRP, like other digital currencies, is a math-based currency (also known as cryptocurrency), which is a digital asset with verifiable mathematical properties. As a digital asset, ownership of XRP can be directly transferred peer-to-peer.

Just like bitcoin exists natively on the blockchain, XRP exists natively on the Ripple network as a counterparty-free currency. Unlike the Bitcoin Protocol, however, Ripple users can opt not to use XRP as a medium of exchange. Instead, XRP performs two key functions within the network: protect the network from abuse and provide a bridge currency for market makers. More on these functions below.

XRP: Protecting Against Network Abuse

Since the Ripple network is based around a shared ledger of accounts, a malicious attacker could create large amounts of “ledger spam” (i.e. fake accounts) and transaction spam (i.e. fake transactions) in an attempt to overload the network. This is commonly known as a denial-of-service (DoS) attack. In a DoS attack, perpetrators attempt to overwhelm a server with so many communication requests that the server is unable to respond to legitimate requests.

XRP’s primary function is to provide a layer of security within the network to protect against these types of attacks.

To protect the network from abusive creation of excess ledger entries, each Ripple account is required to have a small reserve of XRP to create ledger entries. This reserve requirement is 20 XRP (or about $0.12 at the time of writing). This requirement is intended to be a negligible amount for normal users while preventing a potential attacker from amassing a large number of fraudulent accounts to “spam” the network.

As a second line of defense, with each transaction that is processed, 0.00001 XRP is destroyed (roughly $0.000000055 at the time of writing). This is not a fee that is collected by anyone – the XRP is destroyed and ceases to exist. This transaction fee is also designed to be negligible for users. But when the network is under heavy load, such as when it is attacked, this fee rapidly rises.

The goal of this design is to quickly bankrupt attackers and keep the network functioning smoothly. Attacking the Ripple network can get very expensive, very quickly, but for regular users, the cost effectively remains “free.” In this context, XRP can be thought of as a postage stamp for transactions. If the price of XRP were to appreciate significantly to the point where sending transactions becomes a nonnegligible cost for normal users, there is a mechanism in place to lower (or raise) transaction fees by a supermajority vote of server operators.

XRP: A Bridge

Currency for Liquidity XRP can also serve as an ideal bridge for illiquid currency pairs. In theory, users of the Ripple Network could exchange anything of value. This could include fiat currencies, digital currencies, gold and even items like loyalty points, airline miles, or securities.

On a protocol level, Ripple makes a distinction between both the balance type (USD, EUR, XAU) and the issuing counterparty (Bank A, Bank B, etc.). This is important because USD balances issued by two different banks are technically liabilities of different institutions and have different counterparty risk profiles. From the perspective of the protocol, they are different financial instruments. As the number of assets and the number of counterparties in the network grows, the number of currency pairs can quickly become unmanageable for a market maker.

Instead of quoting every possible currency/gateway combination, XRP can serve as a useful bridging tool for market makers. If every currency is liquid to XRP, it is also liquid to other currencies.

Thus, while Ripple users have complete currency choice – meaning they can hold balances in one currency (such as USD) but transact in any other (such as JPY) – the market makers facilitating those transactions may see holding XRP as an ideal bridge currency.

The role of a “bridge currency” or “vehicle currency” is traditionally played by USD in financial markets. Within the Ripple network, there is a functional reason to prefer XRP. Because XRP is a natively digital asset (as opposed to a balance/liability), it is the only instrument within Ripple that has no counterparty risk, so it can be universally exchanged between market makers with no friction. Also, because it has no counterparty, XRP never has third party fees attached to it.

Ripple Labs believes that an increase in the number of counterparties and asset types in the network adds to the utility of XRP and creates demand for XRP in the long run.

The biggest market maker in Poland uses Empirica Platform

It’s been two years since Empirica has successfully deployed the full version of Algorithmic Trading Platform for Dom Maklerski Banku Ochrony Środowiska (DM BOS Brokerage House). Since then DM BOS has become the most active market maker on Polish capital market, running its market making and algorithmic trading operations through Empirica’s platform.

With a great pleasure Empirica would like to inform that DM BOS was lately awarded as Polish Capital Market Leader 2016 by Warsaw Stock Exchange (WSE).

The Gala was attended by representatives of the most important capital market institutions: issuers, brokerage houses, banks, investment firms, industry organisations and associations. DM BOS was awarded in following categories:

 

  • for the biggest share of a local market maker in trading in equities on the Main Market in 2016,
  • for the biggest share of a market maker in the volume of trade in index options in 2016 on the derivatives market,
  • for high quality of the reporting of trades to KDPW_TR in 2016.

– We are very pleased to see, that using our software DM BOS was awarded by WSE in main categories. I would like to sincerely congratulate managers of DM BOS such amazing results for the 2016. Since 2012, when we started our cooperation we are committed to continuously develop and enhance our algorithmic trading platform in order to achieve the highest technical requirements and to satisfy different and changing needs of our customer. I would like to thank DM BOS once again for the opportunity to be a part of these awards. – Michal Rozanski, CEO of Empirica

WSE is the biggest securities exchange in Central and Eastern Europe and organises trading on one of the most dynamically growing capital markets in Europe. WSE operates a regulated market of shares and derivative instruments and the alternative stock market NewConnect for growing companies. WSE is developing Catalyst, a market for issuers of corporate and municipal bonds, as well as commodity markets. Since 9 November 2010, GPW is a public company listed on Warsaw Stock Exchange.

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