“That’s called shared liquidity” I said while explaining a friend how the future of exchanges could be consolidation within a third party application, an aggregator if you will. Imagine this, you have 1000 ABC coins and you want to exchange it for XYZ coins. But ABC is available on Exchange One and XYZ on Exchange Two. So you have to transfer ABC to Exchange one, convert it to BTC/ETH, transfer them to Exchange Two, convert to XYZ and again transfer it to a private wallet for safe keeping. The process seems overwhelming but a lot of people do it for triangular arbitrage everyday.
Alternatively, you can use an aggregator service like Coinswitch, Shapeshift or Changelly to exchange your ABC to XYZ directly. But these exchanges may not have listed ABC or XYZ coins. Maybe these coins are exclusive to certain exchanges.
Now, imagine a new kind of consolidation. A third party allows you to trade on both these exchanges on their own platform. Both ABC and XYZ tokens can stay in the wallets of this one exchange itself. No need to login to Exchange one and Exchange two separately.
Many will argue that we can do it with bots and API trading, but you can still save a lot of time and transfer fees. This process is loosely known as liquidity sharing or shared liquidity.
An exchange is able to share its liquidity with another exchange for the benefit of both. Basically, from one exchange you as a user can trade on multiple international exchanges without even having to make an account there.
A couple of upcoming exchanges are banking on this model but one Indian exchange is already running this business model for over three months now. This exchange is Coindcx. We did a video review of Coindcx earlier. At the time CoinDCX offered trading for 15 coins/tokens and on Binance Exchange only.
However, recently Coindcx has added many more coins to its bouquet and four of them are from Huobi Exchange. Now, you can trade on a few coins on Binance and few coins on Huobi, both out of one exchange – coindcx. It is in essence an aggregator service, but with wallets, trade engine and an exchange-like interface to place your own orders, so exchange it is.
While I still call it Liquidity sharing, they call this model “Deep Liquidity”.
How Deep Liquidity Works
As a trader what you see in the orderbook is not CoinDCX’s orderbook. It is either Binance or Huobi’s orderbook and trade history. If you place an order, the trade takes place on Binance or Huobi exchange. This way CoinDCX users get good liquidity from these exchanges with the comfort of trading from CoinDCX.
But it isn’t as easy as just API based trading, says Neeraj Khandelwal, co-founder of Coindcx. “We build our own wallets, the liquidity is then distributed to exchange wallets and our cold and hot wallets” continues Khandelwal. In essence, when you place an order on CoinDCX, the integration allows CoinDCX to place the same order on Binance or Huobi exchange, based on your choosing. So when you buy or sell a cryptocurrency, you are trading it with a user from these other exchanges.
CoinDCX enjoys the privilege of being the only exchange in the world to successfully leverage the shared liquidity model while the other projects like Alluma and Hybridblock that plans on building their own shared liquidity models are either in pre-ICO stage or closed beta.
Do we need this model?
Volumes on exchanges are dropping rapidly. Loyalists to a certain exchange do not venture out to trade on other exchanges. Arbitragers only choose high liquidity exchanges. Most importantly, the uncertainty around cryptocurrency regulations have pushed people away. A new exchange would have the hardest time to get traders on their platform.
So, a shared liquidity model could be, chemically speaking, the co-ordinate covalent bond of cryptocurrency exchanges. Wherein exchanges like Binance and Huobi offer liquidity to an exchange like CoinDCX so that CoinDCX users can trade cryptocurrency with advantages such as:
- High Liquidity – Orders get fulfilled quickly
- Ease of use – No multiple logins or transfer of coins from one exchange to another
- Exclusive coins – Some coins exclusive to certain exchanges can still be traded on with CoinDCX
- Benefits such as lower withdrawal fees or less confirmations for deposits.
Other Similar Ideas
CoinDCX is innovative in its approach but there are many liquidity solutions catching up. With Bancor or Kyber network, decentralised exchanges are kicking it a notch up by providing good liquidity for token swaps on ETH network.
Another decentralised trading protocol 0x boasts of multiple relayers – the exchanges that can convert tokens on the Ethereum blockchain.
Alluma and Hybridblock are future projects relying on the shared liquidity models, and many coin aggregator services like CoinSwitch, Changelly, Shapeshift, nExchange provide conversion of any token to any token as well.
What differentiates CoinDCX is that it behaves similar to any other exchange. Your limit orders or market orders get executed on a high liquidity exchange at your prices and you can hold your tokens on the exchange itself instead of private wallets. The centralised exchange Vs decentralised exchange to hold and trade coins and tokens is a topic for another day.
CoinDCX is a good exchange/aggregator service and while it can leverage the liquidity of other exchanges efficiently, it is yet to leverage all of the listing. CoinDCX currently lists 30-40 coins from Binance and 4 coins from Huobi, obviously the exchanges have a lot more listings. So you might end up not being able to trade your holdings.
But, if you want to convert a token like MedicalChain to Substratum, Coindcx is your bae. MTN is only available on Huobi and not Binance & SUB is available on Binance and not Huobi, so its the perfect example. No need to have an account on Binance or Huobi. Just bring your MTN to CoinDCX and trade.
The trading fee is 0.2% which is steep when compared to Binance but the same as on Huobi. The exchange was earlier exclusive to Indian traders with mandatory KYC but has now opened doors for international users as well.
What do you think of the CoinDCX trading model? Let us know in the comments below