TechnicalRoundup & WOO X — Deep Dive
A full introduction to WOO Network, WOO X, and thorough risk overview.
Not Financial Advice
TechnicalRoundup is not your broker, intermediary, agent, or advisor and has no fiduciary relationship or obligation to you in connection with any trades or other decisions or activities effected by you using the Services. No communication or information provided to you by TechnicalRoundup is intended as, or shall be considered or construed as, investment advice, financial advice, trading advice, or any other sort of advice. All trades are executed automatically, based on the parameters of your order instructions and in accordance with posted trade execution procedures, and you are solely responsible for determining whether any investment, investment strategy or related transaction is appropriate for you based on your personal investment objectives, financial circumstances and risk tolerance. You should consult your legal or tax professional regarding your specific situation. TechnicalRoundup does not recommend that any Digital Currency should be bought, earned, sold, or held by you. Before making the decision to buy, sell or hold any Digital Currency, you should conduct your own due diligence and consult your financial advisors before making any investment decision. TechnicalRoundup will not be held responsible for the decisions you make to buy, sell, or hold Digital Currency based on the information provided by TechnicalRoundup.
Introduction
TechnicalRoundup recently entered into a 1-year partnership with WOO Network.
This means that our content, specifically our YouTube videos, newsletter, and some Twitter posts will contain promotional material pertaining to WOO Network and its suite of products.
Given we’ll be exposing our audience to a relatively new platform, the purpose of this document is to offer information and transparency about WOO Network given they will feature in our content.
Any crypto trading, especially when dealing with futures and third-party custodians, carries a risk of loss of funds. WOO Network’s centralised exchange, WOO X, takes a different approach to operation compared to most centralised exchanges,, and we’ll attempt to explain exactly how while also elucidating the different risks and benefits of this model.
Colloquially, if we’re gonna shill you something, we’d much rather you make an informed choice as to whether to use it or not and the risks involved.
To address the elephant in the room, you’d be forgiven for dismissing this article given the obvious conflict of interest. We’re receiving benefits from WOO Network while writing a piece discussing its risks and weaknesses. What if we’re omitting certain information, skirting past particular arguments, or taking a charitable view on issues for our own financial benefit? For this reason, we recommend doing your own research and using this only as a starting point for assessing WOO Network.
If you have any questions, concerns, or critiques you can ping us on Twitter and we’ll get back to you with (hopefully) good answers or at least accurate information.
Before you read this document, we highly recommend you build a robust understanding about counterparty risk and leverage as a risk mitigation tool. You can find our write ups on those topics below:
2. Leverage as a risk mitigation tool
What Is WOO Network?
WOO Network is an umbrella term to describe 2 specific products: WOO X and WOOFi (Swap and Pro).
WOO X is a CEX-style product designed to compete with the Binances and Bybits of the crypto space.
WOOFi Swap is a swap-based DEX designed to compete with the Uniswaps and Sushiswaps of the crypto space.
WOOFi Pro is an orderbook-based DEX in its beta stage.
Most of our focus will be on WOO X, because that’s the product we expect will align most with our audience. It’s also the only one that is custodial i.e. your funds are held by another party on your behalf.
What Is Good About WOO X?
The core premise of WOO X is to offer the best available execution for traders.
Execution costs are very important in trading. Over a sufficiently large sample size, the cost of trading can make a profitable strategy unprofitable, and vice versa.
While this is a broad oversimplification, execution costs generally come down to two primary factors for most discretionary retail traders: fees and/or spreads.
Fees are the costs of executing orders in the market.
Spreads are the difference between the (best) bid and ask which affects your fill prices.
In both cases, you’re paying ‘edge’ in costs and/or in the prices at which your orders are executed.
With that in mind, WOO X’s primary focus is to offer the best net execution available on the largest number of pairs, especially in Bitcoin/Dollar and Ethereum/Dollar.
You can compare your execution costs to major exchanges using the transparency dashboard on their website here or via this third-party website here. Clearer comparisons and integrations are coming soon.
In other words, all else equal (big statement), there’s a good chance that on execution alone, WOO X is at the very least an option worth considering as another venue to do some of your trading.
Best Execution: What’s the Catch?
The preceding section begs the question: what’s the catch?
In other words, if there’s decent evidence to suggest that WOO X is at the very least a competitive venue for trading, why aren’t more people using it?
There are a few useful answers here (in no particular order).
First, a lack of awareness. WOO’s revenue model means that it doesn’t have tens and hundreds of millions to throw away at eye-catching sponsorships. Related to this point is the lack of referral link marketing and volume incentives. These two revenue and growth models are currently incompatible with WOO’s business model (this may change with a pending fee model revamp).
Second, while WOO X has recently pivoted away from a Single Market Maker Model which had proven to be controversial, there is still a dominant primary market making firm trading on the exchange, Kronos Research. This is something we’ll discuss at great length in the subsequent sections, but currently, around 40% of the liquidity on WOO X is from a single market maker . The concentration of liquidity however continues to diversify as WOO X’s new market-making program grows.
Last, their fiat on-ramps suck, meaning it’s not a convenient all-in-one venue to do all of your business (which may be an unintentionally positive thing given participants are likely to spread their risk among other exchanges, but again, that’s besides the point for now).
How Does WOO X Afford the Competitive Execution?
This section will discuss WOO X’s business model, and the following section will discuss the risks associated with that model to the user, as well as some mitigating factors.
First, how can WOO X offer good execution costs to its users?
In its current form, WOO X runs a hybrid business model. Futures on WOO X works similarly to other exchanges, just with lower fees, however their “zero fee zone” on Spot pairs uses a model similar to a traditional payment-for-order-flow (PFOF).
In essence, and in the bluntest possible terms, for this “Zero fee zone”, WOO X wants to incentivise traders to execute there because on average, their orders either have no edge or even negative edge. In other words, the average trader is so bad at trading that their orders are easy to hedge or offset on another exchange, while also containing valuable information about retail flows. As a result, the average retail order is likely to contain less edge, is less likely to be toxic or informed flow, and on the whole is likely to be more profitable to a market making firm.
If you wanted to be charitable, you could argue that the relationship between an HFT market making firm and a less time and price sensitive retail trader is not parasitic but one of mutual convenience based on those divergent preferences, but it can’t hurt to assume the worst for demonstrative purposes.
Put simply, whatever edge the market maker on WOO X gives up by offering competitive execution is paid for by the fact that the average trader is shit, trades at bad prices, isn’t toxic, and has either no alpha or negative alpha.
WOO X, Kronos Research, and Aggregated Liquidity
How is a single, dominant market making firm on WOO X able to source the necessary liquidity to allow for zero-fee trading on certain spot pairs??
Before expanding on the particulars, as a general point, Kronos Research’s dominance continues to reduce on WOO X as it grows. On Futures, Kronos Research now makes up the minority of market making.. With more users and by onboarding more market makers via a fee schedule revamp, Kronos Research as a % of total volume should continue to trend down over time.
As a market making firm, Kronos Research trades across all major venues. Practically, this means that in order to remain delta neutral or offset any flow they might not like from WOO X users, they can do so via other venues. Simple example: Trader A market sells 1 BTC on WOO X → Kronos Research’s limit buy is filled and they’re long 1 BTC → Kronos Research sells 1 BTC on Binance to offset the order, making money on the spread. Naturally, this is a gross oversimplification and market making inventory management is significantly more complex than that description, but it conveys the basic point.
In this way, as far as building a mental model, it may be helpful to think of WOO X as an over-the-counter (OTC) desk with a CEX interface. You’re mostly dealing with a single counterparty, they give you the best pricing they’re able to, your custody and counterparty risk is with that same party, and then they manage their own deltas and inventory ‘behind the scenes’ while prioritising order execution for the user. This analogy will become increasingly appropriate when we discuss counterparty risk in detail.
In summary, in its current form, when trading any of the zero-fee spot pairs on WOO X you’re essentially getting verifiably competitive quotes from a market making firm that is able to offer good prices and execution on account of the fact that 1) you probably suck at trading and that’s good for them — they want your flow; and 2) they’re efficient and trade everywhere at a lower cost than the average trader (given their VIP fee tiers), so sourcing deep liquidity for the average retail punter (especially at their usual order sizes) is not a tall order. Your size is not size, your edge is not edge etc.
To be clear, this is not entirely novel or dissimilar to the average CEX experience. At most venues, knowingly or not, there is a very good chance that you’re trading against the exchange’s own desk(s) and/or a large market maker with preferential treatment (reduced fees, negative balances, server colocation, and so on). With WOO X, as we’ll discuss in the subsequent sections, you concede the conflict of interest created by a single dominant market maker trading on its own exchange, but you do so with the benefit of getting a significant degree of verifiable, on-chain transparency about their operations.
WOO X, Transparency, and Counterparty Risk
WOO X’s Terms of Service (ToS) are quite explicit in stating the degree of counterparty risk incurred by the user.
The most controversial portion of the recently-updated ToS states the following.
“You expressly agree and authorize WOOTECH Limited, in its sole discretion, to lend out part or all of your Digital Assets held under your WOO X account to market makers to provide liquidity and to achieve zero trading fee for the qualified users on WOO X. However, WOOTECH Limited will ensure that such Digital Assets, even when they are utilized by the third parties designated by WOOTECH Limited, are used solely for hedging and liquidity aggregation purposes, and are never used for speculation.
WOOTECH Limited will strive to keep the custody ratio, meaning the percentage of user deposit liabilities stored with custodians or in cold storage, versus stored in third-party liquidity sources, greater than 75%. However, despite all our endeavors to safekeep your funds, you shall be aware that such Digital Assets may be posted as collateral on other cryptocurrency trading platforms, and therefore are subject to risks of loss due to the factors beyond the control of WOOTECH Limited, such as technical breach or hacking of the said platforms, force majeure, embezzlement, misconduct, or other similar events. You agree that you shall not hold WOOTECH Limited liable for any damages arising from such losses, while WOOTECH Limited may try to recover the Digital Assets in its sole discretion, but such efforts are in no way guaranteed.”
According to the ToS, all of your assets can be lent out and used by Kronos Research for market making activities e.g. posting collateral.
This sounds pretty bad at face value. You deposit funds for trading and legally, a market making firm can use all of them for their own operations. Understandably, a lot of custody warnings (not your keys not your coins) and Alameda analogue alarm bells will be ringing in your head.
Let’s assess the existing mitigating factors and some general considerations alongside them.
First, the ToS explicitly state that if your assets are to be utilised by Kronos Research, it must be done “solely for hedging and liquidity aggregation purposes”, and “never used for speculation.” Again, with recent business model changes, this is only the case for assets in the “Zero fee zone” for Spot. As a contextual reminder, this isn’t a vague assurance but rather a legally binding agreement between you and WOO X, so it has teeth. If one wanted to steel man the doomer argument, one could quite reasonably posit that “hedging” and “liquidity” aggregation are sufficiently vague to allow for trades with some directional legs within them, and all trading is speculation to some degree. Nevertheless, there is some legally binding assurance that your funds won’t be YOLO yeeted into naked directional trades. It’s worth also adding that according to most reasonable analyses, it was the outright directional speculation that led to Alameda’s downfall once they became less competitive in the market making arena (alongside keeping their garbage venture portfolio afloat, among other things). The fact that WOO X and Kronos Research survived all of 2022, and have been operating since 2019 and 2018 respectively, is a positive indicator about their risk management. Naturally, it is no guarantee of future risk management practices.
Second, while the 75% custody ratio isn’t a strict legally binding number (given the “strive to” language used), WOO X offers a transparency dashboard where you can verifiably monitor what that custody ratio is and what it is made up of at any time. This includes Merkle Tree proofs for individual balances, breakdown by asset, breakdown by exchange, and so on. In this way, rather than dealing with an opaque black box, you can get a good indication of your active counterparty risk simply by checking the dashboard. Colloquially, a majority of the liquidity is sourced via Binance, and if they implode, we’re all fucked anyway. That said, it’s a double-edged sword. The counterparty risk is spread in that the liquidity is sourced from different exchanges, but it’s also centralised in that if something happens to Kronos Research (hack, accounts frozen, catastrophic error etc.) the user may still be affected even if the exchange where the liquidity is being sourced is unaffected.
Third, as another important legal distinction, the ToS afford users “senior creditor” status if WOO X fails. To our knowledge, at the time of writing, no other comparable venue offers this benefit. Being a senior creditor, generally speaking, means that your claims to get your money back take precedence over the claims of other classes of creditors.
Fourth, as mentioned ad nauseam, as a relatively new exchange WOO X is actively working to bring on other market making firms to reduce Kronos Research’s dominance. If the exchange succeeds in growing and attracting more users, and with some changes to the fee structure on appropriate pairs (while still prioritising best net execution), Kronos Research’s total share of activity should go down over time and thus reduce both the conflict of interest of trading on the exchange as well as the single counterparty risk.
Last, as a general point, there is plenty of evidence from the past year to suggest that trading on centralised exchanges incurs a large degree of counterparty risk. Sometimes those risks are known. Other times, and we’d argue most times, they are not fully known or at least are not explicitly laid out. As per the previous sections, it’s best to assume the worst and keep minimum funds with any single exchange. With WOO X, the trade off is essentially best execution but at the cost of centralised counterparty risk, primarily via Kronos Research. That risk is explicitly laid out, verifiable and trackable 24/7, and supported by ToS that in theory prohibit degen behaviour whilst also giving the user some peace of mind via senior creditor status. Or more colloquially, if there are known and unknown risks virtually everywhere, you might as well consider getting the best execution possible while being able to monitor what’s going on ‘under the hood’ with a large degree of transparency, at one venue out of the several that you should be using.
Conclusion
This document, despite its length, is incomplete.
Risk management, counterparty risk, PFOF, and cost of trading are all gargantuan topics that we’ve essentially glossed over.
We wanted to publish something semi-digestible to add some context to our partnership, as opposed to the generic referral link shill to our audience for money (we’ll still do that, don’t worry).
At worst, you might think WOO Network (and specifically WOO X) is not your cup of tea, but perhaps you learnt something useful about their business model or risk management more broadly.
And that’s totally fine. We hope you continue to read and watch TechnicalRoundup.
At best, you might want to try it out and add another trading venue to your list in order to spread your exchange risk.
If that’s the case, consider using our link: https://x.woo.org/en/trade?ref=ROUNDUP
Doing so offers us a minor kickback, and also acts as evidence that we’re not totally useless partners to work with.
In general, we’ve found the WOO Network team to be very transparent, accessible, and responsive. This partnership is very active and we can make change happen, as we did with the recent amendments to the ToS, for example. Accordingly, if you have any feedback, questions, and concerns, simply ping us on Twitter.
Thanks for reading!
Note: This article was edited on 18/09/2023 to reflect changes to WOO X’s liquidity sourcing, branding, and other new developments.
