Why Legolas is the next generation Crypto-Exchange (1/3)

A primer on the digital currency trading activity

December 2017 has probably been one the most important months in the history of crypto adoption with two major milestones.
On the retail front, Coinbase, a retail-friendly digital currency exchange, hit the top spot on Apple’s US App Store boasting more than 10 million customers. 
On the institutional side, CBOE and CME, two major regulated U.S. derivative exchanges, have launched cash-settled bitcoin futures providing financial institutions with a derivative instrument to gain long and short exposure to BTC/USD exchange rate.

While the futures launch is key for broader adoption of cryptocurrencies by financial institutions, there is still a lack of infrastructure to make large cash investments that remain in line with their security and transparency needs. With close to an estimated 200 trillions of global asset under management as of 2015, even the most conservative assumptions in terms of portfolio allocation would result in annual revenues in the order of tens of billions for digital currency exchanges. Within this context, several exchanges will provide services to facilitate the flow of institutional money and innovative solutions will be needed to make it possible.

In this series of articles, we discuss the current landscape of digital currency exchanges, the limitations of existing centralized exchanges and the vision of Legolas Exchange, a trustworthy, demonstrably fair and bank-backed premium exchange.

Trading Activities are Concentrated on Fiat/Crypto Pairs

Back in 2009 when Satoshi Nakamoto introduced the world to bitcoin, the only solutions to own bitcoins were to participate into the bitcoin network through mining or to buy them directly from someone else on specialized forums. Given the high level of frictions, several exchanges started burgeoning to answer the growing demand with online platforms to exchange fiat currencies against bitcoins. Seven years after the first generation of digital currency exchanges has been launched, bitcoins are still mainly traded against fiat currencies.

For example, during November 2017, close to 85% of the bitcoin trading volume was against fiat currencies: approximately 50% against JPY (Japanese Yen), 25% against USD (U.S. Dollar) and 10% against KRW (Korean Won):

Even if we look at the broader picture and include other crypto-currencies and digital tokens in the analysis, the volume of transactions involving digital currencies are still highly concentrated on fiat/crypto pairs as detailed in the table below:

Should we be surprised by this distribution of trading activities?

Probably not, given how the money supply is currently distributed globally. As of 2017, the total value of the world’s money (M2: cash and cash equivalents) is estimated to be close to 90 trillions, dwarfing the ~500 billions total market cap of all digital assets (and ~ 200 billions excluding bitcoin market cap). Therefore, before seeing a significant increase in Cross-Chain and Intra-Chain trading, there would need to be a massive value and ownership shift from fiat to crypto as a first step and actual demand for the services provided by digital tokens. For the moment and in the near future, as the vast majority of goods and services are still paid in fiat, the majority of digital currencies is also quoted in and traded against fiat currencies.

Conclusion of Part 1/3:

The digital currency market is still in its early infancy. The bulk of the trading activity is concentrated on fiat to crypto currency pairs, resulting in a need for both a crypto and a fiat infrastructure for crypto-exchanges. Institutional investors have not yet entered the market, which is still dominated by retail flows.

In the 2nd article of the series “Why Legolas is the next generation Crypto-Exchange”, we’ll see how and why first and second generation crypto exchanges burgeoned in the past few years and will touch on the necessity for institutional investors to rely on a third generation of crypto-exchanges, with more transparency and higher standard of services.

About Legolas

Legolas Exchange (https://legolas.exchange) is a demonstrably fair, bank-backed premium exchange for institutional investors. It incorporates a decentralized ledger within its proprietary centralized platform in order to guarantee the inalterability, temporality and transparency of the order book and ensure a fair trading environment.

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