Why Legolas is the next generation Crypto-Exchange (2/3)

An overview of the current crypto-exchange landscape

In “Why Legolas is the next generation Crypto-Exchange (1/3)”, we’ve detailed the crypto-currency trading activity. In this article, we provide an overview on the current state of crypto exchanges, and touch on the need for a third generation of exchanges, geared towards institutional investors.

The Fiat/Crypto Exchange Industry has been Growing Exponentially

Oftentimes, mainstream media headlines about digital currencies focus on extreme volatility episodes of bitcoin prices obscuring the fact that the fundamental drivers have been growing at a steady pace. Indeed, the fiat/crypto traded volume growth has been steady since bitcoin has been made available on the first exchange in 2009. The chart below displays the total daily volume of bitcoins traded in dollar terms on a log scale since 2010. While BTC/USD exchange rate have changed by multiple orders of magnitude over time, the dollar volume traded has been growing at steady rate of 450% per annum.

The Third Innovation Wave will Hit Crypto Exchanges:

Since bitcoin has been listed on the first exchange, digital currencies’ market cap and bitcoin market cap in particular have grown tremendously following three consecutive bitcoin cycles corresponding to three massive waves of money inflow:

  • 2010–2011: The launch of the first generation of crypto-exchanges such as BitcoinMarket.com and MtGox.com allowed the first crypto enthusiasts to trade their fiat currencies against bitcoins. The liquidity was very low, the volatility very high and bitcoin was still considered a cryptographic experiment by most buyers. However, the bitcoin price grew very quickly from less than 1 cent to 30 dollars catching the attention of a wider audience.
  • 2012–2015: Following the 2011 bitcoin bubble, many people started realizing the potential of bitcoin, the growing demand from non-technical investors and the lack of user-friendly solutions. Therefore, second generation exchanges such as Kraken and Coinbase were launched at the beginning of the second bitcoin cycle to answer the predicted demand from retail investors. While first generation exchanges dominated trading volumes during the second bitcoin cycle, most of them eventually failed because of low security and compliance standards. One of the most tragic cases was MtGox.com, the largest trading platform that went bankrupt after getting hacked and loosing more than $300 millions worth of bitcoins.
  • 2016–20??: Since 2016, a new bitcoin cycle has started in which second generation exchanges are now dominating the market. With the increasing liquidity and the unique properties of bitcoin as an investable asset class, Financial Institutions have started to investigate the best way to gain exposure to bitcoin. As of today, there is still no adapted solution for large and sophisticated investors.

The Transition from Retail-Focused to Institutional-Focused Crypto Exchanges:

Among the largest crypto exchanges in activity today, almost two third were launched during the previous bitcoin cycle of 2013–2015. As the competition for the institutional crypto trading heats up, we should expect a new spike in the number of trading platforms to service them.

Retail appetite for crypto-currencies has been growing exponentially, as revealed by the number of new Coinbase accounts
Institutional investors are starting to tap into the market, by investing through crypto funds.

While second generation exchanges are blossoming, they are very unlikely to be used by institutional investors which require higher standard of services. This need is at the essence of the incoming third generation of exchanges.

The Crypto Exchange Industry is Dominated by Centralized Solutions

Definition of a Centralized Exchange:

A centralized exchange is a platform that facilitates transactions between cryptocurrencies and fiat currencies. Transactions between the exchange’s customers are recorded in the exchange’s internal ledger. Transactions are typically not recorded on a blockchain or on any outside ledger. There is no transparency and neither the account balance nor the transaction history can be viewed. The vast majority of existing crypto exchanges are centralized exchanges

Top 10 Major Digital Exchanges ranked by Bitcoin Trading Volume (November 2017):

  • (BTC/USD) Bitfinex
  • (BTC/USD) Bitstamp
  • (BTC/USD) Kraken
  • (BTC/USD) Gemini
  • (BTC/JPY) Bitflyer
  • (BTC/KRW) Bithumb
  • (BTC/KRW) Coinone
  • (BTC/USDT) Poloniex
  • (BTC/USDT) Bittrex

Among the top 10 digital exchanges listed above, 8 of them are focused on crypto/fiat trading and all of them are centralized solutions.

Conclusion of Part 2/3

As first described in “Why Legolas is the next generation Crypto-Exchange (1/3)”, the crypto currency market is geared towards fiat to crypto currency pairs. This fact, put together with the new appetite from institutional investors makes a third generation of crypto-exchanges necessary. Legolas Exchange will be one of those, providing investors with transparent services and a high quality fiat and crypto custody infrastructure.

In the third and last article of this series, we’ll go through the shortfalls of existing crypto-exchanges and the solutions provided by Legolas Exchange.

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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