Stablecoin-to-stablecoin high-frequency trading, anyone?
By Nick Chong on ALTCOIN MAGAZINE
When does using a stablecoin to trade make sense and when does it not?
This is a question that I have pondered many times in the past half year since stablecoins have merged to challenge the dominance of Tether (USDT).
But first, a bit of background. Whether by chance or not, at Liquid exchange I have become to be known informally as the “stablecoin guy”. Not an expert by any means, but the guy who probably knows the most about the nascent state of the various stablecoin projects that have exploded onto the crypto scene since the end of last year.
Verification of the redemption mechanism of a stablecoin? Check! Fiat reserves audited and published every month? Check! Policies to mitigate against black swan/bank run events? Check! These are the types of enhanced due diligence that I performed for projects wanting to list their stablecoin on Liquid.
Of course, no precaution is too great when dealing with coins that are actually designed to replace our fiat currencies on a one-to-one basis, and essentially guarantee stability to 1 US dollar or 1 Euro.
At face value, the premise of a stablecoin is pretty straightforward — to be a replacement for fiat currency, which can be transferred between people much faster and at lower cost than our world reserve currencies, and without the impediments of our obsolete and slow banking systems. A stablecoin acts essentially as a synthetic fiat currency. The use case is similarly clear: to move funds from one wallet to another at speed.
But are there more spurious uses for stablecoins? I pondered this while thinking about why Tether, a stablecoin mired in controversy, still dominates with 90% of the total market cap for stablecoins.
Stablecoin-to-Stablecoin High Frequency Trading
Feast your eyes on the trading numbers of Tether (USDT) on BitMax Exchange below, where 2 of the top 3 trading pairs are:
- PAX/USDT for $2.1B
- USDC/USDT for $1.6B
Nearly 4 billion dollars were traded in only 24 hours between these three stablecoins: Paxos, USD Coin, and of course Tether.
Why would anyone trade these stablecoins at such high volumes when all are pegged at 1 US dollar? What is there to gain with little price appreciation or depreciation on buying and selling?
Dear friends, enter trans-mining, also known as “transaction mining”.
For those of you who are familiar with trans-mining, you can skip this part. For the others, read on. Suppose for a moment that you owned a crypto exchange with ambitions to rise to the top of CoinMarketCap. If only volumes were higher! But how to incentivize people to trade? Instead of charging traders, how about paying them instead?
But there is only one problem — you don’t have money. But this is the crypto world, so you can create your own money. Call it the Nick-coin or the whatever-coin, no matter. The more people mine, the more you give them Nick-coins. Problem solved!
Now, back to reality. Trading on BitMax Exchange generates around 1.9 million BTMX tokens every day. At value of 10.7 cents per token, trans-mining on BitMax generates around $200,000 of BTMX every day. Those revenues are attractive for those trading stablecoin-to-stablecoin using bots on BitMax. With little risk exposure in asset devaluation (since they are trading stable value assets), they can go on doing this every hour of every single day.
Is Trans-Mining the new Wash Trading?
Right or wrong, trans-mining certainly is very effective at generating large volumes. BitMax is ranked #2 on CoinMarketCap with $3.8 billion traded in the last 24 hours, and stablecoin-to-stablecoin trading accounting for 97% of its total volume. Is trans-mining the new wash trading?
Note that I picked BitMax Exchange for this story, but I could as well have picked a number of other exchanges guilty of the same scheme.
This is the first of a series of thoughts on the emerging stablecoin ecosystem. In Part 2, we will continue exploring interesting, marginal cases for the usage of stablecoins, including in countries where cryptocurrency trading is banned.
