Sep 30, 2019
DDEX Aims To Add More Liquidity To Decentralized Finance
Thanks to efforts by Maker, Compound, and others, decentralized finance (or DeFi) has been gathering momentum. DDEX, a decentralized exchange (or DEX), is presently embracing these developments in the hope of attracting more liquidity to their platform. Here is a look at how one aspect of DDEX product strategy is evolving to stimulate the wider adoption of their platform by sophisticated traders.
Next month DDEX will join the ranks of dYdX, Fulcrum, and other margin trading platforms built on top of the Ethereum Network. DDEX will allow users to do something that they cannot do on any existing platform. Margin traders on DDEX will be able to use Tether (USDT).
USDT is the fourth largest cryptocurrency by market capitalization. It is also the most active cryptocurrency by monthly volume. By electing to focus on USDT, the DDEX team wager that providing Tether holders the ability to trade Ether (ETH) on margin will bring substantially more liquidity to the decentralized finance world and their decentralized exchange in particular.
The volume on even the most active decentralized exchange (or DEX) does not come anywhere near the volume on the most active centralized exchanges. For example, the popular, but centralized Binance exchange recently reported a trading volume of almost one billion dollars in 24 hours. In comparison, IDEX, the most active decentralized exchange, reported a trading volume of around half a million dollars during the same period.
Volume Matters
High trading volumes can provide sustainable competitive advantages for exchanges. For example, BitMex, with its innovative XBTUSD perpetual contract, hit a home run with traders. This popular product has allowed BitMex to maintain dominance over its competitors.
OKEX, FTX, and others have entered into the perpetual contract territory dominated by BitMex. Both exchanges offer extremely high leverage. Leverage gives traders the capacity to trade with borrowed funds. The leverage available on bitcoin is 100X on OKEX and 101X on FTX. This means that traders can borrow $99 or $100 for each dollar that they have available for trading.
FTX offers marginally more leverage than BitMex. In spite of this, Bitmex, with recently reported trading volumes exceeding two billion dollars daily, remains the king of cryptocurrency derivative exchanges.
Market Coverage
In the case of FTX, the founders of the exchange thought carefully about innovating upon BitMex. They expanded markets. For instance, they provided futures markets for even more tokens. Most notably, the created a market for Algorand’s ALGO long before the coin was even tradable.
FTX offered this product at a time when they anticipated demand for speculators wanting to short the ALGO. Shorting an asset means borrowing an asset to sell immediately so that you can profitably purchase it later at a lower price. Traders like to “go short” whenever they feel an asset is overvalued and anticipate a price drop. Conversely, traders “go long” whenever they feel an asset is undervalued.
From a marketing perspective, FTX has been most creative in terms of market coverage. They draw attention to their cryptocurrency derivatives exchange with their innovate markets. FTX allows speculators the ability to go long or short in many different asset markets.
Chief among those markets are their index futures. They have a MID (or “mid-cap”) index that provides exposure to coins like Cardano’s ADA and Ontology’s ONT. They even have a SHIT (or “low-cap”) index. As much as Arthur Hayes, the BitMex CEO, rants and rages over shitcoins, he and his team do not provide exposure to them on BitMex. FTX does.
Depth and Spread
Certainly, from the market coverage perspective, FTX has been successful. However, in terms of trading volume, they cannot unseat BitMex. That is because the largest traders only care about trading volume, market depth, and price spreads.
These traders circumnavigate the most liquid markets because they tend to move larger volumes of assets when they trade. Liquid markets are markets that allow traders to buy and sell cryptocurrencies without impacting the price when they trade. For those that trade larger quantities of an asset, ceteris paribus, high liquidity is the most important quality.
Exchanges that have low spreads are preferable for those traders that buy and sell larger quantities of an asset. An exchange with a low spread is one that does not have a material difference in the price for which an asset is offered for sale or purchase.
Low spreads and deep liquidity (or depth) allow the whales to come in and play. Maybe that is exactly what DDEX wants.
Discipline and Focus
Unlike the Fulcrum offering, the designers at DDEX chose to discipline themselves. They focused on leveraged longs and shorts of ETH only. Maybe they will expand their offerings in the future, but they are going after a niche.
They also offer 5X leverage at a time when dYdX and Fulcrum only offer 4X leverage. This is only a fraction of the leverage offered on centralized platforms like FTX, OKEX, and BitMex. However, given the present transaction speed of the Ethereum Network, it might not be wise to go over 5X leverage on a highly volatile asset like ETH anyway.
Conclusion
The DDEX margin trading platform seems to be going for the jugular. They want to allow previously neglected USDT holders the ability to margin trade from their wallets. Moreover, USDT holders will finally be able to earn interest lending Tether whether or not they trade on margin.
Since USDT is the most active cryptocurrency, this strategy may garner success and draw even more people into the exciting and ever-evolving world of decentralized finance.
Disclaimer: DDEX has integrated the D’CENT Biometric Wallet into their margin trading platform. I am presently acting as the CMO of IoTrust, the makers of D’CENT Wallets.
