Cryptocurrency exchanges have order books just like the NYSE, but the digital investment realm likewise offers something very different known as automated market makers (AMMs).
The conยญcepยญtuยญal simยญplicยญiยญty of digยญiยญtal curยญrenยญcies driยญves much of the exciteยญment and adopยญtion of the investยญment class. Digยญiยญtal curยญrenยญcies are, by and large:
Readยญers who can still recall their earยญly prinยญciยญples of ecoยญnomยญics classยญes probยญaยญbly recยญogยญnize that those 3 tenets are part of the defยญiยญnยญiยญtion of monยญey itself.
Still, conยญcepยญtuยญal simยญplicยญiยญty gives way rapidยญly to pracยญtiยญcal comยญplexยญiยญty when users look closยญer at crypยญtocurยญrenยญcy. Thatโs espeยญcialยญly apparยญent with its use as a mediยญum of exchange, point #3 over. And likeยญwise often in the case of transยญferยญring crypยญtocurยญrenยญcy from one parยญty to anothยญer.
In crypยญtocurยญrenยญcy, unlike conยญvenยญtionยญal finance, there are two very difยญferยญent kinds of exchanges. And helpยญing you grasp them โ just like any thorny topยญic in crypยญtocurยญrenยญcy โ is a chalยญlenge I relยญish takยญing on.
There are two priยญmaยญry ways to transยญfer on crypยญtocurยญrenยญcy exchanges:
Order books are most comยญmon, and theyโre likeยญwise the most recยญogยญnizยญable for anyยญone comยญing from a traยญdiยญtionยญal finance backยญground. This is just like how the New York Stock Exchange, Nasยญdaq and othยญer conยญvenยญtionยญal marยญketยญplaces assemยญble buy and sell orders in a pubยญlic place so new orders can get matched up with them.
In crypยญtocurยญrenยญcy, this is how Binance Crypยญto exchange and othยญer cenยญtralยญized exchanges work. Binance Crypยญto exchange, with approxยญiยญmateยญly half of crypยญtocurยญrenยญcy exchange volยญume, is the largest one.
In the order book realm, traders was known marยญket makยญers help keep busiยญness churnยญing by buyยญing from any sellยญer and sellยญing to any buyยญer, colยญlectยญing the spread betwixt bid and ask prices as their reward โ someยญthing that can be quite profยญitable if done over and over. ( Past week, I talked about crypยญtocurยญrenยญcy high-freยญquenยญcy traders, corยญpoยญraยญtions that proยญvide this serยญvice.)
1 of the advanยญtages of order books is they allow everyยญone to see marยญket depth, i.e. the extent to which orders are conยญcenยญtratยญed around speยญcifยญic price points. Traders can gain insight into marยญket direcยญtion by studyยญing marยญket depth and makยญing subยญseยญquent deciยญsions โ a reaยญson why order books are popยญuยญlar.
On the othยญer hand, crypยญtocurยญrenยญcy has its own unique way of transยญferยญring monยญey from buyยญers to sellยญers, known as autoยญmatยญed marยญket makยญers. (The name sounds like the traders โ marยญket makยญers โ menยญtioned earยญliยญer who prowl order books, but these are very difยญferยญent things.)
Where order books are prevaยญlent across cenยญtralยญized exchanges (CEXs), AMMs are prevaยญlent in decenยญtralยญized exchanges (DEXs). Uniswap is a notable DEX.
Where order books repยญreยญsent a peer-to-peer arrangeยญment underยญpinned by the matchยญing of buyยญers and sellยญers, AMMs repยญreยญsent a peer-to-conยญtract relaยญtionยญship underยญpinned by pools of liqยญuidยญiยญty.
Liqยญuidยญiยญty pools are colยญlecยญtions of crypยญto tokens that have been supยญplied by liqยญuidยญiยญty providers. Liqยญuidยญiยญty providers are users who decide to deposit their own assets into a pool, incenยญtivized to do so by the receipt of someยญthing of valยญue.
Users deposit coins into a liqยญuidยญiยญty pool. Othยญer users who wish to buy or sell interยญact with pools holdยญing the investยญment theyโre interยญestยญed in, tradยญing against the pool itself instead of anothยญer user. Deposยญiยญtors are rewardยญed for supยญplyยญing liqยญuidยญiยญty.
Oftenยญtimes, that comes via the receipt of tradยญing charges or govยญerยญnance crypยญto tokens. A comยญmon term you will hear speยญcifยญic to AMMs is โyield farmยญing,โ where users deposit crypยญto tokens into liqยญuidยญiยญty pools while searchยญing for the greatยญest benยญeยญfit.
The method of incenยญtivizยญing users to deposit coins can have a netยญwork effect, whereยญby the pools of coins grow, increasยญing liqยญuidยญiยญty itself.
Prices of the crypยญto tokens are deterยญmined algoยญrithยญmiยญcalยญly, and often tied to the availยญable quanยญtiยญties of each investยญment. For instance a parยญticยญuยญlar pool may hold $1 Milยญlion worth of Ethereum (ETH) and $1 Milยญlion of USDC โ an ETH/USDC pool). Increased demand for Ethereum (ETH) repยญreยญsentยญed by increased buyยญing leads to a highยญer price for Ethereum (ETH), deterยญmined by mathยญeยญmatยญiยญcal forยญmuยญla.
With DEXs, there is a unique eleยญgance borne out of that equaยญtion. When it comes to Uniswap, the result is approxยญiยญmateยญly $500 Milยญlion in volยญume of daiยญly tradยญing. For conยญtext, this pales in comยญparยญiยญson to Binance Crypยญto exchange volยญume of tradยญing, estiยญmatยญed to be as high as $4 Bilยญlion daiยญly.
Still DEXs proยญvide a valuยญable offerยญing, parยญticยญuยญlarยญly as it relates to traยญdiยญtionยญalยญly less liqยญuid coins. And while CEXs and DEXs are underยญpinned by difยญferยญent things, the interยญsecยญtion of finanยญcial resources, effiยญcienยญcy and incenยญtives underยญpins them all.
And our goal at CoinยญDesk is to proยญvide as much clarยญiยญty as we can in explorยญing how they evolve.
Takeaways
From CoinยญDesk Deputy Ediยญtor-in-Chief Nick Bakยญer, hereโs some news worth readยญing:
- BITCOINโS Non-Funยญgiยญble Token (NFT) BOOM: The Ordiยญnals proยญtoยญcol has sigยญnifยญiยญcantยญly shakยญen up the peckยญing order in Non-Funยญgiยญble Token (NFTs), turnยญing good old Bitยญcoin (BTC) โ shockยญingยญly โ into a major playยญer. In just sevยญerยญal months, Bitยญcoin (BTC) has gone from a tie for last place in Non-Funยญgiยญble Token (NFTs) to the numยญber two blockchain tech for Non-Funยญgiยญble Token (NFT) sales. Ethereum (ETH) remains in first, which makes sense givยญen its use of smart conยญtracts; this was an ecoยญlogยญiยญcal sysยญtem built for this kind of thing. On the othยญer hand, inscribยญing Non-Funยญgiยญble Token (NFTs) into Bitยญcoin (BTC) was not an obviยญous use case for the origยญiยญnal blockchain tech. And is still, here we are.
- A FRENCH WELCOME: Itโs gotยญten hard to be a crypยญtocurยญrenยญcy comยญpaยญny in the Unitยญed States in 2023, with regยญuยญlaยญtoยญry authorยญiยญties takยญing tanยญgiยญble steps to increase scrutiยญny of the indusยญtry, and the loomยญing threat of more action as politiยญcians amp up anti- crypยญtocurยญrenยญcy rhetoric. Just this comยญing week amid the debt-ceilยญing showยญdown, Presยญiยญdent Joe Biden statยญed he wouldnโt accept a deal that โproยญtects wealthy tax cheats and crypยญtocurยญrenยญcy traders.โ And, it should come as no surยญprise that othยญer counยญtries can potenยญtialยญly try to lure Amerยญiยญcan corยญpoยญraยญtions to their friendยญlier shores. Take France, for instance. โIf Amerยญiยญcan playยญers want to benยญeยญfit, in the very short term, from the French regime, and from the start of 2025 from Euroยญpean arrangeยญments, clearยญly they are welยญcome,โ Benoรฎt de Juviยญgny, Secยญreยญtary Genยญerยญal of the Autoritรฉ des marchรฉs financiers (AMF), informed reporters Tuesยญday.
- CANADA, TOO: Coinยญbase Crypยญto exchange, the large U.S.-based crypยญtocurยญrenยญcy exchange, recentยญly intiยญmatยญed it could move overยญseas if the regยญuยญlaยญtoยญry enviยญronยญment perยญsists to be, from its perยญspecยญtive, less than ideยญal. In a subยญseยญquent interยญview with CoinยญDesk, a senior Coinยญbase Crypยญto exchange execยญuยญtive statยญed the comยญpaยญny likes Canadaโs approach, someยญthing he was known โregยญuยญlaยญtion by engageยญment,โ as opposed to the โregยญuยญlaยญtion by enforceยญmentโ scheme elseยญwhere. Makes you wonยญder if Coinยญbase Crypยญto exchange can potenยญtialยญly conยญsidยญer headยญing north.
- A LONG READ: CoinยญDesk jourยญnalยญists did an in-depth analyยญsis of a crypยญtocurยญrenยญcy minยญing facilยญiยญty was known Greenidge Genยญerยญaยญtion in upstate New York. They did excelยญlent on-the-ground reportยญing โ someยญthing no one else appears to have done โ to debunk misยญinยญforยญmaยญtion in the debate over whether minยญing should be perยญmitยญted or not on enviยญronยญmenยญtal grounds. Itโs well worth your read.
Nick Bakยญer.
