© Provided by CoinDesk (Getty Images/modified by CoinDesk)The conceptual simplicity of cryptocurrencies is causing excitement and acceptance in the asset class. Cryptocurrencies, in general, are:
- digital counter...
- storage cost...
- and can be exchanged for other valuable items.
Readers who still remember the first principles of economics can understand that these three statements are part of the definition of money.
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However, conceptual simplicity is quickly giving way to practical complexity as users take a closer look at cryptography. This is especially noticeable when used as a medium of exchange, item #3 above. And also often when it comes to transferring cryptocurrency back and forth.
In crypto, unlike conventional finance, there are two very different types of exchanges. And helping you understand this, like any other sensitive topic in cryptography, is a task I'd be happy to take on.
There are two main ways to transfer to crypto exchanges.
- sort books
- Automobile Marketer (AMM)
Order books are the most common and also the most familiar to anyone with a traditional financial background. This is very similar to the New York Stock Exchange, Nasdaq, and other traditional markets combining buy and sell orders in a public place so that the new orders are matched.
This is how Binance and other centralized cryptocurrency exchanges work. Binance, with roughly half the volume of cryptocurrency exchanges, is the largest.
Traders in the order book industry, called market makers, help keep the business running by buying from any seller and selling from any buyer, receiving as a reward the difference between the purchase price and the sale price; (Last week I talked about cryptocurrency merchants, companies that provide this service.)
One of the advantages of the order book is that it allows you to see the depth of the market, that is, how concentrated the orders are around a certain price. Traders can gain insight into the direction of the market by studying the depth of the market and making subsequent decisions, which is why order books are so popular.
But crypto has its own unique way of transferring money from buyer to seller, known as an automatic market maker. (The name is similar to the aforementioned trader, the market maker that spins the order book, but they are very different.)
While order books are common on centralized exchanges (CEXs), AMMs are common on decentralized exchanges (DEXs). Uniswap is the leading DEX.
While the order book is a peer-to-peer deal based on the combination of buyers and sellers, AMM is a counterparty contractual relationship based on a liquidity pool.
A liquidity pool is a pool of tokens provided by a liquidity provider. Liquidity providers are users who decide to contribute their own assets to the fund, having an incentive to do so by receiving something of value.
Users deposit coins into the liquidity pool. Other users who want to buy or sell interact with the group that contains the asset they are interested in, trading against the group itself and not against other users. Depositors are rewarded for providing liquidity.
Often this comes at the expense of earning trading commissions or management vouchers. A common term you'll hear about AMM is "yield farming," where users place tokens in a liquidity pool in an effort to earn maximum profit.
This method of incentivizing users to stake coins can have a network effect, causing the pool of coins to grow, which itself increases liquidity.
The price of a token is determined algorithmically and is often tied to the available quantity of each asset. For example, a given pool might have $1 million in ETH and $1 million in USD (ETH/USDC pool). An increase in the demand for ETH, represented by an increase in purchases, leads to a higher price of ETH, which is determined by a mathematical formula.
With DEX, unique elegance is taken out of the equation. In the case of Uniswap, the daily volume of transactions is around $500 million. For context, this pales in comparison to Binance's trading volume, which is valued at $4 billion per day.
However, DEXs offer a value proposition, especially when compared to less liquid traditional currencies. And while CEX and DEX are based on different things, they are based on the intersection of capital, efficiency, and incentives.
And at CoinDesk, our goal is to provide as much clarity as possible to explore how they evolve.
Here is some news worth reading from CoinDesk Deputy Editor-in-Chief Nick Baker :
- BOOM NFT BITCOINS. The Ordinals protocol significantly disrupted the NFT innovation stream, unexpectedly making old Bitcoin a major player. In just a few months, Bitcoin has risen from the bottom of NFTs to become the second largest blockchain in NFT sales. Ethereum is still first, which makes sense given the use of smart contracts; it's an ecosystem built for such things. But introducing NFTs to bitcoin is not an obvious use case for the original blockchain. Although we are here.
- WELCOME FROM FRANCE. Becoming a US cryptocurrency company in 2023 is becoming difficult as regulators take concrete steps to increase industry oversight and politicians intensify anti-crypto rhetoric. Just this week, in the midst of the debt ceiling fight, President Joe Biden said he would not agree to a deal that "protects wealthy tax scammers and cryptocurrency traders." So it's no surprise that other countries are trying to lure American businesses to their friendlier shores. Let's take France for example. “If American players want to benefit from the French regime in the short term, and from the beginning of 2025 from the Europe agreement, they are clearly welcome,” says Benoît de Juvigny, secretary general of the Financial Autorité des Marchés (AMF). . he told reporters on Tuesday.
- CANADA TOO. Coinbase, a major US-based crypto exchange, recently hinted that it might move overseas if the regulatory environment turns out to be less than ideal in its view. In a subsequent interview with CoinDesk, a senior Coinbase executive said the company likes Canada's approach, which it calls "participatory regulation," as opposed to "regulatory enforcement" schemes elsewhere. It makes you wonder if Coinbase might consider moving north.
- LONG READ : They do excellent reporting in the field, which no one seems to have done to refute misinformation about whether mining is acceptable for environmental reasons. worth reading