The Importance of System Stability of Crypto Exchanges

Beginner’s Guide / 14.08.2020

In March 2010, the now-defunct bitcoinmarket.com started as the first and only crypto exchange. However, the growth of cryptocurrencies and upsurge in tradable coins caused a rise in the number of crypto exchanges globally. By 2018, the number of crypto exchanges was estimated to be more than 500 platforms.

Exchanges have the aptitude to provide high liquidity to any crypto assets and offer faster and cheaper transfers. Although exchanges have fostered growth in the past three years, their instability is still a serious matter that hinders their growth. It is, therefore, important that developers and users of these platforms understand the significance of stability. Let’s look at the importance of stability in exchange systems.

Attract Investors

One main benefit of stability in crypto exchanges is the fact that it will attract investors. No investor wants to put their money in a failing. The instability in the crypto exchanges hints at failure, and that makes risk-averse investors stay away from the crypto world as a whole.

Attainment of stability from the existing state will make more investors want to join in and enjoy the benefits of exchanges. That will, in turn, drive faster crypto exchange adoption. 

Traders Can Hedge Against Volatility

The crypto world has experienced a vast amount of volatility-related issues since its inception. Bitcoin has, in the recent past, proven to be highly volatile hence prone to lots of price swings. In late March 2020, for example, bitcoins volatility hit a record of 167% for the year. The volatility of cryptocurrencies has led some to consider them as an additional asset class for investment. 

Bitcoin’s volatility has occasionally led to a shortage of services for crypto exchanges. The higher the volatility of the currency, the higher the risks associated with it.

Stability, in this case, will lead to a more stable, less volatile crypto exchange. Traders will enjoy maximum benefits associated with exchanging cryptocurrencies, without anticipating price plunges that may lead to losses

Faster Crypto Adoption

Banking systems, big companies, and individuals have often feared to use exchanges, especially in the crypto world because of liquidity issues. Many fiat regulators are not ready to make losses associated with virtual currency.

Stability is critical in faster crypto adoption. The standard measure of crypto value will not be in fiat. The digital assets will be a standard of valuation independently. That will lead to the more rapid adoption of the crypto world by big companies and small businesses and individual transactions.  

Comfortable Predictability Of Value Growth

Due to the volatility of currencies in the exchanges, determining an asset’s future value is especially hard. Take bitcoin, for example, whose value usually surges after every halving. Although different analysts have found some ways of computing the future prices of bitcoin, they are not sure of any proper value.

However, if the crypto exchanges were stable, the future value’s determination based on the existing value will be easy. Crypto enthusiasts will know the best time to invest in an asset and the best time to let them go. 

Effect of ADL and Clawbacks on Stability

Clawbacks are protocols instituted by exchanges to protect investors who may lose through their liquidation. A good example was seen in the OKEx company a few years ago. A trader in the OKEx crypto case made a risky investment by making high leverage bet on bitcoin with a notional value of more than $416 million. The OKEx company saw that and called him to ask him to close the position partially. The trader refused, and they froze his account, but the trader later made losses when the bitcoin prices tumbled, which caused the liquidation of his account. 

To pay for the loss, OKEx had to cover losses that were beyond the client’s account. OKEx, therefore, used a socialized clawback protocol. Other futures trades had to give up 18% of their profits. They took money from their traders to compensate for another trader.

On the other hand, Auto Deleveraging System is a contract protocol that protects other traders from the harmful effects of risky traders. The ADL protocol helps in covering trader contract losses that cannot be covered by insurance funds.

The ADL protocol is a good stability enabler in the crypto exchanges since traders will avoid high risks, and thus they will not manipulate the market. Other, less risky investors will invest more in the crypto world since they know that they are not going to pay for different investors’ risks. 

Conclusion

System instability has been menacing the crypto exchanges for quite a while now. The cause is that different protocols are set that are meant to protect senior traders but, in the process, leave other traders in harm’s way. However, other companies have chosen to look for protocols that protect the small investors from losses made by the financial giants in the crypto exchanges.

Stability attainment in the crypto exchanges will attract more investors in the short and long run and lead to faster growth. The stability of crypto exchanges is vital for the future global adoption of cryptocurrency.

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Wayne is a Blockchain enthusiast and expert in crypto trading. Currently, he covers trendy issues on digital currencies.