How to create a Crypto 2.0 Ready Exchange?

The recent disruption of the crypto asset market has shaken confidence in this relatively new market, but the crisis could mark a major turning point in the technology and product evolution of the asset class that is critical for future institutional adoption.

With the decline in crypto asset prices mainly attributed to two factors – the quantitative tightening of the Federal Reserve and the collapse of TerraUSD, a stablecoin – will be a crucial first step for the industry to restore confidence in the asset class. any other asset class starts with having the right infrastructure.


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If you build it they will come

Building a robust financial infrastructure for crypto is essential to ensure that the system can absorb future shocks and create the conditions for greater institutional participation.

The critical question for the next phase of building crypto is therefore how to build a crypto exchange that can attract both types of market participants – retail and institutional – and create an environment in which these pools of liquidity and their intermediaries can coexist ​and can communicate with each other. † with each other.

To meet the challenge ahead and take advantage of future growth opportunities, exchanges need to address both the technology and product angles, which are also intertwined in the case of crypto.

Resilience on UX

From a purely technological perspective, it’s worth remembering that the first generation of crypto exchanges were built by engineers in Silicon Valley who had a fundamentally different approach to exchanging technology.

Their goal was to create exchanges with the best user experience for retail, but they lacked a deep understanding of how capital market infrastructure has evolved over the past 30 years. This lack of experience is evident in the fact that many crypto exchanges, faced with increased volumes or volatility, have exhibited performance, latency and load issues.

This problem is recognized by exchanges and for this purpose, many of them are already looking to fill technological gaps, increase capacity and improve performance by building new trading systems in view of the gradual migration from the old to the new.

The Barter Problem – Designed for Retail

Another aspect of the technological challenge is that the first-generation crypto exchanges are designed for retail investors, limited to web and mobile user interfaces. This has made it difficult for institutional firms to interact with the exchange feed as it stands – these exchanges lack an industry standard approach or FIX gateways with market data order feeds and scrap copies that institutions would expect to see – making it impossible to get reliable information. and timely order confirmations, for example.

To attract more institutional flows from exchanges, vendors need to start thinking about building exchanges with standardized FIX-based protocols, integrations with the OMS/EMS landscape, and institutional-grade user interfaces and APIs that are more easily accessible and available to institutions. liquidity.

Product diversification calls for a broader swap offer

The second aspect that trades need to address is the product angle. While the first generation of crypto exchanges mainly focused on spot products, as crypto matures, we will see more product diversification.

We are already seeing growth in OTC derivatives and options-based products that will attract more institutional liquidity. The interaction between option flow and spot flow is more suitable for institutions from a risk management perspective.

However, with the expansion of products comes a huge increase in the scale and volume of message flows – moving faster, much more liquidity and many more traded instruments – which also affects infrastructure. This requires a larger, better and more flexible institutional infrastructure, an infrastructure that can only be provided by architectural approaches steeped in capital market infrastructure knowledge and experience.

After: With Regulation Comes Trust: The Future of the UK Crypto Industry

The world of crypto is undergoing significant evolution – from a technology, product and regulatory standpoint, creating arbitrage opportunities along the way. These changes will help mature the asset class and attract new entrants to the crypto market that have the potential to critically increase the flows and volumes we see today. Exchanges must be prepared for growth by laying the right foundations – by tackling the technology stack to take advantage of future opportunities.

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