Transaction fee mining exchanges like FCoin have been controversial from the start, but a new report suggests they are quickly dying out.
Exchanges, of course, form the backbone of cryptocurrency. The sector would be a very stultifying place without them. Eight years after the first one opened its (virtual) doors, exchanges have increased in both number and variety. Some are good, some are bad.
The bad, it seems, don’t survive long.
Transaction fee mining (TFM) exchanges, trading platforms that reward users with native tokens, were found to have few users and thin order books according to a report released by a London-based data and price aggregator service. TFM exchanges – only recently introduced – are already on the way out, despite efforts by some exchanges to artificially inflate trading volume.
The CryptoCompare Aggregate Pricing Index (‘CCCAGG’) found TFM exchanges saw a significant decline in the average 24h trading volume from September to October. CoinBene fell by just under $40m and CoinEx by approximately $70m; EXX managed to increase by $9m last month.
The report indicated that many TFM exchanges had high volumes, but small trade sizes. The average size of a CoinEx order, for example, was $125; those of conventional exchanges, like Bithumb and Huobi Pro, were $3,000 and $1,500 respectively. They also all had thin order books, meaning there was little diversity between ask and sell orders.
TFM exchange volumes were also disproportionate to the number of daily active users. CoinBene had approximately 2,000 uniques every day; Kraken, an exchange with a similar trading volume had just under 10,000. EXX’s trading volume was more toward $160,000 but had as little as 700 site visitors per day.
FCoin was a different type of crypto exchange
The key difference between a conventional and transaction fee mining exchange is the different transaction fee model. A normal exchange will add a small charge per order, which goes towards the maintenance and upkeep of the exchange, as well as profit if it’s a centralized exchange. TFM exchanges still take fees for every trade, but these are collected together, and exchange users are reimbursed in native tokens.
Ostensibly, this encourages more users onto the platform and then gives them something back for participating. Native tokens are swapped for well-recognized cryptocurrencies – bitcoin (BTC) or Ether (ETH) – with TFM exchanges implementing referral schemes to encourage more users onto the platform. The native token value shrinks as more are distributed. Because of this, some worry they are a type of Ponzi scheme.
One of the best examples of a TFM was the FCoin exchange, which launched back in the summer. Exchange users would pay transaction fees in BTC or ETH and receive FCoin tokens in return. Although the exchange reported daily trading volumes above that of established services like Binance and OKEx, it later transpired most of these orders were executed by bots.
Binance founder and CEO, Changpeng Zhao (‘CZ’) criticized the exchange’s model; that it tricked unwitting users into participating in a token sale.
Transaction fee mining exchanges: the last gasp of a bygone era?
A disproportionate number of active users to trading volume indicates platform activity is automated. That the trade sizes are small and the order books thin suggest most of these bots are acting on similar trading instructions.
Although the evidence is not conclusive, the disparities suggest TFM exchanges are artificially inflating trading volumes, with a high frequency of small trades between bots working on the same instructions.
The CryptoCompare report highlights that trans-fee mining exchanges may be on the way out. Co-founder and CEO, Charles Hayter, thinks that the game is up. “TFM exchanges have thin orderbook and low visitor to volume ratios – this is therefore an illusion of best price execution”, he said. “Under the hood, TFM is a marketing technique and a one-sided fundraising mechanism that seems to have had its time.”
The report highlights nearly 10% of the total market trading volume was formed from orders coming from transaction fee mining exchanges. Most of this is artificial, but it nonetheless highlights the scale that some of these still operate at. This is likely to decrease in the future and with it, the entire TFM model.
The transaction fee mining exchange hasn’t represented the best of crypto, and the model led many to believe it was a scam.
Sort of like Initiative Q…
The author is invested in BTC and ETH, which are mentioned in this article.