How to build an exchange suitable for Crypto 2.0

The recent market dislocation in cryptocurrencies has weakened confidence in this relatively new market, but the crisis may mark an important turning point in the technological and product development of the asset class, which is crucial for future institutional adoption.

With declining cryptocurrency prices primarily attributed to two factors – the quantitative easing of the Federal Reserve and the collapse of TerraUSD, a stable currency – a critical first step for the industry will be to rebuild confidence in the asset class, and this, as with any other asset class, begins with have the right infrastructure in place.

If you build it, they will come

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

The critical question for the next phase of crypto-building is therefore how to build a crypto-exchange that can attract two types of market participants – retail and institutional – and create an environment where these liquidity pools and their intermediaries can co-exist and interact. together.

In order to meet the challenge that lies ahead and take advantage of future opportunities for growth, the stock exchanges will have to address both the technological and the product angle, which, when it comes to crypto, is also interconnected.

Resilience over UX

From a purely technological point of view, it is worth remembering that the first generation of crypto exchanges was built by Silicon Valley engineers who had a fundamentally different approach to exchange technology.

Their focus was on building exchanges that had the best retail user experience, but they lacked depth in understanding how the capital market infrastructure had developed over the past 30 years. This lack of experience is evident in the fact that many cryptocurrencies, when faced with greater volume or volatility, have shown problems related to performance, latency and load.

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

The exchange problem – built for retail

Another aspect of the technology challenge is that the first generation of crypto exchanges was built for retail investors, limited to network and mobile interfaces. This made it difficult for institutional firms to interact with the exchange flow in its current form – these exchanges lack an industry standard approach or FIX gateways with market data order flows and drop copies that institutions expect to see – making it impossible to obtain reliability and timely order confirmations, e.g. .

In order for exchanges to be able to attract more institutional flow, suppliers must start thinking about building exchanges with standardized FIX-based protocols, integrations with the OMS / EMS landscape and institutional user interfaces and APIs that are easier for institutions to access and offer. liquidity.

Product diversification requires a broader exchange offer

The second aspect for stock exchanges to address is the product angle. While the first generation of crypto exchanges was largely focused on spot products, we will see further product diversification as crypto matures.

We are already seeing growth in over-the-counter derivatives and option-based products that will attract more institutional liquidity. Interacting with option flow vs spot flow is better suited for institutions from a risk management perspective.

However, the product expansion comes with a huge increase in the scope and volume of message flows – faster movement, far more liquidity and many more instruments being traded – which also has implications for the infrastructure. This will require a larger, better and more flexible institutional infrastructure, one that can only be delivered by architectural approaches that are permeated by capital market infrastructure knowledge and experience.

More: With regulation comes trust: the future of the British crypto industry

The crypto world undergoes significant development – from a technology, product and regulatory perspective, and creates arbitrage opportunities along the way. These changes will help mature the asset class and bring new entrants to the crypto market that have the potential to critically expand the flows and volumes we see today. The exchanges must be prepared for growth by laying the foundation correctly – grab the technology table to take advantage of future opportunities.