How Do Cryptocurrency Exchanges Work And Why Bitcoin’s Ecosystem Uses Them (For Now)
Bitcoin, upon reading its whitepaper, paints the idealistic portrait of creating a peer to peer system for possessing and transferring money without the artificial borders created by third parties, companies, and governments.
But while Bitcoin has managed to solve this issue on a technical basis, the real world comes back with a far longer list of other challenges that come against Bitcoin and widespread adoption, the first challenge being acceptance.
For example, if you want to pay for pizza in Bitcoin, or a crypto of your choice: the receiving party must be a willing participant in the transaction, and especially willing to receive Bitcoin in return for the pizza that they'll make and give to you. If you compare this with a fiat currency, the US Dollar as an example, stores selling pizzas of any quality and quantity are more than happy to take those off your hands in an exchange.
So what is the issue here? Well, it's down to the fact that digital currencies have not become mainstream just yet. Meaning that the amount of people accepting them are in the minority compared to those that reject them. We need to find those who want to exchange our cryptos to fiat or other coins. Crypto exchanges were born.
What do Crypto Exchanges do? They prove successful in creating a huge pool of supply and demand for those actively interested in getting involved in the cryptocurrency market. They are directly involved in and used for day trading, along with this, they simplify the whole aspect of working with cryptocurrencies.
One of the things that it helps to prevent is the likelihood of people accidentally throwing out hard drives or secure kits containing an unspecified but otherwise valuable hoard of Bitcoin. With Crypto Exchanges, there's no chance of that happening for users.
Exchanges can also help with another problem that is endemic and unique to the world of digital currencies: seeing as though all crypto addresses are a series of hash-codes and numbers, meaning that users will occasionally send money to the wrong address. And with no bank being involved in the transaction, there's no way for the original party to get that money back.
As Calvin Cheng, CEO of ABCC, said, in one instance,
“one user [had]sent a huge amount of tokens to a wrong address. In theory, the user has the full responsibility for the mistake. However, our team worked hard to help him recover from the loss.”
On the other side of this, exchanges are also an ideal target for hackers, with some of the more notorious hacks such as the Mt. Gox hack being one of the biggest attacks on record, while the Bithumb hack was one of the latest, but Bithumb managed to cover $31 million worth of the total losses.
Bitcoin Has Fallen
Bitcoin, along with the vast majority of cryptocurrencies has gone through a rough ride, to losing a significant amount of their value individually, and also totally through their market cap. While some investors believe that the cryptocurrency market is an over-inflated bubble that's set to burst, other investors remain relatively hopeful that the market will rally and rise once again.
The focus that cryptos detractors and supporters talk about, is the need for the focus to be shifted towards the products that they build instead of the price. But this all comes down to the single, most important question: Does Bitcoin have an underlying, credible use case, or is its only use for criminal activity on the Dark Web?
There have been a significant amount of regulations and crackdowns instigated against both blockchain and various cryptocurrencies, a number of which act to take the fight to scams while others have no clue what blockchain really is. But apart from the official stance, studying crypto exchanges reveals a good deal about public support. Coinhills is one of the sites that lists these exchanges.
Upon greater observation of these exchanges, there appears to be some interesting information. According to statistics and research provided by SimilarTech, the majority of its users of these exchanges originate from the United States and China. With 35% of activity, each between the two countries is truly interesting, especially considering the Chinese government hasn't exactly been receptive to cryptocurrencies, to put it mildly.
As a result, while China is certainly not amongst the most crypto friendly countries in the world on an official basis, the statistics from SimilarTech show something completely opposed to the Chinese Governments policies. It instead reveals a real popular support there is for digital currencies in these countries.
The Market For Exchanges
As we've previously seen, cryptocurrency exchanges have successfully managed to tap into a major global market, with different exchanges competing on trading volume, to the tokens they make available to investors, even over the various services that they offer.
Another example of this competitiveness includes how exchanges have begun offering zero-fee transactions to grow their client base. Other exchanges, such as ABCC have put into effect an innovative model to reward their clients: they pay users in their own virtual token, including having a dependence on their share of the tokens, and with investors paying into their tokens, users will be able to get a proportional share of the profits they generate (80% of the transaction fees are distributed to them).
To further encourage the early stages of user participation, these tokens are awarded based on the users activity and halved every 120 days, functioning in a similar way to Bitcoin's mining rewards mechanism.
Is this a method going to work? Well, so far, ABCC's annual growth rate has been promising so far, but let's also not forget that they also have the support of the former foreign minister of Malta on board with the company. ABCC's website also provides a truly accessible platform for users, with their website supporting 11 languages so far, and have also released native apps to further simplify the process.
While Bitcoin and other cryptocurrencies have seen their prices fall over this year, Bitcoin remains a significant player. And exchanges provide a simplified, reduced risk path into the realm of crypto investment, with fewer worries and uncertainties and more rewards.