In the previous instalment, we talked about the outdated and problematic aspects of stock exchanges and how crypto exchanges are innovating in ways that traditional ones simply cannot keep up with.
We have established that traditional stock exchanges around the world are and have been very well established, which may seem like a good thing, but in reality, it implies over-saturated competition, incredibly high barriers to entry, and small chances for projects to do extremely well compared to others. However, it’s fair to say that crypto exchanges have built their platforms using traditional exchanges’ blueprints. They have nonetheless improved on a few things.
Models that crypto exchanges have adapted from traditional ones include financial products.
Financial products are assets (investments and securities) that provide buyers and sellers with short-term or long-term financial benefits. Examples of financial products could be shares, property, cash investments and others. These products diversify risks and allow more liquidity into the economy.
These products are also known as financial instruments. These assets can be traded or can also be viewed as capital packages that can be traded. Examples of products include bonds and derivative instruments such as options and futures, which are the ones we most often hear about in crypto trading.
(Look through options and futures infographics here):
Crypto exchanges haven’t been offering products trading for very long; Bitcoin futures and options were only introduced in 2017. Before that, exchanges were relatively simple, if not basic. They were focused on coin-to-coin trading.
The introduction of crypto trading derivatives contributed to crypto exchange’s rising popularity, adding extra value and interest in an otherwise “safe” model. These newly adopted financial instruments aren’t used by all traders, but with more people getting increasingly educated on the subject, this might change in the future. Each product provides traders with a new way to support crypto, without relying on the volatile high-and-low nature of cryptocurrency prices.
Instruments such as futures and options grant traders with opportunities to shield themselves against the dangers of price fluctuations and give people in countries where crypto is banned a chance to participate. Nonetheless, being a trading instrument, some element of risk remains. Another way crypto exchanges are innovating is the advent of staking rewards.
Staking is the process of holding funds in a cryptocurrency wallet to support the operations of a blockchain network. Staking relies on users who are participating in blockchain activities through a personal crypto wallet, such as Coinbase.
Staking allows people to earn passive income by simply holding crypto. Binance is an example of an exchange that offers staking rewards. Crypto exchange’s unrelenting innovations have shaken some governmental feathers, as most cryptocurrency-related innovations always do.
Back in July of this year, the UK markets regulator Financial Conduct Authority (FCA) proposed a ban on financial instruments linked to cryptocurrencies, the reason being the fear that it would result in major losses for retail consumers who are unlikely to understand crypto instruments’ value or risks.
The organization’s cited complaints often heard whenever a government entity attempts to halt a new development in the crypto industry, such as “extreme volatility”, “ill-suited to small investors” and so on.
Regardless, the future of crypto and product-based exchanges looks brighter than ever, with relentless innovation and creativity at the forefront of every new development.