Thorchain: The centralized exchange killer?
Thorchain will be much more profitable to traders then centralized exchanges
Transaction Fee versus Slippage Fee
I read with great interest the recent article by @jk6276 , in which he reported on the report by #gauntlet in the Thorchain GitHub detailing the difference in how Liquidity Providers will be rewarded on Thorchain then other Decentralized Exchanges like Uniswap. In brief, other exchanges pay Liquidity Providers all or a percentage of transaction fees generated by swaps in the pool they provide liquidity for, and so the more activity in the pool the more transaction fees. But there is the risk of impermanent loss and competition with arbitragers. Good for Liquidity Providers, Bad for Centralized Exchanges.
Slippage Fees greater the Transaction Fees
In contrast to this Thorchain charges token swappers a slippage fee, calculated on how much slippage their trade will cause. And the larger the trade, the higher the slippage. For those of you who are unfamiliar with the concept of slippage: It’s kinda like big sellers entering any market, the larger the size of their trade, the bigger their impact on the price. The same goes for large traders effect on liquidity pools. Thus charging all traders a slippage fee, especially large traders is calculated to improve earnings for Liquidity Providers, while decreasing their risk. Good for Liquidity Providers, Bad for Centralized Exchanges.
DeFi is huge and has Tremendous Liquidity
Unless you have been asleep in a cave for most of 2020 you are aware of the huge success of decentralized finance of DeFi, the majority of which is on decentralized exchanges of the AMM or Automatic Market Maker variety, of which the most successful is Uniswap, on Ethereum blockchain. The increase in the amount of USD deposited on these exchanges was estimated at millions in September of 2019, and exceeds 1.62 billion currently, a 1000x fold increase in deposited liquidity. An unprecedented movement of money into an investment niche. Good for Liquidity Providers, Bad for Centralized Exchanges.
Picture of total liquidity on Uniswap
Picture of top five trading pairs.
The number one trading pair is wrapped Bitcoin-ETH with over 190 million USD worth of those two tokens alone. Good for Liquidity Providers, Bad for Centralized Exchanges.
Increased Profits
This increased profit is good for Liquidity Providers, but bad for centralized exchanges because traders go where the profits and liquidity are, and for a year they have been moving to Uniswap. Good for Liquidity Providers, Bad for Centralized Exchanges.
Increased Security
In order to trade Bitcoin on a centralized exchange you transfer your Bitcoin tokens to the centralized exchange wallet. The coins are no longer protected by your private keys, in your wallet. They are now in someone else’s wallet. This breaks the central rule of cryptocurrency security, not your keys, not your crypto. This doesn’t happen on Thorchain. On decentralized Exchanges like Uniswap you can’t deposit your Bitcoin, you have to trade it for a wrapped Bitcoin Token. Then you have to leave your real Bitcoin with a custodian and trade the wrapped Bitcoin token, basically an ERC20 Token on Uniswap or other exchanges on Ethereum. But on Thorchain it’s atomic swap and so your tokens are tradeable. There’s no need to use wrapped or ERC20 tokens and trust your tokens with a custodian. Good for Liquidity Providers, Bad for Centralized Exchanges.
Distribute the wealth
On a centralized exchange, all transaction fees go to the owner. Traders don’t get any of those fees. But on decentralized exchanges traders get a share or all of transaction fees. It’s been a great attractor of traders. On Thorchain traders get slippage fees, which are estimated to be greater then transaction fees. The net effect on decentralized exchanges and Thorchain is broader or decentralized wealth distribution, as instead of all exchange profits going to a small group of owners of the exchange, centralized profit distribution. All the profits go to the liquidity providers, a decentralized profit distribution. Good for Liquidity Providers, Bad for Centralized Exchanges.
Centralized Exchange Killer?
All of us in cryptocurrency know it has risk. Trading has risks, centralized exchanges are a risk, wrapping tokens has risk and liquidity provision has risk. But traders tolerate risk to make profits. But if Thorchain gives traders greater profits and reduces security risk, while also increasing trading opportunities... Thorchain could attract the majority of business in Liquidity Provision and Yield Farming. Thorchain could literally be like a vacuum cleaner or a black hole, that sucks up all the trading.
Do your own diligence
But don’t take my word for it, read the references below, do your own research, the cryptocurrency space is constantly changing, evolving and as more money flees low interest rates and inflationary government COVID-19 practices and decimated Country economies, the high yields of staking and liquidity provision, plus the economic certainty of Bitcoin as a store of value, the amount of money invested into cryptocurrency will only grow.
@shortsegments
Graphics by Leofinance Graphic Credit
Other Posts by @shortsegments
Thorchain: Atomic Swaps and True Decentralized Exchange for cryptocurrency Link
Blocknet: Atomic Swaps and a network like the internet for crypto blockchains. Link
A Brief Look at Centralized and Decentralized Exchange Link
Leofinance: The Star Trek Borg of social media finance blogging. Link
Ethereum 2.0 POS Transformation Link
Six ways to earn Leo Token and Ethereum on Leofinance. Link
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