How to build an exchange fit for Crypto 2.0


The recent dislocation of the crypto asset market has eroded confidence in this relatively new market, but the crisis could mark a major turning point in the product and technological evolution of the asset class, which is essential for future institutional adoption.

With the decline in crypto asset prices being attributed primarily to two factors: the Federal Reserve’s quantitative tightening and the collapse of TerraUSD, a stablecoin, a critical first step for the industry will be to rebuild confidence in the asset class. , and this, as with any other asset class, starts with having the right infrastructure.

If you build it, they will come

Building a strong financial infrastructure for cryptocurrencies is essential to ensure that the system can absorb future shocks and create the necessary conditions for further institutional participation.

Therefore, the critical question for the next phase of cryptocurrency construction is how to build a cryptocurrency exchange that can attract two types of market participants (retail and institutional) and create an environment in which these pools of liquidity and their intermediaries can coexist and interact. together.

To address the challenge ahead and capitalize on future growth opportunities, exchanges will need to address both the technology and product angles, which, in the case of cryptocurrencies, are also intertwined.

Resilience over UX

From a purely technological point of view, it is worth remembering that the first generation of crypto exchanges were 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 lacked a deep understanding of how capital markets infrastructure had evolved over the past 30 years. This lack of experience is evident in the fact that many crypto exchanges, when faced with high volumes or volatility, have shown issues related to performance, latency, and load.

This problem is being recognized by exchanges and to this end many of them are already looking to address technological shortcomings, increase capacity and improve performance by building new trading systems with a view to gradually migrating from old to new. .

The Exchange Problem: Built for Retail

Another aspect of the technological challenge is that the first generation of crypto exchanges were created for retail investors, limited to web and mobile user interfaces. This made it difficult for institutional firms to interact with the exchange stream in its current form: these exchanges lack an industry standard approach or FIX gateways with loose copy and market data order streams that institutions would expect to see, which which makes it impossible to obtain reliable information. and timely order confirmations, for example.

For exchanges to attract more institutional flow, providers need to start thinking about creating exchanges with standardized FIX-based protocols, integrations with the OMS/EMS environment, and institutional-grade user interfaces and APIs that are easier to access. and provide for institutions. liquidity.

Product diversification requires a broader exchange offer

The second aspect that exchanges need to address is the angle of the product. While the first generation of crypto exchanges focused primarily on spot products, as crypto matures we will see more product diversification.

We are already seeing growth in OTC derivatives and options-based products that will attract more institutional liquidity. Interacting with option flow versus spot flow is better suited to institutions from a risk management perspective.

However, product expansion comes with a huge increase in the scale and volume of message flows (faster movement, much more liquidity, and many more instruments being traded), which also has infrastructure implications. This will require a bigger, better and more flexible institutional infrastructure, one that can only be delivered through architectural approaches that are steeped in the knowledge and experience of capital markets infrastructure.

Plus: With Regulation Comes Trust: The Future of the UK Crypto Industry

The world of cryptocurrencies is undergoing significant evolution, from a technological, product and regulatory perspective, creating 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. Exchanges need to be poised for growth by laying the right foundations – addressing the technology stack to take advantage of future opportunities.