Cryptocurrencies are generally traded through networks of centralized and decentralized exchanges. Each exchange has a number of buyers and sellers whom all participate in the process of price discovery. The connections between these different exchanges are limited, as users tend to cluster around what they consider to be the ‘best’ exchange. The clustered nature of users and exchanges means that price discovery between exchanges is somewhat isolated.
Introducing the ELA:
The Exchange Liquidity Aggregator (ELA) will let traders and investors buy and sell at the best price on the overall market, without having to register with each exchange separately. The demand is strong for a service where users can buy or sell cryptocurrency from any exchange without having an account, and Dimensions Network is building the solution to allow users to do just this; traders will have access to pricing at any major exchange by only having a single account.
Connecting to other exchanges:
The aggregator connects to a number of cryptocurrency exchanges, and then uses the platform’s liquidity to buy and sell cryptocurrencies directly on the other exchanges. The price of cryptocurrency varies from exchange to exchange, sometimes the prices are very close, but often a 1-3% or more difference in the price between the exchanges can be observed. The ELA gives Dimensions Network users access to the prices from the other exchanges, so that all that’s needed is just one account and the Dimensions platform will settle the trade through back-end processes on behalf of users.
The ELA will have special appeal for investors and traders looking to place very large orders. If they place this large order on a single exchange then it will cause the price to move (slippage), and result in a non-optimal execution. It’s not uncommon to see cases where a large market order forces the price on one exchange out of sync with other exchanges or a limit order which holds the price fixed on one exchange while the price diverges on the other exchanges. The Aggregator will automatically spread a large order out over multiple exchanges so that the impact to any single exchange is minimized, and the user will, therefore, get a better overall price. This feature could be especially appealing for institutional clients, as a key requirement for them is to have the best market liquidity. The Aggregator connects Dimensions to all major exchanges via priority APIs and adds their liquidity to Dimensions. The figure below illustrates how orders are executed using the ELA:
Price Arbitrage Across Exchanges:
The exchange aggregator, by its nature will open up opportunities for arbitrage and this presents a unique use case, but only up to the limit of Dimensions available liquidity on each exchange. For example, if Dimensions had $1 million USD worth of FIAT on an exchange with Bitcoin priced 2% lower than another exchange, and $1 million USD worth of Bitcoin on that exchange; the aggregator could be used to buy and sell Bitcoin to capture the price difference between the exchanges. There are two clear limits to this arbitrage, firstly, whether the $1 million USD FIAT runs out before the prices are equalized by the arbitrage, and secondly, the prices may equalize long before the FIAT is expended, perhaps after only a few thousand dollars.
High Value Trades:
In another use case - A hedge fund wants to purchase 20 Million USD of ETH. They need an exchange or OTC facility which can accept their 20 Million USD without problems or delays, then purchase sufficient cryptocurrency without impacting the current market price. The hedge fund does not want to deal with multiple exchanges to try to spread the order across the market, they want a single point where they can buy and sell at the best possible price. Dimensions can accept their funds and use the liquidity on the platform, and the many other exchanges Dimensions is connected to, to source the required quantity of coins with the minimum impact to the market price on any one exchange.
The Take Away:
An Exchange liquidity Aggregator can sometimes also be referred to as a shared or global order book, something that has been missing from the cryptocurrency market up until now. It’s a game-changing back-end technology that can change the way traders approach the market and solve a very real problem. The idea of shared liquidity and by association, the guaranteed best price for buying and selling cryptocurrencies is set to create a win-win situation for all the parties involved - the exchanges and the traders looking for a better and easier trading experience.