Although they can appear insignificant, fees may be more pivotal in the success of an exchange than you’d assume. This is all because they have more than one use. Not only do they fund the costs and further development of the platform, but they also have the power to shape the way its users operate.
A carefully thought out fee structure can go a long way in ensuring the exchange operates smoothly, authentically, and to the benefit of all its participants.
Before we begin, let’s distinguish between the two key types of fees; maker fees, and taker fees. These often have differing rates, and are important because they contribute to an exchange in different ways.
Maker Fees Maker fees apply to orders which provide liquidity to the order books. These are orders which do not automatically execute at current prices. Instead of executing immediately, they sit in the order book until somebody fills them.
Taker fees Taker fees apply to orders which remove or take liquidity OUT of the order book. These orders execute at the best price available, at the time that the order is made.
Let’s take a look at how an exchanges’ fees can shape user behavior, through incentives.
Preventing Wash Trading and Fake Volume In an ideal world, users would trade all they want, for free. Unfortunately, however this isn’t possible. The first behavior we want to incentivize is AUTHENTIC trading volume –for this, some sort of fee is a must.
Fees go a long way in preventing “wash-trading”, a practice where a user essentially buys and sells into their own orders, to give the illusion of authentic trading. Wash-trading is very closely associated with price manipulation, and is illegal in legacy markets. In fact, a number of crypto exchanges have been exposed for their unnatural market volumes, as highlighted in this paper by Bitwise, which was submitted to the SEC.
Stacking The Order Books, Naturally “Market-making” orders are important for an exchange, as they provide liquidity to users — in other words, increase the number of buyers and sellers in the order book, at any given price point. Without sufficient bids and offers in the order books, users can’t get a reliable price for their trades. This lack of liquidity can result in large market orders getting bad or unexpected prices compared to the market price — a phenomenon known as “slippage”.
So, how can we incentivize users to place more market-making orders, instead of orders that remove liquidity?
Very simply, traders will have a stronger tendency to pick the cheaper option, leading to better order-book liquidity. But what if we took it a step further, and PAID people maker rebates, rather than charging them fees?
###CRIX is one of the only exchanges to offer maker-rebates, rather than fees. We believe our users deserve to benefit from great liquidity, and that genuine market makers should be rewarded for their contribution to the platform.
Register Today and find out the range of benefits that accompany trading on the Crix platform!