Coinex: Critical flaws in “trade-to-mine” model
8th July Shenzhe- Chainge Meetup in Shenzhen, Haipo Yang, founder of Coinex, shared his insights on the “trade-to-mine” model.
In June, Fcoin introduced the “trade-to-mine” mode to the crypto exchange markets. Followers are swarming after the success of Fcoin. According to incomplete statistics, in June alone, at least tens of exchanges have emerged or are about to introduce “trade-to-mine” mode: OCX, Manbi, 58COIN, BKK, TTF etc.
According to 8btc, the CoinEx platform launched the “trade-to-mine” model on July 1 and the trading volume has risen rapidly, ranking top 5 as on 17 July. As of press time, the price of CET, the Coinex token, is about 0.11 USDT, a 14 fold increase compared with the initial price of about 0.008 USDT.
What is the critical flaw of “trade-to-mine” model?
What is the “trade-to-mine” mode? Traders will get rewards or tokens when they complete trading on the exchanges. Users can benefit from rewards while exchanges benefit from the liquidity. The holders of exchange tokens could gain rewards of trading fee. It’s a “3-win” situation for exchanges, users and miners. However, such mode is sustained on the basis that the exchanges tokens would continue to rise. What would happen if exchange tokens began to drop?
The lower the price – the higher the mining output, which is also the biggest flaw in this model. Many people have found this problem on exchanges. For miners, “trade-to-mine” is actually an almost risk-free or very low-risk arbitrage behavior. Miners create liquidity on the platform to obtain platform tokens that may exceed 100% of return. Miners will sell tokens that they mine in the first place to recover the funds. What is the result? The newly-mined tokens will be dumped in the market Therefore the higher the output, the lower the price. This is the critical flaw of this model.
This is the situation that neither the platform nor the users are willing to see.
How to avoid such dead end? The key is to control output.
Because the total amount of tokens is limited, mining is like fuel consumption. All tokens will be mined or distributed one day. If the output of mining is under control, the balance between new output and new funds could be achieved.
For all exchanges, the only way to prevent “trade-to-mine” from being a Ponzi scheme is to achieve a soft landing. That is, after the “trade-to-mine” model is over, the platform can really prosper without relying on such incentive model.
So how to control output becomes the cornerstone. The DragonEx (Dragon Exchange) introduce a hard cap on mining every day. For example, if one million tokens are issued every day, whoever has the most transaction volume will be rewarded. This is a very simple and rude rule. Since everyone wants to compete for the distribution, the end result is that the trading volume of a platform is very high in zero hours and not much trades in the whole day.
Obviously this is what the platform doesn’t want to see. Authentic liquidity means users can buy and sell quickly. It is meaningless to rely solely on the initial volume of the day, and it does not play a positive role in the platform.
Therefore, when the CoinEx “trade-to-mine” rules were designed, we followed the design of Bitcoin. Bitcoin introduces adjustment of difficulty. We also introduced the rules of difficulty of CET.
The first version introduced real-name authentication. Users who passed KYC can participate in mining with limiting the max amount of each account can mine. With dynamic adjustment of difficulty, the daily output is in a relatively controllable range. But the side effect is that demand for KYC has spawned a new market – buying and selling KYC information. Later, we found that a complete set of KYC information could be sold for hundreds of yuan.
The second problem is that the spikes of trading bring great pressure to the performance of the website. At the peak period, there are nearly one million orders submitted per minute, and the number of transactions is 2,000. The server is under tremendous pressure, which is not the normal volume of exchanges. Currently, the largest exchange has dozens of trading every second. Although CoinEx is still very stable under such great pressure, a POS-like solution is introduced. By locking CET in account, traders can get an additional mining share per hour. It seems that this is a relatively effective solution and it also makes production more stable.
Trade-to-mine, in fact, is not a core competitiveness for an exchange.
The core competitiveness of the exchange should be security and technology, providing users with a rapid and high-quality experience. Other features include better and more reasonable design of the entire website.
Regarding the future development of CoinEx, more products may be launched, including futures contracts, leveraged trading, C2C fiat trading and more. Another key issue is the listing. Exchanges benefit most from the “vote-to-list” policy, which hurts the project and traders. Therefore, CoinEx is open to submission of all projects but a professional review would be conducted by Coinex. In this way, the exchange have reduced possibility of low quality projects and help to promote high-quality projects.
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