Best Brokerage Model For Cryptocurrency Exchanges

Any exchange, crypto or otherwise, has to find the correct brokerage model to balance network growth and revenue growth. There are 3 parameters to look at while deciding the most suitable  model –  User friction, market liquidity and transaction execution.

Here’s looking at the various models followed by popular crypto exchanges.

  1. Buyer and seller both pay equal – In India, Coinsecure and Zebpay follow this model. User friction exists for both the parties, revenue burden is distributed but liquidity in market will always be low.
  2. Maker and Taker, both pay equal – Maker/Taker differentiation became popular in crypto world. Primarily, this separates liquidity creator from the liquidity absorber. Works in similar way as above for all 3 parameters.
  3. Only taker pays – GDax from Coinbase follows this model. Only transactions that absorb the current liquidity from the exchange have to pay. This model does incentivise creating liquidity in the market but there are too little transactions that get executed as the taker has to pay a penalty (the fee). There is too much anxiety with respect to being a taker vs. a maker. If you become a taker, you pay a fee which you wouldn’t need to pay if there was a cent of a difference. If you become a maker and wait, the market might turn against you and transaction might never happen.
  4. Only Buyer pays – Koinex in India follows this model. Seller is incentivised to create liquidity in the market. Seller has 0 anxiety. Buyer pays a little fee, which is fine as he was anyways looking to invest in the instrument. As compared to Gdax model, there are more transactions that get executed here, with the same revenue generation per transaction, as one side is still paying.

In ecommerce marketplace, it’s always the seller who pays. On the contrary, Airbnb makes the buyer pay for the transaction/convenience fee, over and above the tag price. Would Airbnb do more transactions if the tag price was the final payment amount for the consumer?

Which model works where? Your thoughts?


Also published on Medium.

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