What does the lightning network change for cryptocurrency derivative traders?
In the context of trading, being first is everything. And on traditional exchanges, being first is often an advantage measured in…
In the context of trading, being first is everything. And on traditional exchanges, being first is often an advantage measured in microseconds. Unlike traditional exchanges, cryptocurrency exchanges often play both the role of the exchange and clearing member/house. This means that in many cases, the exchange both safeguards a traders funds, maintains the orderbook and acts as the main price discovery venue. Exposing a trader up to problems before they’ve even traded such as delayed access to market opportunities, slow settlement speed and counterparty risk.
In theory, these problems affect different types of traders in different ways. But theory only gets us so far. For a normal trader, how do these problems present themselves?
Picture a trader, let’s call him Zhang Smith. Zhang has a hunch that ETH is going to increase in value over the next few hours and he wants to profit from the change in price. Zhang does not care about holding the underlying asset; he simply wants to speculate on price. So what does Zhang need to do first? Zhang needs to find a derivative exchange that allows him to speculate on price using his Bitcoin (we’ll cover other cryptocurrencies in a seperate post).
Zhang is already signed up with exchanges such as FTX, Bitmex and Bybit who all offer the product he wants to trade. If Zhang wants to take a position on any of the products offered by these derivative exchanges, he needs to send his bitcoin there first. So he uses his wallet to send $100 worth of Bitcoin to one of the exchanges. Here’s problem number one, Zhang’s speed of access, rather how quickly he can open the position he wants, depends on how fast Zhang can get his Bitcoin on the derivative exchange. Zhang opens his wallet to send his bitcoin, and is told it’s going to cost him around $8 in transaction fees. Egar to trade, Zhang hits that send button, sending his Bitcoin to the derivative exchange.
If Zhang sent ~$100 worth of Bitcoin using his wallet (that takes care of fee estimations) to derivative exchanges such as FTX, Bitmex and Bybit at the same time this is how long it would take for his Bitcoin to show up in his account in each service as ‘available balance’ ready to trade with.
Why the difference in times? Each exchange has different methods of verifying a balance. Some require only 1 transaction confirmation as enough, others need more, or some just refresh their user balances faster than others. Some may even make it faster for some users depending on where and how they sent their deposit using risk analysis servies such as GAP600.
Luckily, Zhang did not forget about opening a position in the time it took to get his funds on the platform. In fact, he opened a position and closed it in profit an hour later. So now Zhang wants to move his Bitcoin and any profits back to his own wallet because he’s heard how risky it is leaving them on exchanges (counterparty risk) or maybe Zhang just wants to use his profit to buy a pizza. Whatever the reason, Zhang needs to make a withdrawal.
How long would it take Zhang to move his bitcoin plus any profit back to his own wallet on average? Here’s how long it took us to withdraw ~$100 worth of Bitcoin from these exchanges a few hours after depositing on them.
Zhang fell asleep before the funds hit his wallet, and sadly, he forgot to buy the pizza with his profits. Zhang’s experience accessing exchanges is one that’s all too common. Zhang, as a retail trader, may have missed an opportunity because he could not get funds on the exchange fast enough, he may have even got liquidated if he could not update his margin balance fast enough or he may have even lost all of his funds if he decided to just leave them on the exchange.
What about lighting deposits and withdrawals?
The lighting network can change the experience for traders like Zhang by dramatically speeding up transaction speeds. For example, Bitfinex, currently allows traders to deposit and withdraw from their exchange using the lightning network and are setting an example for others to follow. Other exchanges such OKCoin and Kraken are also taking a step in the right direction for their users by allowing for Bitcoin deposits and withdrawals over the lightning network. Have a look at these speeds:
A Bitcoin deposit over the Lightning Network using Bitfinex
Time until Bitcoin is ready to trade after a deposit: ~1 second
A Bitcoin withdrawal over the Lightning Network using Bitfinex
Time until Bitcoin is ready to spend after a withdrawal: 8 seconds (limited by how fast the confirmation email is sent/recieved)
What’s the future? How does this experience improve for traders like Zhang?
With the added experience improvement sending Bitcoin via the Lightning Network brings, it’s not a case of if other exchanges will support it, it’s a case of when. Widespread support would truly be beneficial, but deep down, for traders like Zhang the improvement is only incremental. He still has to deposit and withdraw from the exchange service, like he did before. What’s next?
We believe that with second layer protocols like the Lightning Network, traders can access markets using bitcoin with a completely new experience. Settlement is instant and traders need not carry additional risk when opening, closing, or maintaining a position. Kollider enables funding and settling positions on an order-by-order basis, meaning any collateral or margin is sent at the point of opening an order without pre-funding an account of any kind. For traders like Zhang, that means being able to find a product to trade, post margin and execute in a single click and only ever risk what they have dedicated to the position, any remaining funds that are not used stay in the traders own wallet.
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