Strategic Thinking of an Exchange

eBook

2018 Ternion. All rights reserved.

Authors:

Rudolf Medvedev CEO & Founder

David Mark Chief Growth Officer

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Table of Contents

Introduction

Challenge 1: Volatility

Challenge 2: Security

Challenge 3: Liability

Conclusion

3

4

7

10

12

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IntroductionFrom the very first Genesis Block of Bitcoin to represent the first of Bitcoin’s mining in 2009, Satoshi Nakamoto’s (not his real name) creation has steadily grown and spawned further use of Blockchain coding to create other cryptocurrencies. From Litecoin in 2011 and Ripple in 2012 to the Ethereum Genesis Block in 2015, cryptocurrencies have taken the world by storm and have revolutionized how people make transactions and regard finances.

What originally attracted cryptocurrency users was the decentralization of the currency in a way that not only made party to party transactions efficient, but also untraceable. With no third party in between, cryptocurrencies became the best way to move capital between parties interested in leaving others out.

Decentralized Exchanges (DEX) like Waves, IDEX, Oasis, and Stellar as well as unregulated Crypto Exchanges have all popped up in the last few years. While this has provided an amazing opportunity for peer to peer transactions, it has led to a tremendous amount of volatility in currency prices and vulnerability to hacks. Moreover, claims of insider trading have been growing in even larger exchanges like Coinbase.

Deeper issues like security and liability appear to lie at the foundation of the mainstream uncertainty in cryptocurrencies.

This has culminated in a recent crash where the crypto market lost over 15% of its value.

In this book, we are going to take a look at the challenges the cryptocurrency revolution is facing. These challenges are growing pains that are an important wake up call for the broader ecosystem.

Only by facing these challenges as a mature industry we can ensure that cryptocurrencies continue to expand and become the predominant reserve currency for transactions around the world.

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Challenge 1:

Volatility

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One of the hardest challenges facing the cryptocurrency ecosystem is the volatility of cryptocurrency prices. Whether it’s Bitcoin, Ethereum, Ripple, or any of the smaller currencies, negative or positive news appears to set the crypto market on a wide pendulum swing.

Price volatility occurs at a far wider rate in cryptocurrencies as opposed to

The market rose from $6,525 to nearly $20,000 in a matter of weeks and then crashed a short while later where it fell to a low of $6,859. Within the drop, it rose and fell many times.

Since cryptocurrencies are unregulated, many currency users have been trying to jump in, in order to “not miss out,” on the fad. This has caused a natural price climb. These new investors were adept at traditional investing. However, the lack of regulation in cryptocurrencies, which ultimately means a lack of security, caused these same investors to flee when it became apparent that exchanges were vulnerable.

A lack of institutional money has allowed for volatility to continue and the volatility has in turn kept institutional money away.

Given the lack of traditional financials involved with cryptos, the amount of capital backing them remains thin, thus contributing to the perception that they are risky. All of this has increased volatility in the crypto markets.

According to the founder of Evercoin, Miko Matsumura:

The market before was clearly overheated. The only fear in the market is ‘missing out’. These speculations led many to rush into the market resulting into price inflation.” However, he adds that “the market is stabilizing since the panic is wearing off.

other commodities due to a few factors. Understanding these factors will guide us to finding the solution.

Perhaps the most obvious factor contributing to the volatility in cryptocurrency prices is the herd mentality behind capital deployment in any of the number of currencies. This can be best seen in the price fluctuations in early November of 2017 to early February 2018.

Bitcoin EOS Ethereum Litecoin Ripple

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One example of this shift towards regulation is Coinbase’s announcement on the 7th of June:

Today, we’re announcing that Coinbase is on track to operate a regulated broker-dealer, pending approval by federal authorities. If approved, Coinbase will soon be capable of offering blockchain-based securities, under the oversight of the US Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). This step forward is being made possible by our acquisition of a broker-dealer license (B-D), an alternative trading system license (ATS), and a registered investment advisor (RIA) license.

While there is a desire on the part of many cryptocurrency enthusiasts to keep the ecosystem as free of regulations as possible, there is a growing chorus of industry leaders who are beginning to support a move to increased regulations.

While the SEC has recently decided that most cryptos like Ethereum are not securities, it is clear that some sort of regulation is needed. This is not bad. It is in fact a necessary step to lure institutional money off of the sidelines. This will keep those crypto investors from jumping every time they sense an issue with an exchange or smell a drop in the prices.

This is key to stabilizing the currency prices. Essentially, without regulation a very easy door remains open for investors to manipulate prices if they have enough capital to play with.

While there is still a drive on the part of the SEC and other similar institutions in other countries to be opposed to dealing with cryptos, this is changing. And with it we can see a serious push towards meaningful regulation that does not weaken the positive decentralized aspects of cryptos, but rather creates real oversight of the many centralized exchanges out there.

Solution: Regulated Cryptocurrency Exchanges are a Must

This may not be far enough, given that Coinbase acquired Paradox a DEX, which it will offer to customers outside the USA. Despite this, Coinbase’s recognition that it must adapt is clear.

Ultimately, regulation breeds confidence and in turn a much-needed perception of security.

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Challenge 2:

Security

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Since the beginning of cryptocurrencies, there has always been hacks. Given the unregulated nature of even the most public and widely used centralized exchanges, hackers can penetrate and alter the blockchain of these exchanges.

While many exchanges have suffered from hacks costing billions of dollars, the real outcome is a frenzy to jump ship and cash out before more exchanges are hacked.

Another result of a lack of security is that large institutional investors are keeping out. As we mentioned above, the lack of institutional investors is partly due to price volatility, yet it is also connected to a lack of security.

Exchanges are meant to be a secure place to trade coins or exchange crypto into fiat currency, but most crypto enthusiasts do not keep their coins on the exchange, but rather in their wallets due to hacking concerns.

Some observers have noticed that the rapid drop in cryptocurrency value over the last months appears to be partially connected to centralized exchanges being hacked. Yet, despite the possibility that hacks contributed to a downward fall, many experts do not believe there is a direct correlation other than adding to the fear that cryptos are a risky investment.

Naeem Aslam, Chief Market Analyst at ThinkMarkets, explained how this latest hack is another instance of negative press for the cryptocurrency space.

Exchanges are not utilizing the top-notch technology to protect consumers, and hackers are taking full advantage of this issue. The question is, is there any limit to these hacks? After every few months, we are seeing the same pattern emerging. This is the result of loose regulatory control, and regulators must step in to protect the consumers. Anyone who wants to do anything with exchanges should be forced to adopt high-grade security and regular security upgrades.

The continuing security problems in crypto exchanges are causing coin holders to flee, thus preventing real growth both in institutional money and innovation in the crypto ecosystem.

Bitcoin EOS Ethereum Litecoin Ripple

Tether Hack $31 Million

Coincheck Hack $534 Million

Bithumb Hack $32 Million

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As we discussed earlier, regulations are becoming more and more necessary to not only ensure that volatile price swings begin to taper off, but in a related subject, to provide basic security guidelines for exchanges to follow. By following security guidelines, these exchanges can provide real trust with their users. This trust will help increase the user base.

Yet, if the broader community sees these hacks as opportunities to improve, then cryptocurrency adoption will grow.

Christian Ferri, President and CEO of BlockStar says:

As in every technology, hacking will be painful for some in the short term; but it will be a major driver in strengthening the crypto ecosystem, making it more secure, which is key for mass adoption.

Amy Wan, CEO and cofounder of Sagewise, agrees:

There will always be a community of crypto enthusiasts, despite all the hacks. But blockchain and crypto will not become more mainstream unless and until the space resolves these fundamental infrastructure issues and provides users with transactional confidence and certainty.

Solution: Regulation and Security Go Hand in Hand

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Challenge 3:

Liability

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This is a touchy subject, but liability between the exchanges and their customers is a challenge the cryptocurrency ecosystem must address in 2018.

Why?

The current uncertainty in the crypto markets and a lack of expansion to a more mainstream usage of even the larger crypto exchanges is due to a poor sense of liability to the customer.

After all, if something goes wrong, who is liable? Without real regulation and oversight there is little to do if the exchange is hacked. Yet, putting the hacking issues off to the side, most exchanges have poor Know Your Customer (KYC) strategies and lack accessible customer support. This has inhibited growth and fed the perception that cryptocurrencies are risky.

Exchanges are meant to have safeguards against ill-intentioned actors as well as price manipulation. Without better KYC strategies these exchanges can do little to assuage customer fear in relation to utilizing the exchange.

All of this has increased due to a lack of liability in almost all exchanges in relation to their customers.

Once again, liability or the lack of it, feeds the overall perception that cryptocurrencies are risky. By increasing this perception, the industry has been kept from real growth and widespread acceptance. Most traditional banking customers not only trust their banks, but do so because they feel the bank has a sense of liability towards the customer. Until cryptos can create this, the ecosystem will be challenged to expand.

We have been focusing a lot on regulation as a major solution for cryptocurrency exchanges in 2018. This is because most of the challenges are an outgrowth of a lack of regulation. In terms of the liability issue, proper KYC practices need to be implemented in order to ensure users that they are protected, and bad actors that seek to manipulate the exchange or hack the exchange’s blockchain are removed.

Increased regulations and oversight that demands real liability and KYC on the part of the exchange will go a long way to fixing this issue. By doing so, exchanges will increase their customer retention and be able to expand to a broader market.

Solution: Regulation and KYC

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Cryptocurrencies are going through massive changes. Gone are the days where unregulated exchanges will determine the direction of the ecosystem.

Cryptocurrencies were always about radical change. However, if the wider market remains skeptical, uneasy, and even downright antagonistic to cryptocurrencies due to unregulated and unreliable exchanges, then cryptocurrencies will fail to transform our world.

Last year we saw quite a big step forward in recognition of cryptocurrencies. But this led to the absurd levels of greed and fear of missing out. All of that resulted in activity beyond outreach to control. As there was no regulatory framework, many used the opportunity to cheat others out of their prosperity. This led to the consequences throughout the year 2018. However, liability towards the customers can undo the current situation and make the Crypto market prosper.

- Rudolf Medvedev, CEO Ternion

The current situation for cryptocurrencies has reached a breaking point. As more and more people want to get a piece of the market as it grows, exchanges will become regulated platforms giving stability to currencies and a projection of increased security. In fact, many leaders in the crypto ecosystem agree.

So, what we see is the real need for the cryptocurrency ecosystem to mature and adopt regulations that will allow it to grow

into a space where investors, customers, and users do not have the fear of massive fluctuations in currency value as well as a protected and secure trading platform.

Lack of regulation has led to a lot of traditional financial institutions remaining on the outside of the ecosystem.Our obligation is clear. We must build exchanges and tools that help merge traditional financial platforms with our new crypto ones.

If we are serious, then 2018 will be remembered as the year where cryptocurrency exchanges tackle volatility, implement security enhancements, and accept some sort of liability in relation to their customers. By tackling these three challenges the cryptocurrency ecosystem will expand and penetrate traditional institutions and expand its market.

The choice is ours.

A word about Ternion:

Ternion is a hybrid crypto exchange with a fiat gateway and integrated merchant services. Ternion is a pioneer in the industry of accountable, regulated and transparent exchanges.

Ternion triad ecosystem is based on a functioning business model:

• The Ternion Exchange is a regulated, licensed and centralized entity which allows fiat to crypto trading.

• The Ternion Payment Processor facilitates the process of payments between vendors and sellers and allows them to receive and pay in a currency of their choice.

• The Ternion Liquidity Fund sustains liquidity and supports efficiency of the other two entities.

Our mission is to build feasible future innovations in the cryptocurrency industry based on modern financial and legal realities.

Conclusion