Exchange circuit breakers might be the next big thing the crypto space if the current fiat economy canbalization by volatility is anything to go by. The volatility has been highlighted by the COVID-19 pandemic forcing market players to look for a lasting solution.
The fiat economy has not been spared volatility with the coronavirus making the situation fragile. However, the digital money market is taking a cue from the likes of New York Exchange that deploys circuit breaker to ward of volatility.
Crypto and decentralized finance (DeFi) have been relying on liquidation offloads when the market performance is at its worst. However, some crypto exchanges are turning to circuit breakers seeking permanent solution a move that has seen debate on whether this is the best way to protect the investor in a decentralized economy.
Are exchange circuit breakers the crypto future?
Vadym Kuryovych, the brain behind an Estonian regulated crypto exchange STEX appears to have a different opinion when it comes to exchange circuit breakers. He says:
Trading derivatives on the offshore exchanges looks similar to playing roulette in Madagascar casino. You knew you’d get busted the minute you joined but the potential payout entices you to take the risk.
With growing uptake of derivatives and other crypto products, exchanges are turning to educate the user on the best practices. However, simplicity is important since not all investors are tech-savvy. Borrowing circuit breakers for both the exchange and tokens from the fiat economy seems the best way to protect their portfolios.
Platforms have already implemented exchange circuit breakers
There are two sets of crypto exchanges in the market today, those who have embraced the circuit breaker protective layer and those who have resisted the change. Those not for the implementation are citing decentralization while others feel it will not work well with demand when liquidation is high.
Exchange circuit breakers need to be used selectively, while Bitcoin, for instance, is decentralized, other crypto products might not be. However, it is a good tool to protect users against events like black swan. With crypto, huge sell-offs have been witnessed with the latest being the BitMex Black Thursday whose DDoS attack saw BTC price crash which affected the end-user; the investor.
This could have been avoided if the BitMex ecosystem had exchange circuit breakers. This does not only jeopardize user funds but it has long term cost implications for the exchange. High profile exchange like Binance does not have the protection which Changpeng Zhao, the CEO has never indicated on implementing.
Zhao appears to support dGen founder Jake Scott’s sentiments that:
With circuit breakers, we start to see a cryptocurrency market that betrays some of the fundamental reasons for it to exist.
He goes on to add:
Without circuit breakers, we may never see products such as a Bitcoin ETF, due to the huge price variations that could occur between the 24 hour and traditional exchange-traded product. I’m personally in favor of the circuit breakers because it appears much of the recent problems were caused by margin trader’s uncovered shorts and subsequent clogs in the Bitcoin and Ethereum networks. Price crashes were much more extreme for those reasons.