A shortened translation of an article by Bitcoin developer Jimmy Song. Originally published on Medium. Articlereflects the subjective position of the author, which may not coincide with the opinion of the editors of Mining-Cryptocurrency.ru.
Recently, cryptocurrency exchange CoinFloor announced the delisting of BCH and ETH. As of January 3, 2020, BitGo will no longer support BSV due to a hard fork that will take place in a month.
This is the beginning of the trend, and in this article I want to talk about listing altcoins and why exchanges will continue to delist certain coins.
Token listing economy
There are three main ways to add coins to cryptocurrency exchanges:
- Customer demand;
- Bribe from the main token organization (usually these are founders or a fund);
- Hard fork.
The exchange earns on commissions from transactions, so long-term demand is an excellent indicator of the potential income that can be obtained from listing a token.
A bribe is a temporary solution because demand(if it exists at all) is usually short-term. Nevertheless, this short-term profit can be substantial, especially during the bull market, since general madness causes a rapid increase in prices even for low-liquidity coins.
Finally, hard forks create coins on whichcustomers also want to get extra profit. BCH and ETC were two projects that essentially “forced” exchanges to deposit coins to customers. This, again, is a short-term solution, since after such airdrops, most people do not keep such coins for a long time.
It is quite difficult to determine the real demand for a coin, and many exchanges simply do not. For this reason, trading volume after listing is often disappointing.
Token Support Costs
Listing costs vary bytype of coin. For example, supporting Ethereum nodes is very expensive for exchanges compared to supporting Bitcoin nodes. In addition, hard forks are becoming a big problem because they require maintenance and fixed costs. At BCH and XMR, the forks were held every 6 months, on the ethereum network several times a year. Without updates, the exchange will not be able to verify transactions, and downtime is bad for its reputation.
Bitcoin, on the other hand, has done without hard forks throughout its long history.
Thus maintain highly liquidBitcoin is pretty cheap, while supporting ethereum and other less liquid altcoins is very expensive. Ultimately, the complexity of system updates determines the cost of a coin, and at some point it may just be economically unprofitable or even impossible to continue supporting (as is the case with BSV in BitGo).
If revenues outweigh maintenance costsaltcoin, the profitability of listing seems obvious, but this is a short-sighted opinion. There are a number of threats associated with listing a token, which should also be taken into account - this is the risk of hacking, the risk of reorganizing the blockchain, and regulatory risks.
Hacking crypto exchanges today does not surprise anyone,and losses are usually substantial. Hacking can be internal (employee or owner) or external. Listing a new coin adds an attack vector to any exchange.
The most famous example is the storyCryptsy, which was allegedly hacked in 2014 by adding a coin whose node contained malware. The coin's creators apparently used full node software to access Cryptsy's systems and were able to steal 13,000 BTC and 30,000 LTC as a result.
Security audit of each token code is requiredto reduce this risk, but given how much code you need to learn, this is not a very common practice. In addition, any software updates must also undergo a separate check. Frequent forced updates or hard forks make security even more costly.
Another risk is the possibility of reorganization.blockchain. A coin can be attacked directly, and attackers can use the exchange as a victim. For example, someone can deposit a large number of low-hash rate PoW cryptocurrencies onto the exchange, exchange it for something more liquid and withdraw. After that, the cryptocurrency can be attacked and reorganized so as to cancel the deposit transaction. Obviously, the exchange would lose a lot of money on this.
Finally, there are certain risksregulation. For example, AML / KYC requirements may make it difficult to list coins with a high level of anonymity. Also, a coin can be recognized as a security. These risks include not only laws that exist today, but also laws that may be adopted in the future.
Ideal listing conditions
- Firstlylisting should be the answer to strong demand. Not short-term, but long-term demand. As a rule, immediately after listing, interest in the token appears, but over time, it fades (with the exception of several cases).
- Secondly, the token code must be verified. Any update must also pass a security audit.
- Thirdly, the confirmation threshold should be high or other methods should be provided for ensuring the security of funds from the creators of the coin in case of blockchain reorganization.
- Fourth, listing should include all informationregarding the legal status of the coin, as well as the rules that may be adopted in the near future. As a rule, exchanges perform better on this issue, since legal expertise is cheaper than the security review of the token software.
Many exchanges do not pay enough attentiontoken security. For example, in the case of Ethereum, they blindly run any software that the Ethereum Foundation will give them, or, even worse, just rely on Infura.
This means that very few exchanges are responsiblefit to the listing of coins. In the future, we will increasingly hear the word “delisting”, since errors in altcoins can cost a lot to the exchange, and trading volumes are reduced. We will also be less likely to see listings of new projects, taking into account all the risks and costs of adding a new coin.</p>