You might not have traded on Fcoin or Bitforex, but you’ve probably heard their names mentioned in crypto trading circles. These exchanges are at the forefront of a relatively new business model known as transaction fee – or trans-fee – mining. While innovative, the token model deployed by these platforms is not without its controversies.
Also read: How Coinmarketcap Incentivizes Exchanges to Report Fake Volume
What Exactly Is Transaction Fee Mining?
With a conventional cryptocurrency exchange, a maker and taker fee is levied on each side of the trade. The taker’s fee is typically higher, averaging 0.5-0.75%, while the maker (the person selling the asset, and thus providing liquidity) might pay closer to 0.25%. Ordinarily, this fee is deducted at the point of the trade being executed. It’s normally collected by the exchange in the form of ETH or BTC, or BNB if trading on Binance. Transaction fee mining exchanges take a markedly different approach.
Transaction fees are the primary way by which exchanges make their money. Trans-fee mining exchanges flip that model by handing all of the fees back to traders in the form of a native token. In fact, during promotional periods – typically when launching the exchange – these platforms might even offer a rebate of greater than 100%. In other words, traders are technically profiting, in the form of native tokens, for each trade they made. It sounds too good to be true, and like all things that fall under this banner, it is. But first, let’s consider the upside to trans-fee mining.
Trans-Fee Mining Is a Good Way to Get Noticed
Fcoin didn’t invent trans-fee mining, but it was the first exchange to popularize it. The platform, under the guidance of former Huobi CTO Jian Zhang, rolled out its native token in early June. As Crypto Exchange Ranks (CER) reports, “as time went on, Fcoin’s trade volume started to fade, and the exchange slid down the ranks on CMC…On Aug 8, noticing the trend of rivals offering more than 100% trade fees reimbursement, Fcoin decided to implement their own 10% bonus.” As a result of this initiative, Fcoin’s volume leapt by some 7,000%, to over $2 billion, as can be seen below:
From the perspective of exchanges that have pioneered the trans-fee model – namely Bitforex, Fcoin, Coinex, Coinbene and Coinsuper – it’s proven an effective means of gaming the system. Cryptocurrency market aggregators such as Coinmarket Cap have long excluded zero-fee exchanges, as their data skews the rankings. But because exchanges like Bitforex and Fcoin technically charge fees, albeit with all tokens collected from this disbursed to the community, they can leap to the top of the charts, and in doing so, gain shed-loads of new inbound referrals.
The other benefit for the exchanges is that this system provides a means of bypassing an ICO. Rather than deal with the hassle and legal issues associated with holding a tokensale, they can simply distribute tokens to early adopters, with high frequency traders rewarded the most. Traders are still paying for these tokens, however, in the form of ETH or BTC that must be paid to the exchange in return for native tokens.
Trans-Fee Mining Is Ethically and Financially Dubious
To go from “obscure exchange” to “top of Coinmarketcap” virtually overnight is certainly an effective way to get noticed. But there’s a difference between gaining recognition and being recognized for all the wrong reasons. The nature of trans-fee mining models, which incentivize early adopters, often using referral schemes, and whose tokens typically rocket in value before crashing hard, has all the hallmarks of a ponzi scheme. It is no coincidence that several of the exchanges using this model, including Bitforex, have been called out for reporting fake volume.
In a study conducted into the practice of trans-fee mining exchanges, CER found that 80% of the platforms it investigated promised to reimburse more than 100% in trading fees: Bitforex (120%), Fcoin (110%), Coinbene (130%), and Coinsuper (125%). In addition, Bitforex and Coinsuper promise to use 80% of transaction fees earned to buy back exchange tokens, while Fcoin and Coinex promise to redistribute trading fee revenue in the form of dividends.
CER concludes: “It’s obvious that the implementation of “trans-fee mining” likely leads to a huge ramp-up of trade volume, but charts suggest that such a pump is very unlikely to be the result of a natural influx of traders. Using trading bots to inflate volume, this could be someone eager to collect reimbursed tokens via “trade mining” and dividends distribution.”
Exchanges are entitled to adopt the token model they believe best serves their needs and those of their community. But traders should be cautious of the reported trading volume and promised dividends of this new breed of exchanges, whose operators will do whatever it takes to claw their way to the top of the heap.
What do you think of transaction fee mining exchanges? Let us know in the comments section below.
Images courtesy of Shutterstock, and Crypto Exchange Ranks.
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