A report by the World Federation of Exchanges (WFE) states that 40% of cryptocurrency trading platforms are decentralized and use distributed ledger technology. On the other hand, most (60%) platforms use a central limit order book (CLOB), which is very similar to regulated trading platforms.
The WFE report states that there are a total of 500 cryptocurrency trading platforms offering various cryptocurrency-related products and services. The survey, with participation from multiple cryptocurrency platforms, provides key insights into retail and institutional demand.
The report notes that many cryptocurrency platforms choose to rely on off-chain CLOB systems for price oracles, quote display, and order execution. These entities only use the blockchain for settlement and custody purposes, which means traders do not directly interact with the DLT, which ultimately helps save transaction costs. This way, transaction fees only apply when the order is settled on the blockchain. A cryptocurrency trading platform with this type of arrangement is called a centralized exchange (CEX).
The survey revealed that, with the exception of custody services, retail demand for cryptocurrency-related products and services was higher than institutional demand. Institutional giants have shown greater demand and higher demand for crypto custody services. According to the different types of product demands of the two types of investors, the report estimates that retail customers have low awareness of the importance of investor protection.
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Turning to liquidity and customer demand, the report found that while transaction fees on decentralized platforms are lower, transaction activity on centralized exchanges is higher. The report also revealed price differences for the same trading pair on different platforms, leading to arbitrage opportunities. However, the WEF report claims that this type of price volatility highlights potential inefficiencies in the cryptocurrency market.
The report further found that while most countries have “know your customer” requirements, both centralized and decentralized cryptocurrency exchanges fall short in enforcing such measures due to the lack of uniform cryptocurrency regulations .
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