Crypto exchanges can improve customer experience on their platform’s via Lightning technology by providing greater liquidity while offering enhanced privacy protections. In this post, we will focus on the matter of liquidity; its importance to traders and how both exchanges and traders benefit.
Lightning for Exchanges Series
- Regulation Part 1 — Money Transmitter Rules
- Regulation Part 2 — Money Transmitter Rules
- Security Part 2 – Backing Up Your Lightning Wallet
- Security Part 3 – Private Key Management
- User Experience – Liquidity
- Managing Fees With Lightning
- Routing Nodes
One of the biggest challenges facing investors and traders is the inability to quickly access their funds on an exchange. This is especially problematic for withdrawing funds as it typically requires two to three on-chain confirmations before a person can take custody of their cryptocurrency. With block confirmations taking anywhere from 10 minutes to 1 hour (or more) depending on fees and demand, depositing and withdrawing funds can be burdensome and frustrating for customers looking to transfer their cryptocurrency. This friction hinders traders ability to take advantage of opportunities that arise on other currencies or on other exchanges.
To understand the real potential of Lightning, it is important to understand how its value scales with the congestion of on-chain transactions.
Consider the bull market of late 2017 when bitcoin prices hit their highest at close to $20,000 per coin. At its height, the average fee in U.S. dollars was $37.30 to have your transaction confirmed on the blockchain. Note: that was the average fee. Some traders were willing to pay more than that to have their transaction confirmed. When fees are high, it creates bottlenecks in trading. It erodes profit and activity begins to grind to a halt as nobody wants to pay higher and higher fees.
If you are an exchange that already has a large of amount of investor’s funds, this is less of a problem. However, if you are a smaller exchange, it can be incredibly difficult for traders to transfer funds to your exchange as they are less inclined to pay these fees. As we will see, by integrating Lightning, any trader on the network can quickly withdraw and deposit their funds.
When making deposits or withdrawals with Lighting, there are no blocks to wait around for. Transactions are negotiated directly between the involved parties, including any potential routing nodes (see our post on routing). A typical trader would most likely not be directly connected to the exchange they want to trade on. That means their debiting or crediting transaction would have to be routed. For a typical Lightning transaction today, that means a second or two of wait-time.
However, If we assume on-chain confirmation time of 1,800 seconds (30 minutes), that is a 900% increase in speed to execution.
It’s called “Lightning” for a reason.
If a more dedicated trader sets up a direct channel with the exchange in question, the only limits to how fast transactions could be made are technical limits like connection latency. That means transaction times in the ballpark of a 100 milliseconds. A trader could go in and out of positions very rapidly with no custodial risk between trades. A non-decentralized exchange could keep the benefits of being centralized while greatly reducing the level of trust needed by customers.
Nobody likes waiting. And definitely not for their money. Especially when there is an opportunity to make more money.
There are a number of advantages for the exchange that adopts Lightning and Lightning Network.
First, it bears repeating: exchanges can reduce the transaction time of 30 minutes or more for on-chain confirmations to nearly instantaneous transactions. And as mentioned, Lightning Network can do this reliably.
This has the additional benefit for the exchange that pays confirmation fees for its customers. During a low-fee, low traffic period, paying for on-chain fees is a nice benefit and value for an exchange’s customers’. However, during periods where the opposite is true, as in December 2017, covering those fees can quickly erode an exchange’s per trade profitability.
Second, better user experience increases their customer base. Because it is easier and faster to trade, more traders will use that service. Thus, an exchange will have more opportunities to offer additional value-added services and custom offerings to their increased customer pool.
Third, is trading revenue. As noted above, traders can move funds into an exchange must faster than before. This makes it plausible for the trader to take advantage of a trading opportunity that currently exists on that exchange’s order book. Currently you have to hope that trading opportunity exists 30 minutes after you deposit funds, which is unlikely. The more trading, the more fees generated. With Lightning, it is easier and exponentially faster to move in and out of positions.
Making it easier for traders to trade will make an exchange more competitive and profitable. By adopting Lighting, crypto exchanges can reduce transaction times 900% from current on-chain confirmations. Traders can quickly deposit or withdraw their crypto assets. This not only provides a better user experience but also will likely lead to more trading volume and activity. This will generate more trading revenue for the Lightning enabled exchange.
If you are an exchange or interested in what Lightning can do for you and your business, contact us at [email protected].
You can also reach us on the Lightning Network: