A grassroots Australian crypto exchange has seen volume spike by 1900% after it introduced a new token rewards model.
Melbourne-based grassroots crypto exchange Blockbid has seen trading volume increase from US$10,000 a day mid-year to average around US$200,000 a day after it introduced a Liquidity Incentive Model.
It’s a bit like a credit card rewards scheme, but it incentivizes adding liquidity to the exchange rather than wash trading.
Sure, $200,000 in volume is pocket change to the major overseas exchanges but it gives Blockbid a valuable foothold in Australia – a tough market that has claimed numerous exchange startups including Huobi Australia and MyCryptoWallet.
They now have 18,000 users in total with about 400 trading on a day to day basis.
Blockbid uses a market maker to ensure global average prices and offer a limited selection of coins including Bitcoin, Ether, Bitcoin Cash, Litecoin and XRP.
The Chicken and Egg problem of starting a new exchange
Getting new users to switch to a new exchange is incredibly difficult.
There’s the chicken and egg problem that nobody wants to trade on your exchange because it has low volume, but you can’t get significant volume without people trading on your exchange.
Most exchanges try something like trading competitions or transaction fee mining which can end up incentivizing wash trading in some way.
This doesn’t help the exchange get genuine volume and it’s bad for users as low liquidity means high slippage.
So Blockbid partnered with a crypto economist from the University of New South Wales to design a system that encourages liquidity rather than volume.
That’s the same approach CoinMarketCap will soon take to rank exchanges, which will see three-quarters of the current Top 20 wash trading exchanges wiped out.
How does it work then?
The model sees traders rewarded with BIDL for adding to liquidity (with greater rewards for those who provided liquidity earlier on). Each month 50% of the transaction fees are spent buying back the tokens and burning them.
Token emissions also halve every 60 days until August 2020
It’s fabulously complicated and Blockbid COO David Sapper assures Micky that there’s lots of maths behind it to ensure it works securely and efficiently.
“It’s a bit like a credit card rewards program,” said Sapper.
“You spend money on trading on the platform, you earn rewards points and at the end of the month. You can sell back the points that you’ve earned for whatever value you perceive those tokens are worth. And we do on market buy back.”
He said they have completed two buybacks so far and burnt a total of 11.9 million BIDL tokens.
“That is over 1% of the total supply and 8% of the circulating supply.”
The top trader (Telegram user @mojo20190101) so far has put $165,000 through the exchange in the course of a month.
He paid $329 in fees but ended up making $1030 by selling half his BIDL rewards for the month.
“If he’d sold all his BIDL token rewards he would have made 7x his fees back,” Sapper said.
Still no banking partner though
Blockbid was forced to drop support for Australian fiat earlier this year after its accounts were closed. Instead, it now offers KYC free trading – except for OTC customers who are able to transfer fiat in via a separate system.
Sapper said the few local ‘crypto friendly’ banks all required a large float in the account (ironically reducing Blockbid’s own financial liquidity), and overseas services were cost-prohibitive.
They are still exploring options.