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For Startups, Cryptocurrency Exchanges can be a Bane.
Digital asset exchanges play an important role in the cryptocurrency market; whether this role is positive or negative boils down to individual exchanges. While some exchanges are making decisive moves to ensure the long-term growth of the blockchain space, some exist for mere short-term profits.
It can be hard to tell which exchanges have ill intentions as every brand tries to place a positive face. Wash trading is the most obvious display of exchanges that seek to offer no real value-additive to the blockchain space. Since the digital asset market is mostly unregulated, many exchanges simply put a display of liquidity by relying on heavy wash trading. Often, this tactic exists simply to trick traders into signing up; they are tricked into thinking the exchange offers good liquidity. Such a motif could be forgivable since wash trading in such cases leads to mere wasted time on part of traders. However, wash trading is used for more than just user growth: this tactic is used by certain exchanges to pad up their sales pitch to projects with unlisted tokens.
With the promise of strong liquidity, exchanges littered with wash trading trick projects into thinking they are receiving a liquid secondary market. Instead, projects receive little to no liquidity but end up paying a hefty fee.
While wash trading is a common vice among exchanges, it is not the only way nefarious exchanges fleece funds out of startups. In fact, one exchange recently went out of its way to publicly display a means it utilizes to extort funds from projects it supposedly lists for free.
Exchanges: Often a Bane in Disguise
DUO Network is a cryptocurrency startup that aims to create decentralized dividend markets for the Crypto traders. The project’s team claims that derivative markets are far bigger than the underlying asset in the traditional equity and debt markets. However, in the cryptocurrency market, spot trading far exceeds the trade of derivatives.
The reason for this is that the cryptocurrency derivatives market is primarily in the hands of one centralized exchange (BitMEX) that is listed as an offshore enterprise in a legal haven. Most traders who delve into the cryptocurrency derivative market end up dismayed. The lack of transparency in the unregulated cryptocurrency derivative market is the key reason for the mitigated interest traders have had in digital asset derivatives. This, according to DUO’s team, is a missed opportunity that decentralization can solve.
The project has already launched its beta application and recently raised funds to deliver a finalized product. After listing on BitMax, DUO was offered a free listing on MXC exchange. The project and its community welcomed the latter as it was unplanned seeming boon to the project’s growth and adoption.
However, things didn’t end so positively.
Opportune Time to Strike
Most blockchain projects offer private sale investors lockups to ensure that the token supply grows along with adoption. While DUO’s first listing happened quite some time ago, its private sale investors will receive their first unlock on vested tokens at the end of May. This is a critical time for DUO Network as the project’s circulating supply will inflate and some private sale investors will look to liquidate their position. At such important events in a project’s token supply timeline, exchanges are expected to play a strategic role in ensuring orderbook uptime.
However, MXC exchange decided to take advantage of the vulnerability DUO would face at such an event.
While the project was initially offered a free listing, MXC recently demanded DUO Network a market making and maintenance fee, along with a delisting threat in case the payment is not made. A delisting is always a negative event but a delisting right at the point of private sale unlock is an incredible blow to any project. Even though DUO remains listed on BitMax, one of the most liquid cryptocurrency exchanges in the space, a delisting from MXC forces a negative shock at a critical point.
As the project has a limited amount of funds, DUO declined to pay the listing fee. Consequently, MXC delisted the token right before the private sale unlock. This is a clear display of how cryptocurrency exchanges hold so much power in the blockchain space that they can take advantage of startups during time of vulnerability.
While DUO has declined to make the payment, and now faces uncertainty once its private sale tokens unlock, it is quite likely that other projects have fallen prey to MXC’s bait and switch tactic.
The bait is the offer of a free listing, and the switch is the sudden demand for payment at a time of vulnerability for a token. Exchanges like MXC have taken a short-term approach to profitability in the cryptocurrency space and the presence off such market players is incredibly dangerous as it forces valuable startups with powerful development proponents to either give up funds intended for project advancement or face delisting in times of vulnerability.
For the cryptocurrency space to move forward, it is imperative that projects realize some exchanges may veil themselves as strategic partners only to offer a painful sting. Project teams need to avoid accepting listing offers, even if they are free, from digital asset markets that have not established a good reputation.
For startups, Cryptocurrency Exchanges can be a Bain. was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.
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