Unlike other blockchain projects, Changer has a clear business model that can generate revenue. Changer’s goal is to achieve mass-adoption of cryptocurrency assets, contribute to the financial lives of people, and create a sustainable business at the same time. A brief explanation of the profit model is described below.
In Changer’s DFX Gateway, numerous trading pairs are traded 24 hours a day, and prices vary slightly for buying and selling. This price difference is the spread, and the size of the spread varies slightly depending on the liquid ity of the trading pair. The structure is designed in ways that can automatically adjust profits considering the market condition so that pricing remains the most competitive. Changer’s profit will range between 10 and 80 bps (0.1 to 0.8%) depending on the market condition for each transaction.
Starting with Changer’s institutional and retail customers’ trading activities from exchanges and hedging to arbitrage, and so forth, Changer’s profits can continue to increase as the DFX Gateway integrates into external crypto payment or remittance services.
DFX currencies, which are the results of trading on Changer, will first be allowed to be withdrawn in cryptocur rency; and then in fiat currency in the future. For example, if you have eKRW within the Changer platform, you will be able to withdraw the eKRW in cryptocurrency. A small withdrawal fee will occur. For future withdrawals in fiat currency, a similar or higher fee will be charged.
When using the prepaid card that is connected to the Changer eMoney balance, Changer will collect a portion of the customer’s payment fee. This is expected to be about 1% (100 bp) of all payments.
Changer will offer customers additional opportunities to earn profits such as by depositing and signing up for as set management products for the DFX currencies they hold on Changer. Changer will create a structure where Changer can receive sales fees and collect a portion of the asset management profits generated.
As market participants start to trade through Changer where all the liquidity of markets has been channeled into, Changer can act as a clearing house for those market participants. Let’s assume three customers A, B, and C need some transactions done. Customer A needs to send 50 BTC to customer B and 30 BTC to customer C. Meanwhile, Customer B needs to send 20 BTC to customer A, 70 BTC to customer C, and customer C needs to send 30 BTC to customer A and 50 BTC to customer B. The existing way was to have the transfers done on the blockchain, making it expensive and difficult to estimate the processing time (sometimes taking more than 24 hours). If all the people A, B, and C are customers, Changer can receive their requests and correct their balance once their security authentication is completed. They can settle their transactions immediately. Please refer to the diagram below.
The gas fees on Ethereum, the second-largest blockchain by market capitalization, recorded 99 USD per trans action in August 2020. The fee, which was 72 Gwei on average on August 25, 2020 (9 PM UTC), hit 162 Gwei on the 26th (4 AM UTC), soaring 225% in just seven hours.
Volatility in blockchain transactions are not new, and it seems the situation would not change much in the near future (Ethereum co-founder Vitalik Buterin said1 he would “freely admit” that Ethereum 2.0 is “much harder to implement from a technical perspective” than he had expected). In this light, there are enormous uncertainties for institutions actively trading cryptocurrencies when settling transactions with their counterparties on the blockchain.
Changer thus intends to build and serve as a clearing infrastructure where Changer can play a role in customer authentication and update customers’ balances whenever they make payment requests to other customers on the platform. Without having to process transactions on the blockchain, Changer’s clearing service for institu tions will charge a clearing fee of 15 bp (0.010.05%), which will be significantly lower than clearing through the blockchain.
If it is possible to identify traders (not robots) who are very actively and frequently placing orders on a particular exchange, it becomes easier to predict the price gaps for the same product between other exchanges. There are in fact 13 stock exchanges in the U.S., including the NYSE and Nasdaq.
For this reason, high frequency trading (HFT) companies, of which robots automatically trade 100% of the time, pay major exchanges and securities companies to become officially licensed market makers and monitor all the markets. Then, when a customer places orders through a specific broker, they adjust the quotations they posted on all other brokers or do arbitrage trading in the blink of an eye to gain profits.
Regulation NMS, enacted in 2005 and implemented by the US SEC in 2005 with the aim of advancing securities trading, played a major role in weakening NYSE’s presence in US stock trading from 79% in 2005 to 9.9% as of August 30, 2020. This triggered competition among exchanges, allowing brokers and dealers to choose the order in which they send their customers’ orders to multiple exchanges.
Regulation NMS includes the “Order Protection Rule'' that requires brokers and dealers to send customer orders to exchanges that can guarantee best execution. Due to intensified competition, however, exchanges began to compensate brokers and dealers for sending customer orders. With increased robot-based trading and complexity of the market, it has become less transparent how much brokers route orders to which exchanges.
To promote transparency in order routing, the SEC revised Regulation 606 in November 2018 and was implemented in 2020. The amount that the US stock exchanges paid to brokerage firms and liquidity providers that sent customer orders was 1.6 billion USD in the first quarter of 2020.
Securities companies that were paid for order routing and liquidity partnerships in Q1 2020 were: TD Ameritrade (202 million USD), Robinhood (90.9 million USD), E*Trade (79.4 million USD), Charles Schwab (53.6 million USD), Fidelity Brokerage Services (25.7 million USD), and Interactive Brokers (18.1 million USD).
Companies that paid them other than the exchanges were: Citadel (172.2 million USD), Global Execution Brokers (56.9 million USD), Virtu Americas (52.9 million USD), G1 Execution Services (51.5 million USD), and Morgan Stanley & Co. (44 million USD) — liquidity providers using the HFT strategy.
As the number of exchanges wanting orders and companies that supply liquidity to the market or trade based on HFT or ultra-low latency trading strategies (mainly Citadel and Virtu Financial) increase, they have to pay companies that directly serve the customers in exchange for accessing special information or acting as a designated liquidity provider.
As Changer channels multiple liquidity sources into one and processes customer transactions in one place, the platform will be able to seek compensation from those liquidity providers and exchanges when the number of its customers and trading increase in the future.