Something that keeps coming up is the idea that OMG will grab a slice of forex and crypto trading. In this rather excellent post
Civilian- suggests that OMG might grab a slice of the daily 3 trillion forex trade and the yearly 10 trillion Crypto Exchange Trade.
This type of speculation has been further stoked by the news
that MUFG (a partner of Omise) is planning to build an exchange and maybe they will build it on OMG...
I’ve promised a few folks here on the omise_go subreddit that I would explain why that is highly unlikely to happen as expected... and also to explain why that does not matter.
As you read through this, you may get a little disheartened, but don’t, because I’ve got some great news at the end that makes up for the debbie downer stuff at the start. HFT
The first important point to note is that most exchange liquidity is created by high frequency trading HFT.
These HFT bots are always running. They make trades every second. With each trade they try to gain just a fraction of a percentage point and as a result they usually make large trades to make money on those very small gains.
This means that just about any time a regular day trader wants to make a trade it is instantly snapped up. Which is great for day traders! There are many HFT companies that are market makers and collectively give electronic marketplaces huge amounts of liquidity.
The world of HFT is conducted in milliseconds.
Trades MUST be able to execute within the shortest time possible (sub 1 second end-to-end). It is, after all, computer against computer. This is why many HFT companies pay huge amounts of money to get the fastest possible connection to an exchange.
In many cases they even get an office right next to the exchange and wire a fiber through the wall, directly to the exchange’s network, to try to get a competitive advantage.
So, to recap, HFT traders are market makers, they create the liquidity that makes it very convenient for other traders to be on the system. Confirmations
For a transaction to complete on a DEX like OMG, it must be confirmed by multiple nodes. Each node will be at a different location in the world. We don’t know how distributed nodes will be geographically, but, presumably there will be enough distance to help add security to the network. Perhaps different cities, different countries, or, at the very least different regions of the same city.
You can imagine how a network like that could not work very well for HFT... based on the simple constraint of the speed of light!
In the traditional model the HFT firms buy a single direct connection to a centralized exchange with a ping time of 10ms. When they place the trade no confirmations are required. So just one wire and one api endpoint and a few milliseconds.
If they try to make that same trade on a DEX the trade would require multiple nodes to be discovered and confirm the transaction with each node incurring it’s own 100ms? 200ms? network latency. It seems almost impossible to imagine a system like that enabling sub second trades end-to-end. Reason #1
So, DEX confimrtatons and network latencey is reason #1 why it is very unlikely any traditional exchange would move to run on the OMG network.
After all, they would jeopardize their relationship with HFT traders and the fees they bring. They would also jeopardize the liquidity that their other customers rely on so much.
You may say, but wait, the OMG DEX will give them the liquidity they need, but that is a moot point because a) for them it will be unproven and b) they will not want to lose the huge amount of revenue they make from HFT to another exchange that didn’t switch.
Keep in mind the bulk of the 3 trillion daily trading is created by these types of exchanges. Exchange Architecture
I’m not sure if this is common knowledge, but running an exchange can be disgustingly lucrative. The per trade cost is basically zero. This is due to the core architecture of an exchange.
Essentially, when fiat or crypto is deposited into an exchange, it goes into a large global wallet that the exchange owns. Then a number of that same amount is assigned to a customer record.
From that point forward all the “trading” is simply swapping numbers in a database. There is no actual money, or value, of any kind swapping hands per trade. The money remains in the large global wallet and is not touched.
For example, at its most basic, the database code it takes to make a single trade might look something like this:
UPDATE customers SET USDT = USDT - 25 WHERE customer_id = 1; UPDATE customers SET OMG = OMG + 1 WHERE customer_id = 1;
Those two simple SQL statements tell a database to subtract 25 and add 1 to a customer record. In this case the record says USDT and OMG but don’t let that fool you, it’s not really USDT or OMG it’s just database columns, with convenient names.
Additionally, for every trade something like this happens:
UPDATE customers SET USDT = USDT - (25 * 0.0025) WHERE customer_id = 1; UPDATE exchange_profits SET USDT = USDT + (25 * 0.0025);
THAT is the exchange taking a 0.25% fee per trade. For example, yesterday bittrex (the 7th busiest crypto exchange) did a total volume of $1,027,873,751. We can calculate how much they made by doing this:
VOLUME * 1.0025 = TOTAL VOLUME - TOTAL = PROFIT
So, from their 0.25% Bittrex made $2,569,684 yesterday.
Ignoring the fact that a DEX is not fast enough for HFT trading, let’s imagine that bittrex did decide to run on the OMG network.
In this case Bittrex could use the OMG infrastructure and add a surcharge on top of every trade.
Let’s imagine a best case scenario that OMG trades cost 0.1% per trade and that Bittrex could then add 0.15% on top.
This means that Bittrex would be losing $1,027,8737 per day vs what they could be making by running their own infrastructure. Reason #2
I hope you can see there is no “infrastructure savings” that OMG could bring that could offset the level of profit exchanges make. With the amount of money that exchanges make they can easily hire developers to fix any scaling issues or other technical problems that they may have.
All that is to say, loss of profits is reason #2 why it is very unlikely that any existing exchange would switch to run on the OMG network.
This is also why it is highly unlikely a traditional bank like MUFG would build a new exchange on the OMG network. Why would they? When they can literally make billions of dollars of extra profit by running it on their own infrastructure! Disruption Patterns
So, right about now, you’re probably feeling depressed because it feels like we just lost trillions and trillions of earning potential from our beloved OMG :(
Well, let’s talk about why that doesn’t matter by looking at patterns of disruption...
Many people think Uber makes all it’s money by replacing Taxis. Wrong! They made it so easy, cheap and addictive to use on-demand transportat that customers use Uber in ways that they never used Taxis.
For example, before Uber came along I personally used Taxis about one time a year but now I use Uber about 4 times a week!
Uber created a completely new market. Very few people ever used Taxis 4 times a week but, now, lots of people use Uber 4 times a week. This equates to a staggering amount of new money that has nothing to do with “replacing” Taxis.
The same pattern can be seen with Slack.
Before Slack came along there were plenty of competitors doing what Slack did. Sure Slack took some of that business away, but the real money they made was by bringing in hundreds of thousands of new companies who had never used a product like that.
They just made Slack so easy to get started with and then so easy to continue to use. Even my mum uses slack!
The same can be said for Google. Google literally brought a whole new set of people to the internet because it made it easy to find stuff. OMG Disruptions
It’s a little bit difficult to see where or how disruption might play out.
For example, Microsoft always had the lofty goal of everyone getting a computer. But, it was actually the iPhone that ended up being the reason (and disruption) that caused everyone to get a computer.
For this reason it’s hard to predict specifically where OMG might take us and what new markets will come to exist because of it.
That said, one thing that a lot of disruptions to have in common is that they make something easier and/or cheaper. So, perhaps if we explore what OMG makes easier and cheaper, we might get some ideas of new markets it could create. Easier for Developers
In the same way that etherium makes it easy to create new alt-coins and as a result we have LOTS of alt-coins now. The OMG network and SDK will make it easier to build... exchanges… like Bittrex!
Now, don’t get mad at me.
I know I just convinced you that exchanges won’t be run on OMG... but I was talking about existing
exchanges not new ones created by indie developers.
OMG makes it wayyy easier for a solo indie developers to build something like an exchange because all they need to do is build the front end and plug it into OMG.
It would not be useful for HFT traders. It would not rake in the kind of profits that Bittrex does. It may even only make $1.99 in the app store. But, that is still worth it to an indie developer!
In this way, hundreds, or perhaps even thousands, of new exchange style apps will be created that run on the OMG network.
There are many reasons that a consumer might use an app like this vs Bittrex. For example, if exchange fees were 0.1%. Or if the app had automation built in. Or perhaps the app had a UI that was much more pleasing to use.
In the same way that Uber created a whole new type of transportation customer, these new apps might create a new type of crypto and forex trader.
Of course, it will not just be exchange apps that OMG makes easier for developers, but since that is what we are talking about, that is why I mentioned it.
Other things that will be easier will be cross border payments, cross cilo payments (paypal -> venmo), cross currency payments, in game payments, etc.
Each new type of “easiness” that is passed on to developers will end up spawning a new set of apps and markets. Easier for Consumers
The simple fact of being able to easily move money around will create thousands of possibilities. Far to many to mention here. Cheaper for Consumers
Nothing is better than cheaper AND easier. With OMG we get a lot of that. Also, too many possibilities to mention here.
Perhaps that should be another post... Conclusion
I work at a large-ish forex trading company($FX) as a customer support representative. We place high value on customer care, so we don't have any calls per hour quotas to meet, which means we might sometimes get to sit on a call for an hour or two while we attempt to solve whatever issue the clients are facing. It's actually a pretty fun job.
This tale is from a few months ago, when I just started working there. A Tech Savvy Customer($TSC) calls in with an issue regarding one of our mobile trading apps, and I get to pick up the call.
I sign into my workstation, and about a minute after I turn the phone on, I get a call. "This is going to be a great day." I think and pick up the call.
$Me: "Welcome to $FX, can I have your account number?" $TSC: "It's 1111111. I have an issue with my mobile trading app. The app updated a couple of days ago, and ever since the update my account won't get logged unless if I kill the app through the task manager."
$Me: Now this might be interesting. I get a pen and paper ready to write down all the relevant information (Personal preference. I summarize everything after I end the call)
$Me: "OK, can you tell me the brand and OS version of your phone?"
Shockingly, he knows how to get the relevant details. This might be a unicorn.
$TSC: "S5 Edge, android 5.1" $Me: "Alright. Can you please describe the issue in detail?" $TSC: "Yeah: After logging off my account, I get to the login screen. So far so good. When I press the home button, I get the icon at the top showing that the app is running. If I open it, I'm logged into my account again. Same if I launch it through the main menu or the play store. I sent you guys an email a couple minutes ago with screenshots and a more detailed explanation, can you confirm you've received it?" $Me: Scribbling furiously " One moment please" Hold. I raise my head and ask around, "Hey guys, did one of you spot an email from $TSV's email address in the past half hour?" $Other reps: "Nope." $Me: Le sigh. Resume call "Thank you for holding, unfortunately we didn't get the email. Could you send it to [email protected]$FX.com?" $TSC: "Yeah, give me a sec. I don't actually mind myself, but there are people who don't lock their phones or leave it with unsupervised children. Someone might get royally screwed over this." $Me: Ding "You're absolutely right sir. I just received your email. I'll forward it to our QA and technical teams to have a look." $TSC: "Cool, thanks." Hangs up $Me: Yeah, screw you too
So I look through the screenshots and explanation... I swear, the guy either used to work QA or is currently working as a QA. Damned thing looks more detailed than most professional bug reports I've seen.
So I start writing a ticket to our RND team, but I figure I'll also try and replicate the issue. I can't stress enough how much leeway we get when dealing with customers, and if something like this happens a rep may go missing for the rest of the day. I sign off the phone, and steal a few phones from my fellow reps, both iPhones and Androids. I got lucky with 2 phones that didn't have auto updates running, so they had an older version which didn't have the issue. But as soon as I updated it? Yup, not logging out.
I change the severity of the still unopened ticket to critical, and write a tl;dr in the ticket notes, along with the phone models and version numbers I replicated it on.
Ticket sent, and I get the level 2 tech that was assigned to it on the phone.
$Me: "Hey, so this issue was spotted by a client. I replicated it on 5 different devices. All get the same issue." $L2T: "Yeah, saw the ticket. You're CCed on any updates about this. You'll need to follow up on this with the client once it's done." $Me: "Really?" $L2T: "Yeah, the rep who catches the issue does all the follow ups until resolution." $Me: Sounds fun. $L2T: "Cheers"
A few days pass, and I finally get an update
Ticket closed. ask the customer to update his app
So I do just that. While waiting for him to puck up I check it on my own phone. Looks like it's fixed.
$TSC: "Hello?" $Me: "Hello, this is $Me from $FX. I'm following up on an issue you had with your mobile app?" $TSC: "Yeah, it's working fine. Thanks."
Awesome client. Made me feel utterly useless.
Moral of the story? Some customers use CS reps as a human ricketing system. This is one of maybe 3 cases where I didn't actually do anything at all.
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