For a number of reasons, transaction fee has gained a negative reputation within the space. In this article, we’ll explore why this model has failed so far. We’ll also outline how Ethex is working to launch a better transaction fee incentive model for traders on via a 100% decentralized protocol.
What Is Transaction Fee Mining?
Transaction fee is an incentive model used by exchanges to reward active traders. Instead of the exchange collecting all fees on both the maker and taker side of a transaction, transaction fee typically gives a percentage of collected fees back to traders in the form of the exchange’s native .
, , , , and have all implemented transaction fee at some point in time. Of these exchanges, FCoin is probably the most well known.
FCoin: Successes and Failures
From an initial marketing exposure perspective, exchanges have benefited from this model. For example, CoinMarketCap and similar sites oftentimes won’t list zero-fee exchanges in their rankings. However, exchanges that have transaction fee are typically included. Take FCoin for example. Because it saw other exchanges implementing rebates of over 100%, it decided to launch a 10% bonus campaign for FToken (FT) in August 2018. This move was quite successful in gaining new users, generating a 7,000% increase in 24-hour trade volume to over $2 billion. Again, in April 2019, volume on FCoin spiked to over $11 billion after implementing an updated rewards model.
In between these two points, however, 24-hour volume flattened out significantly, generally ranging over $100 million but less than $300 million. The initial volume spike could be due to the introduction of additional incentives.
Checking the on April 28, 2019, FCoin ranks first place in reported volume among 257 exchanges. For adjusted volume, a stat which doesn’t include any transactions from transaction fee , FCoin ranks at the bottom with $0. Essentially, with FCoin, it can be difficult to get a true perspective on actual volume.
Negatives of Transaction Fee Mining
Throughout the history of this incentive model, many people have had concerns with its implementation and the strategies exchanges use to gain interest from new traders. Here are a few of the biggest known issues.
Centralization of Token Supply
Many exchanges, including those that use other incentive models, have reported fake volumes by on the maker side and taker side of transactions. While this is a major issue overall, it is worse in the cases of exchanges using a native reward earned via transaction fee . Essentially, the exchange operator has the ability to gain majority control of the supply quite easily. Besides, being unfair for ordinary traders, it also opens up the possibility that an exchange could perform a massive sell-off scheme of its own native at any point in time.
Reimbursement of Over 100 Percent
Several exchanges that use this incentive model have . These include BitForex (120%), FCoin (110%), CoinBene (130%), and Coinsuper (125%).While the exchange might operate at a loss initially, the goal is to onboard as many traders as possible initially so that the exchange can gain enough liquidity from traders who will continue to match orders. Eventually, the exchange aims to reach profitability after the promotional period ends. This early bonus model might appear beneficial for traders in the short-term, but it is unsustainable as a long-term incentive model.
Buyback Initiatives
Bitforex and Coinsuper promise to use 80% of transaction fees earned to buy back exchange . They then burn these in order to create deflation. This is also popular among exchanges that don’t use transaction fee (i.e. ). While a buyback/ burn strategy isn’t necessarily a negative, the fact that the exchange can use this as part of a strategy to gain an even larger majority of its own native supply presents potential issues for those traders that want to HODL that for the long-term.
Wash Trading
Because all transactions on transaction fee exchanges earn the native , there is no structure in place designed to disincentivize wash . Effectively, the exchange encourages traders (and its own bots) to complete both the maker and taker side of an exchange.
Published at Tue, 30 Apr 2019 22:11:58 +0000