This is the second chapter in the series on how exchanges work. You can read part 1, an intro to crypto exchanges here, and part 3, on DEX, here.
5 key takeaways
- Exchange aggregators act as brokers, enabling users to access and execute trades across multiple crypto exchanges from one platform.
- Advanced aggregators can help carry out complex trades, which increases the number of possible trading combinations through synthetic pairs.
- Aggregators can offer superior fiat payment rails, enhancing the user experience by localising and streamlining transactions.
- Users must choose their aggregator carefully, considering transparency, ethical trading practices, and affiliations with reputable exchanges.
- Centralised Finance (CeFi) aggregators make the Know Your Customer (KYC) process easier by allowing users to complete it just once, rather than repeating it for each individual exchange.
Today, we delve into a topic that’s garnering much interest in the crypto industry: exchange aggregators, also known as meta-exchanges. In this guide, we'll unpack how these platforms work, their advantages and disadvantages, and the value they bring to the table, including whether they can provide access to low exchange fees.
How Crypto Exchange Aggregators Work
In crypto, at their core, exchange aggregators function as brokers. When a user places an order on an aggregator platform, the order is not executed on the platform itself, but rather, it's sent to other exchanges for execution. This approach allows exchange aggregators to offer users access to multiple exchanges from a single interface.
Aggregators can connect to several exchanges, establishing a broad network to source liquidity and low exchange fees. They have the ability to send orders for a particular trading pair to a selected exchange, even if other exchanges also support that pair. However, the power of aggregators lies in their ability to scan across their network of exchanges to find the best price for a user's order.
If a particular pair, say BTC/ETH, is supported by multiple exchanges, the aggregator can choose to divide an order among several exchanges. This allows the aggregator to take advantage of different prices on different exchanges, potentially delivering a better price than any single exchange could offer.
Beyond executing existing trading pairs, more advanced aggregators can facilitate synthetic pair execution. This process involves finding a path from currency A to B using any available trading pairs across exchanges, with the aim of offering the best possible price for the entire transaction. For example, to make a direct exchange from EUR to the SwissBorg token (CHSB), an exchange aggregator may first go from EUR to USDT, USDT to BTC, BTC to ETH, and finally ETH to CHSB. Theoretically, any exchange pair in the world becomes possible as long as the fiat/crypto is available on the exchanges it connects to.
Fiat onramp and offramp with exchange aggregators
Exchange aggregators can often enhance the user experience by offering superior fiat payment rails and reduced fees on trades. By aggregating various exchanges, they have the potential to operate in a more localised manner, adapting to the specific banking systems of different regions. This can lead to improved ease of transactions, as users can deposit and withdraw funds using their local currency and preferred banking methods. This kind of localisation can help to reduce transaction costs, increase transaction speed, and improve the overall user experience. The process of converting cryptocurrencies to fiat and vice versa can be streamlined and simplified, making the world of cryptocurrencies more accessible to a broader audience.
Pros and Cons of CeFi and DeFi Aggregators
It's important to note that exchange aggregators are not regulated entities in the same way as traditional exchanges. They don't necessarily adhere to the same levels of transparency or trading practices, nor are they required to clearly disclose their pricing mechanisms, such as the source of their prices or any added margins. They can even trade against their users.
Consequently, it falls upon the individual user to diligently select an aggregator that prioritises transparency and ethical trading practices and puts user interests before profit. Users must ensure that their chosen aggregator interfaces only with exchanges of the highest reputation and standards. A particularly useful practice is to seek out aggregators that provide transparency reports for each exchange, enabling users to track the path and price points utilised in executing their trades.
Among aggregators, CeFi platforms offer a distinct advantage regarding the KYC process. Rather than undergoing the often tedious and repetitive KYC process with each individual exchange, users can complete it just once with the CeFi aggregator. This consolidation simplifies the process significantly, allowing users to access multiple exchanges through one platform without the need for repeated identity verification, thereby enhancing efficiency and user experience.
In contrast, Decentralised Finance (DeFi) aggregators are typically more transparent in regard to fees and spreads, as all transactions are recorded publicly on the blockchain and can be viewed by anyone. However, they come with their own unique set of challenges. DeFi aggregators can face issues such as low liquidity or, in the opposite scenario, high gas fees and slow transaction speeds due to high liquidity on overcrowded blockchains like Ethereum. Users should also be aware of potential pitfalls like slippage and the risk of Miner Extractable Value (MEV).
The SwissBorg Solution
At SwissBorg, we've taken a different approach with our Smart Engine . While we provide the functionality of a crypto exchange aggregator, we put transparency at the forefront of our operations, empowering our users with information about where and at what price their orders were executed. This level of transparency ensures that we don't add hidden spreads, nor do we engage in trading against our users.
Ultimately, exchange aggregators have revolutionised how users interact with crypto exchanges, offering a single point of access to multiple platforms, potentially better prices, and in some cases, lower exchange fees. However, users must be aware of the trade-offs involved, particularly around transparency and pricing. As always, due diligence is key!
