That’s not meant to be a trick question. Commission-free exchanges (drum roll) are exchanges that don’t charge you money to make a trade. End of story? Not quite. There are plenty of different types of commission-free exchanges cropping up and not all are created equal (in fact, not all are completely created yet, but as the trailer says… coming soon).
Commission-free exchanges are not to be confused with decentralized exchanges, the ones keeping Coinbase, Bitfinex, and Binance awake at night. These use smart contract technology to facilitate (truly) peer-to-peer transactions. But they’re still in their infancy and most have significant limitations, namely, basic trading features, low liquidity, and fiendishly difficult user interfaces.
The Rise of Cryptocurrency Exchanges
Back in the glory days of 2014, Mt. Gox handled around 70 percent of all global Bitcoin transactions. At the peak of its popularity, the Japanese giant raised a lot of controversy when it was hacked.
The problem with centralization? One single point of failure. Your funds are held in one exchange and are vulnerable to various third-party attackers.
The fall of Mt. Gox led to an explosion of cryptocurrency exchanges, most of which have suffered some kind of security vulnerability at some point, including Coinbase. As the stakes get higher and centralized exchanges compete against each other, they also fall under scrutiny for other reasons…
After all, wasn’t the point of Satoshi’s white paper to send peer-to-peer transactions without involving any middlemen? What are we doing with centralized giants making millions of dollars every day off of our transactions?
How Do Commission-Free Exchanges Work?
Commission-free exchanges appear under different guises, but most of them have one thing in common. They don’t charge any commission but still make their money somewhere– whether it’s through higher trading prices or charging interest on user accounts.
Oftentimes, when something looks like it’s too good to be true, it probably is. Dig a little deeper and you’ll usually find if you don’t pay commission, you’re still being tapped at some other point. There’s no such thing as a free lunch, as the saying goes. This type of commission-free exchange goes against Satoshi’s vision yet again, but in a different way. No fees. Sure. But also no transparency. At least with centralized exchanges that charge commission you know what you’re paying and when. None of this cloak and dagger stuff.
But, is there another way?
Not all commission-free exchanges work in this ever-so-slightly underhand way. But still, it’s always pertinent to ask; if they’re not charging commission, how are they making their money? Because you can be sure they’re not doing it out of the love.
Let’s take a look at a couple of interesting commission-free exchanges:
Cobinhood appeared on the scene in 2017 as the world’s first zero-fee cryptocurrency exchange. Their aim? To cut through the competition and offer traders truly commission-free trading. And they’re actually doing a pretty good job. There are over 60 cryptocurrencies available, the user interface is friendly for beginners, and they have a high level of community trust.
So, how do they make their money? Well, like Robinhood, they offer a prime subscription service, which may not sit easy with everyone. There’s also a Cobinhood ICO underwriting service and even a margin trading loan option, which sounds just a little bit risky.
Cobinhood is also centralized at the moment, which means that your funds are as exposed as they are sitting in any major exchange, although they have announced plans for a decentralized rollout. But, if your goal is high frequency, low volume trading, this could be a good option.
Digitex Futures is a Bitcoin futures cryptocurrency exchange in the making with a release date for the latter half of this year. The premise seems to be unique. Not only does Digitex offer commission-free trading, but they’re providing a decentralized exchange as well. Through smart contract technology, account balances are decentralized, reducing the risk of hacks, and the exchange governs itself autonomously.
How will they make their money? Well, while traders will speculate on the price of Bitcoin, Ether, or any other of the cryptocurrencies Digitex will store, their trading profits are paid out in the Digitex native token (DGTX). Traders cannot buy/sell alt assets without purchasing DGTX first, which creates the demand for their token.
According to their whitepaper, Digitex covers their costs by “minting a small number of new tokens each year instead of charging transaction fees.” If that sounds a little sketchy, it’s not a license for the Digitex team to print money, since the whole community has to vote through decentralized governance each time new coins need to be released.
But does issuing more coins bring down the value of existing tokens? Yes. Although, only temporarily. By allowing more traders in on the game, the demand for DGTX will supposedly offset inflationary costs. Definitely an interesting idea but whether it works or not remains to be seen.
With the backlash of negative press against centralized exchanges and their profits, the tendency towards commission-free exchanges is growing.
Just remember that if you’re going to look into any commission-free exchange, do your homework first. Make sure that you’re not paying an excessively high price for Bitcoin and Ether instead of 1.5 percent, or you’ll be shooting yourself in the foot.