Recently, exchanges like BitMex and BitForex showed exorbitant volumes after launching a strategy known as “transaction mining”.
Looking at the volumes reported by CoinMarketCap, it is easy to note that some exchanges are achieving extraordinary results. CMC labels those exchanges as “transaction mining” marketplaces, and excludes their data from the overall price and volume statistics for the leading coins. Recent analysis from CryptoExchangeRanks (CER) looks at the patterns on some of the most prominent new exchanges, and sees the effects of transaction mining on volumes.
Transaction mining is a simple mechanism – it rewards those who place trades by reimbursing their trading fees through the issue of new exchange tokens. The chance to receive new tokens to compensate for transaction fees has led to regularly increasing volumes.
The rapid ascent of transaction mining has led the crypto community to believe that new exchanges are performing a new, elaborate scam. The rewards on exchanges also resemble a token sale, in that they give the exchange fees in other, more valuable coins, while receiving the native coin of the exchange.
Because “transaction mining” exchanges are anonymous and for now don’t require KYC, it is possible for anyone to inflate volumes and seek transaction mining rewards.
Transaction mining exchanges such as Bitforex, CoinBene, Fcoin and to a degree Coinsuper also show a readiness to list obscure tokens where larger exchanges are limiting their selection, and even delisting some assets. The other concern of analysts is that those exchanges have very low security. Given the recent wave of exchange hackings, those marketplaces may pose a unique vulnerability.
Additionally, transaction mining is one more tool to make the exchanges noticed and possibly invite real traders. In the summer of 2018, markets like BitForex showed trading anomalies that looked like bot activity. But after a while, the volumes dwindled and were revived only after the exchanges introduced transaction mining.
No one knows what the trading will look like when the exchanges distribute their native token. For markets like Binance and KuCoin, the native token has proven to be key to volumes and liquidity, and transaction mining exchanges now copy that model.
The CER research also notes that most of those native coins are sold at a discount, as traders are reimbursed for more than 100% of their fees.
Usually, transaction mining is also the work of bots, as the regular placement of orders cannot be optimized to take the scheduled rewards.
Traders are advised to be cautious about the new crop of exchanges and their schemes, and avoid small-scale assets listed on those markets due to risk of low liquidity and high volatility.