Wassup, it's Taylor again — CEO of Hedgehog, the all-in-one platform for tracking and trading every digital asset that deserves your valuable attention. Today I've got something a little different for ya!

My employee Sonya joined Hedgehog in spring, to help us stay in touch with users. (If you hang out on Discord, she's the rabbit avatar.) Her first idea was interviewing a savvy crypto influencer about the business of cryptocurrency exchanges, since that’s where most of us get our hands on the stuff. "A million distractions later," according to Sonya, here is her report...

Eric Wall is among the saner voices in the crypto ecosystem. He's got one foot in finance and the other in engineering, having worked on the backend of traditional exchange systems — most recently at Cinnober, a firm later absorbed by Nasdaq. Nowadays Eric puts his tech background to use running Arcane Assets, "an actively managed fund with the mission of capturing the value appreciation of cryptocurrencies as an asset class in the years ahead."

When we spoke in [checks notes] April, he said it straight: "What we try to do is outperform bitcoin and charge fees from the outperformance." Even more blunt: "If you're not outperforming bitcoin you're not actually worthy of a price." See why I like him?

Eric is a money guy, but he's not just a money guy. We first "met" on Twitter, where he has an audience of 65k followers, attracted by the infamous rainbow meme and valiant efforts to sync an Ethereum node. Personally I got to know Eric better when my previous employer, the Zcash Foundation, sponsored a series on practical crypto privacy that Eric wrote for the Human Rights Foundation. I was impressed by his research skills and even-mindedness.

Since Eric trades for a living, I asked for the rundown on modern cryptocurrency exchanges. Scams remain rampant, but the industry has grown past the bad old Mt. Gox days. Exchanges have to compete with each other based on features — the specific functionality offered to users, not to mention seamless implementation.

I asked which are the top three exchanges leading the pack in innovation. Eric mentioned:

  • Bybit for low-friction access to leverage,
  • Deribit for retail-friendly bitcoin options, and
  • FTX for being "very quick to construct derivatives that allow you to trade the instrument before it’s even accessible to the spot market."

How does FTX pull that off? Eric explained that people with the right connections buy tokens OTC in "whale amounts," then provide liquidity to FTX before any other firm can catch up. For example, FTX was first to list MobileCoin. According to Eric, this advantage "comes out of having a very talented development team in-house." By contrast, an exchange using white-labeled technology is dependent on outsiders and can’t move so fast.

Eric remarked that "basement-built products" are no longer common in this industry. "Now the technology stacks that cryptocurrency exchanges run are starting to be on par with what the traditional finance space provides." Which is no mean feat: "It's been kind of insane to see the complexity that these exchanges have had to navigate," versus simply plugging into an established clearinghouse.

In 2017 people wanted access to as many cryptocurrencies as possible, but these days leverage is the hot thing. "It's a requirement from the get-go." Still, "broad asset exposure" remains key for most intermediate traders, so offering multiple different asset pairs is a plus. The more the merrier!

Social media helps drive these trends. "You want to be able to execute the same trades that you see other people executing" and "emulate the trading styles of other popular traders." Eric pointed to Zhu Su of Three Arrows Capital as an example.

As a pro, "I want to be able to get leverage on my trades," meaning futures and margin trading. Naturally he prefers low rates "so I can hold long-term leverage positions." Also, "What's very attractive is if you can choose how you collateralize [trades]," for example USD being an option as well as bitcoin.

What about the rest of us? Well, the basics are the basics! Most people are just looking for an easy user experience, believable assurances of safe custody (YMMV), and ideally some actual insurance for lost funds. Among small-scale individual traders, tight spreads are crucial and matter more than liquidity.

"If you're a larger player," however, "liquidity means everything," since the goal is "being able to get in and out without moving the price." You'd rather not pay extra if you can help it, nor do you want others snooping in your business! Better to fly under the radar.

Taylor again. That's all for — oh wait, almost forgot the giveaway 😳 That would be tragic. Let me know, should we put more interviews in the newsletter? Reply to this email with feedback and you'll be entered to win a Ledger Nano S hardware wallet.

MAXIMUM EFFORT,

— Taylor