Case Study: Curated Price Feeds for Custom Markets
In previous articles we have done case studies on Decentralized Insurance and Sports Betting. One of the main strengths of ORAO is our use of Predefined Data Protocols. They allow for general data, of course, but they also allow for very flexible financial data products. In this article we will examine their usefulness for automated trading, both on-chain and on centralized exchanges.
Limitations of General Use Price Feeds
If you have ever visited one of the market cap sites like Coingecko or Coinmarketcap, you will be familiar with their structure. They tap into APIs from a great many different exchanges, all of which have very slight variations in price. They aggregate and average out those feeds to present a single price for Bitcoin, for Ethereum, and for each of the other cryptocurrencies being shown. The more volume on an exchange, the more weight is ascribed to the price point from that exchange.
For idle curiosity this is fine. The numbers don’t have to be exactly right, and they are always going up and down a bit anyway. For automated trading, however, this most accessible level of price feed is not very useful. More detailed price data is necessary. What’s the exact bid and ask price on Binance? On Huobi? On Kucoin? For arbitrage trading to be possible, you need exact information, and it needs to be as fresh as possible. Half a second’s delay can easily be enough to erase the opportunity as other traders act more quickly than your own bots.
There are also more regional variance than the average crypto trader may be aware of. Strict, time consuming regulations in South Korea consistently result in significant premiums on whatever is currently in demand. At the time of writing, the price of Bitcoin on Bithumb is $35,915, while on Binance it is only $34,904. While South Korea is consistently the developed nation with the highest premiums on crypto, they are not the only one. Japan regularly sees flareups of several percent above the prices on international markets, and Hong Kong lies as high as 2–4% above Western markets. And this doesn’t even touch on markets in developing nations, or those with local currency issues, where premiums are regularly in over 10%. For a decentralized market with supposedly free movement of coins and tokens, national regulations move local prices more than you might think. Market cap sites typically ignore these outliers to give more accurate general purpose international prices.
Unique Opportunities, Unique Data Requirements
For most traders, you are either limited to participating in only these high premium markets, or you have no access to them at all. That’s the only way these price differences can persist. However, while these markets are walled in by regulations, they are not single exchanges, and often support thriving ecosystems of their own. In addition, some traders find themselves in unique positions where they have access to combinations of markets that most others do not. Whether they have rare combinations of dual citizenship, or are simply able to negotiate local bureaucracies and regulators, these traders have unique opportunities to take advantage of arbitrage opportunities. To make that work however they also need combinations of data that nobody else has any use for. Public price aggregations are useless to them, and earlier oracle platforms have not been able to service their needs either.
But this is where ORAO’s Predefined Data Protocols can make a major difference. Because the ORAO network can support any number of custom data protocols, buyers can submit requests for the exact data they are interested in from the precise list of exchanges they trade on.
This isn’t only useful for high premium countries, either. The US has notoriously burdensome regulations for foreign exchanges that accept American traders. Even Binance does not allow US traders on their main exchange. Thus American companies are often not able to trade on most International markets. With ORAO, these companies can purchase curated price feeds for only the exact list of US and US-compliant exchanges they do have access to, without price points from large international exchanges like Binance distorting the price data.
Regulations on decentralized exchanges are… spotty at best, but here also some traders are able to use them while remaining compliant with local regulations, while others are not.
Taken together, all this paints a complicated landscape for traders who are seeking to remain compliant with local regulations. Whether data is needed with on-chain or off-chain delivery, however, ORAO data providers are able to cover their exact data needs, enabling precision and high speed trading superior to any other oracle platform.