Author: Professor Suo said

What is the purpose of going for contracts?

Recently, or say in the past year, Binance has launched a large number of contracts. I haven't counted the number of contracts, but it’s highly likely that it has surpassed many once-leading 'derivatives exchanges'.

Now many exchanges actually focus more on 'contracts' and rarely on spot trading. The reasons are generally similar: spot trading with a high market cap easily allows users to take over, while with contracts there’s no fear because users can short or go long.

So including but not limited to Binance, OKX, Bybit, the number of contracts they launch is much greater than that of spot trading; the reasons are here.

Moreover, the main point is that with spot trading, you might really need to 'reserve spot' for users to withdraw, while 'contracts' don’t need that at all since it’s not 'physical delivery'.

If you look from a more detached perspective, exchanges are essentially places that provide 'trading'. So as long as they provide trading pairs, they earn transaction fees. Thus, whichever transaction fee can make money, they go for that; whichever can increase 'fee income', they will pursue it.

So going 'leverage' is not just about 'transaction fees', isn't leverage geometry's income too?

So from the perspective of the 'exchange', this is a normal operation, after all, it’s about 'transaction fees'. Unless you insist on thinking that the 'exchange' eats into customer losses, then there are more explanations for that, which can completely rely on everyone's imagination, so I won't elaborate further; it's unnecessary.

What is the reason for the greater impact of spot trading?

Here it’s more like discussing the question of why spot trading has a greater impact on exchanges or prices.

In spot trading, the 'reserved spot' for user withdrawals leads to a lot of circulation being locked in exchanges, while many users may not necessarily buy or sell them. This could mean that the market cap circulating in the market could be much less than the actual market cap.

If the exchange lists spot, it means they must have spot themselves. After all, before opening trading, they need to ensure that there is spot at the exchange address, and these addresses are all open.

So the positive impact on prices is far greater than that of 'contracts', and the main point is that listing spot will make 'liquidity' not so good. Here, 'liquidity' refers to many 'spot tokens' being locked in 'exchange searches'.

Especially when many spot tokens are monitored on-chain, and someone finds that a certain exchange has a very low token balance, they will force a withdrawal, making the exchange buy tokens themselves. This has happened with $REEF, where there weren't enough coins in @gate_io, leading @dotyyds1234 to force a squeeze for a while 😂.

The 'liquidity struggle'

In fact, the main relationship between contracts and spot lies in the debate over 'liquidity'.

After going for contracts, liquidity is very good, and since there's no need to buy 'spot', the actual impact on prices is 'not significant'; it all becomes larger through the later 'arbitrage' trends. Therefore, many people will use 'contracts for arbitrage', which leads to 'liquidity' being very good.

Moreover, many tokens can be observed; the trading volume of spot is far lower than that of contracts.

Even because of contracts, you can make money whether it rises or falls, which leads to even better liquidity.

Similarly, with 10,000 U, in the contract market, it could turn into a cash flow of 200,000 U. For the exchange itself, it’s just skimming off the top; whoever can generate more cash flow is the preferred one.

However, spot trading, especially with the current poor liquidity, is not good because of the recent market conditions. Altcoins are going down, and for many exchanges, the spot is like a big bullish candle followed by a continuous bearish trend. Few can rise further after being listed on exchanges, even wealthy and powerful VC coins can't do it. Can meme coins relying solely on concepts achieve it?

So it provides an option where you can make money even when falling, that can only be with contracts.

So actually, from the standpoint of making 'users money', there’s nothing wrong with going 'contract'.

The 'final chapter'

In fact, for those with a significant position, if they go for Binance contracts, it can provide ample opportunity to exit. With spot, they might not necessarily be able to exit completely.

Because the depth of spot isn't very strong, and the trading volume isn't large. If you simply rely on a big dump on-chain, it’s quite difficult. If you directly open a contract, the chances of getting in are much higher.

It reminds me of $ARKM, where a certain group member held 10% of the total circulation at the start, and couldn't sell it off with spot, then opened all contracts and gradually sold off, directly completing the exit.

So actually, there’s no conflict between spot and contracts; it’s just about how you use them or how you understand the concept of liquidity.

For most assets, better liquidity leads to quicker declines, while poorer liquidity results in better rises.

For example, assets like NFT, BRC20, etc.

Think about how many transaction fees there are; exchanges always want a piece of the pie, right? If there's no spot, there must be contracts, right?

Ultimately, it’s all business. They can't control the price; if they short, everyone can directly buy on-chain to explode the short 😂.

Good liquidity is always controlled by 'market makers'.