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Cryptoeconomics & Liberty

24h trading volume Per On-Chain Payment

Chart notes:

  • Green area: Total exchange-traded volume of coins per day, in US$;
  • Blue line: Ratio of exchange-traded volume per all on-chain payments, in US$;
  • White line: All-time average of blue line.

24h trading volume Per On-Chain Payment explained

The charts above illustrate the relationship between the exchange trading markets of selected cryptocurrencies, and their respective, network-wide gross payment volumes. Priced in US dollars for comparison. Though market buy and sell demand is reflected in this ratio, there is another interesting concept that can be viewed on these charts. This concept is unique to the blockchain world. It is the difference between on-chain and off-chain transactions.

Let's start with an observation. Blockchains can be used to transact for many different things at any timewhether that's users buying coffee at a shop, trading Bitcoin for US dollars at an online exchange, or just sending money to a friend. And as shown in the previous section, the network-wide sum of all these transactions is transparent, and that sum is constantly verified on the distributed ledgerthe blockchain.

Based on this fact above, we should expect that total exchange-traded volume, which is only one thing you can do on a blockchain, would be a subset of gross payment volumes. That is, trading volume "should" be less than 100% of gross payment volumes, at all times.

Notice the charts. Sometimes exchange-traded volume is many multiples over 100% of gross payment volume. Why?

Off-chain transacting. This is an important concept, one that users should understand when protecting their assets. It is the reason some crypto exchanges experienced "hacks" and funds were stolen or lost in the past (though it must be noted, security and best practices here are always improving).

Essentially, off-chain transacting means a transaction related to a blockchain assetsuch as the purchase of Bitcoin or Litecoin on an online exchangeis documented and processed somewhere, but not on the Bitcoin blockchain itself. The transaction is "custodial;" meaning, it's brokered, verified and "stored" electronically by a third party—a middleman. The exchange shows you on the screen that you just bought 1 BTC from someone, but in reality you have the "right" to 1 BTC, which is reflected in your user account on the exchange. This is not necessarily a bad thing in all situations, and perhaps sometimes desirable. Here is not the place, however, to explore this nuance further.

The important thing to keep in mind, based on the charts above, is that we can clearly see exchanges around the globe, in total, often engage in off-chain transacting. This means that, for that day, all trading volumes amounting to more than 100% of gross payment volume (and then some) were done off-chain, and thus the underlying asset is not yet truly "owned" by the end buyer, on-chain.

We're getting long here, but it comes down to thisif you buy your cryptocurrency on a custodial exchange onlineand plan on holding long-termit is good practice to always send your coins immediately to an address and wallet that only you control the private key to, on-chain. Using a hardware wallet or other form of cold storage is a very good idea. Even if your cryptocurrency online exchange is highly reputable and has a 100% successful defense rate against hackers, users should understand that they don't really "own" the asset, in a "blockchain sense," until it's confirmed on-chainon the blockchainin a wallet which only they hold the private keys to.

Here we can see why blockchains offer a form of verifiable ownership that is different from anything the world has yet seen. Indeed today, all stock and bond brokers, and even banks (especially banks), are essentially custodians for you, holding cash and securities in accounts in your name, so you don't have to deal with the "hassle" of managing stock certificates and storing dollar bills (or gold bullion, if you're into that). This may or may not be fine in the good times; but as we have seen, what happens if your bank makes too many loans and a major recession occurs?

With blockchains, you don't have to take this risk. There are other risks, to be sure, but they are much different than we have ever seen in the financial world. Blockchains bring most of the responsibility, education and security back to the individual, and away from the middleman. Something to keep in mind.

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