Whales are big players in the cryptocurrency world. They hold large amounts of cryptocurrency and can move the markets with their trades. But they also face unique challenges when it comes to managing their money, says 0xDorsal, Co-Founder of Integral.
One of the biggest challenges is the complexity associated with trading tokens in large volume on-chain. Attempts to mitigate complexity with order-splitting, racks up gas fees and can take a long time. Historically, buying ETH through a decentralized exchange (DEX), swap protocol or aggregator has lacked efficiency or cost-effectiveness – especially pertaining to large trades. Simply put, it’s inefficient and expensive for large trades.
While “whales” often get a bad rep, they play an important role in the ecosystem. They provide liquidity and often hold onto assets for the long haul. But they need specialized platforms that can accommodate their large trades without costing an arm and a leg in fees.
In the first generation of DeFi, or DeFi 1.0, the focus was on decentralization above all else. This meant that anyone could participate, regardless of experience or expertise. While this was a noble goal, it didn’t always lead to the best execution. In fact, many professionals in the space found DeFi 1.0 lacking when it came to performance.
DeFi 2.0 is different. Finance and decentralization are equally important. This means that the platforms need to be up to the high standards set by professionals in the finance world. Only by meeting these standards will DeFi 2.0 be able to attract mainstream adoption.
Whales and DeFi
The key need is the ability to efficiently execute large trades without incurring exorbitant fees, and also without inadvertent price manipulation, which is when the order size impacts the price. Further, whales need a way to avoid impermanent loss, which can occur when the price of an asset fluctuates while an order is being filled.
We are finally beginning to see solutions to this set of problems emerge, as developers look to deliver DeFi platforms specializing in efficiently executing large trades without these drawbacks. A custom-built DEX for whales is crucial, as specialized platforms can execute trades of less liquid tokens according to a Time-Weighted Average Price (TWAP) to remove price impact. This means that the price of the asset you’re trading won’t be affected by your order size.
This also ensures that all trades are executed in a permissionless, decentralized and on-chain way. This is important because it allows whales to trade without having to go through a centralized entity. And because it’s on-chain, it’s more secure.
Whales Are More Common Than You Think
Whales are often seen as a mysterious and elusive group, but they’re actually more common than you might think. According to the Whale Analyst Report, trade activity across leading DEXs has skewed towards whales.
For instance, on the DeFi platform Aave, which is a lending protocol, the average size of transaction in Q3 of 2021 was roughly $461,000. On Maker, another lending protocol, the average transaction was $1.5 million. These numbers show that there is a significant amount of money being traded by whales on DeFi platforms. As more new primitives emerge, it is critical that platforms are in place to facilitate such orders in a seamless, user-friendly manner.
Platforms to accommodate whales are not at the expense of the small retail trader – in fact, the opposite is true. By hosting whales, these platforms can offer increased liquidity and tighter spreads, which is ultimately beneficial for all traders. Moreover, these whale-oriented platforms minimize price impact, reducing market manipulation and allowing for a more efficient market overall.
Market manipulation has long been a problem in the world of cryptocurrency trading. Whales, with their large orders, can easily move the market. An extensive Deloitte report titled “Market Manipulation in Digital Assets” highlighted that as much as 90% of crypto trading volume could be a target of market manipulation.
Behaviors like pump-and-dump groups, where whales buy a digital asset at a low price and then sell it at a much higher price after artificially pumping up the price, are common. Another technique, wash trading, is when a trader buys and sells the same digital asset to create the false illusion of market activity.
Whales and wash trading
Wash trading is a common practice on many exchanges, as it allows whales to accumulate a large position without affecting the price. This is problematic because it can lead to market manipulation and hinder the development of a fair and efficient market.
Further, spoofing, which is when a trader places a large order with the intent of canceling it before it is filled, is also a tactic used by whales to manipulate the market. Spoofing can lead to false market signals and result in higher prices for a digital asset that may not be justified by fundamentals.
The problem of market manipulation by whales is compounded by the fact that many exchanges do not have adequate controls in place to prevent such behavior. This lack of regulation and oversight is one of the key challenges facing the cryptocurrency industry today.
In order for the industry to mature, it is critical that exchanges put in place measures to prevent market manipulation by whales. Otherwise, the industry will continue to be plagued by illegal activities and bad actors will continue to take advantage of retail investors.
In the meantime, custom-built DEXs can help by executing trades of less liquid tokens at time-weighted intervals to mitigate the effects of whales and protect retail investors. This type of platform provides increased fairness and transparency in the market and is a critical step in the right direction for the cryptocurrency industry.
The DAO: A New Breed of Whale
Not only are whales more common than you think, they are also beginning to appear in a variety of makeups. Typically, when we think of whales, we conjure up ideas of individual traders or large institutions with deep coffers. However, DAOs (decentralized autonomous organizations) are beginning to surface as some of the most influential whale traders in the market.
Over the past two years, DAOs have become something of a phenomenon, operating as entirely democratized entities that crowd-fund projects while earning members passive revenue share. As DAOs continue to emerge, the potential utility of such organizations has grown to tantalize those within the Web 3 ecosystem. In past months, we’ve seen DAOs pull together funding to attempt purchasing a copy of the Constitution, as well as an NBA franchise.
While at first glance, the notion may seem absurd, the underlying reality is that these attempted buys set a standard for what DAOs will be capable of in the not-too-distant future. As DAOs become more robust and contend for larger purchases, DAO treasury management has become a central topic in DAO governance – and will continue to be a major topic with newly-founded DAOs securing bigger treasuries from token sales. With the sheer volume that DAOs are now trading, not only are they whales by nature, but, like individual whale traders, are not equipped with the proper tooling to facilitate large trades in a cost-effective manner.
JPEG’d DAO, for example, recently passed its first proposal to buy $15 million worth of $CVX to earn more from an upcoming liquidity pool on Curve. Moving forward, DAOs making purchases of this size will become the new normal, yet there are not currently DEXs for DAOs to perform such trades. While there are centralized options available to conduct these trades, using them would be against the very decentralized and trustless nature of DAOs, and impose uncertainty to the governance.
Large individual traders and major entities were the typical whale trader, but DAOs are steadily emerging as whales in their own right. Moving forward, it is crucial any and all whale traders are equipped with custom-built trading options to ensure trades are made with premium security and pricing.
The Future of DeFi
DeFi is finally evolving to meet the needs of whales. As the DeFi space continues to grow and mature, we can expect to see more platforms and solutions that cater to the needs of large traders. This is good news for the ecosystem as a whole, as it will help bring more liquidity and capital into the space.
This isn’t just beneficial for large traders in the crypto space. Large traders in traditional markets can now use DeFi platforms to trade a variety of assets in a more efficient and cost-effective way. We can expect to see more innovation in the space in the months and years to come.
Beyond aiming to make DeFi the standard for large trades, whale-oriented platforms also aim to service crypto whales and DeFi traders with a long-term mindset. As we move into a new era of finance, it’s important that we have platforms that cater to all types of traders, and that allow for efficient and secure trading of a variety of assets.