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In recent months, aided by the approval of the first Bitcoin ETFs, more and more new crypto enthusiasts have entered Web3. The advent of a new technological era based on blockchain is fertile ground for the emergence of many promising new projects, but they often use tokens to fund themselves via Initial Coin Offerings. The token becomes accessible to the general public when it is listed on an exchange, and if you are wondering how do tokens get listed on exchanges, here is the answer!
On most reputable exchanges, tokens are listed based on project regulation, positive achievement history, team reputation, and community reviews. Unfortunately, however, most exchanges list tokens primarily based on the upfront payment they receive, speculating on this event and offering unsafe products.
Exchange's Speculation on Token Listing: a Case Study
How do tokens get listed on exchanges? This PlasBit research will explore a case study in which speculation by most crypto exchanges can clearly be seen. For the sake of the case study, we would call the project by the Pseudonym "Project X" and the exchange by the Pseudonym "Exchange Y."
Step 1: "Project X" makes a presale of its token
In this first step, a project based on blockchain technology performs an Initial Coin Offering (ICO) in which it obtains funding and offers a utility or security token in return. This is a standard method for Web3 projects to fund themselves, even though they need to fully comply with regulations.
Step 2: The project grows and decides to list the token
In this second step, after its successful ICO, "Project X" has created a sizable community of holders and is continuing to develop to achieve its mission. As happens in most cases, the token holders want to list the token as soon as possible, allowing it to be traded. In 99 percent of cases, by necessity, projects must opt for a paid listing, which is guaranteed by many exchanges but does not make the process speculation-free.
Step 3: The project evaluates which exchange to list the token
To make it clear what kind of speculation is behind it, we must note that there are a lot of "door-to-door promoters" who contact all blockchain projects, proposing listing fees depending on the quality of the exchange. For example, this is a recent list of prices for listing one's token:
Most expensive exchanges to list a token
Kucoin: $100k-300k; OKX: $150-300k; Phemex: $100k; Huobi: $100k-250k; Bitfinex: $150k-300k; Bybit: $100k-200k; Gate.io: $100k-300k; Bitget: $50k-150k
Medium expensive exchanges to list a token
MEXC: $40k + $20k Tokens; Lbank: $40k; Bitmart: $30k; Xt: $20k; Probit: $15k-20k; Coinw: $15k; Bitrue: $12k-35k; Digifinex: $10k; Bing X: $30k-100k
Cheap exchanges to list a token
Latoken: $10k-15k; Coinstore: $10k; Cointiger: $5k; Indoex: $3,5k; Dex Trade: $2,5k; Azbit: $1k-3k.
As you can understand, the business for these exchanges mentioned, which are certainly not impartial or transparent in deciding whether or not to list a token, is to make money and speculate on both the token's listing and trading fees.
Step 4: "Project X" decides to list the token on "Exchange Y"
In our case study, "Project X" decides to list on the second-tier "Exchange Y". This exchange offers a solution that provides payment in both dollars and tokens, suggesting that they will also profit from the sale of tokens. The terms are clear: a contract of $40,000 plus an extra $20,000 in their native coin token. With $10,000 paid upfront, everything seemed on track for a fantastic partnership.
Step 5: "Project X" pays the Fee, "Exchange Y" changes the contract
Although the contract had been signed, the true reality of these exchanges now emerges. "Exchange Y" insisted that "Project X" needed to be listed on another exchange before proceeding with the agreed-upon listing. This was a transgression by "Exchange Y", never mentioned before, and practically impossible for "Project X" to pull off, given their commitment to "Exchange Y" as their first centralized exchange listing.
Step 6: The situation degenerates, and the contract is not respected.
To make matters worse, "Exchange Y" heartlessly demanded an immediate full payment of $60,000, doubling the financial strain on the already struggling blockchain project. Adding insult to injury, the exchange showed no empathy for the $10,000 advance payment "Project X" had made. They refused to refund it, even after unilaterally changing the terms overnight. The dream partnership had turned into a nightmare.
Step 7: "Exchange Y" keeps the upfront payment and does not list the token
As a conclusion of this case study, the end is not the best. After changing the terms of the deal, the exchange mentioned kept the upfront payment. The project is not reimbursed, and the token is not listed.
Key Takeaways From "Exchange Y" Case Study
- Speculative Nature: Many exchanges primarily list tokens based on the upfront payment they receive, leading to speculation and potentially unsafe products being listed.
- Implications: The case study highlights the risks associated with token listing on exchanges and some exchange practices' lack of transparency and fairness.
- Recommendations: Projects should carefully evaluate exchange options, consider reputability, transparency, and potential risks before committing to a listing agreement.
- Call for Regulation: The case study underscores the need for greater regulation and oversight in the cryptocurrency exchange industry to protect investors and projects from unfair practices.
- Lessons Learned: Project X's experience is a cautionary tale for other blockchain projects entering into listing agreements with exchanges, emphasizing the importance of due diligence and clear contractual terms.
How Do Tokens Get Listed On Exchanges? Exploring The Criteria
Now that we have thoroughly understood a specific case study, highlighting the speculative intentions of most exchanges, let us go into more detail on how tokens are listed on exchanges. First, we must distinguish four types of exchanges:
- Centralized exchanges that make money on trading fees
- Centralized exchanges that make money on payments to list tokens
- Decentralized
- Fake exchanges
Centralized Exchanges that Make Money on Trading Fees
This category of exchange is, in practice, the most honest. In fact, the exchanges that mainly make money on trading fees are the ones that - tend to - not accept payments for listing tokens. Consequently, by not accepting money to list the token, they only select the most reliable projects and those with the least inherent risk for users. They actually choose to list tokens for their quality and reliability and avoid accepting payment to list dubious tokens. What parameters do they choose to list a token or not?
Regulatory Compliance
The first consideration this type of exchange makes is on the basis of project regulation. Did you follow a regular token-selling process that complies with regulations? According to recent regulations, the project has to follow anti-money laundering (AML) and know-your-customer (KYC) processes. An exchange with a good reputation will not sell tokens if they have not been sold in a regulated and compliant manner.
Technical Standards and Security
Another element that the most trusted exchanges take into account is the security of smart contracts and the token ecosystem. Tokens must demonstrate resilience to potential vulnerabilities, such as security breaches, code exploits, or network attacks. Most reputable exchanges prioritize tokens that employ proven and audited technologies, adhere to best practices in software development, and implement robust security measures to safeguard user funds and data.
Market Demand and Liquidity
An important element that is often underestimated is the liquidity of the pool. Indeed, if a token with low liquidity and capitalization is placed in the market, even if a small number of holders decide to sell at the same time, then the price collapse will be sudden. Because of the low liquidity, only the first sellers will be able to recover their investment, while all the others will see the value of their assets go towards zero. On the contrary, high liquidity tokens enhance the trading experience for users, facilitating efficient price discovery and minimizing slippage during transactions.
Project Credibility and Transparency
Every good exchange that decides to list a new token first analyses the credibility and transparency of the team. The team should preferably have experience in the field, should be doxxed, and should have communicated transparently to the community. Projects that demonstrate integrity, professionalism, and a long-term vision are more likely to gain listing approval from exchanges.
In conclusion, this first type of exchange is the most reliable one because it does not list tokens according to payment, speculating on them, but lists tokens according to their reputation and reliability. Nevertheless, as is also right, they must somehow make money to make the exchange sustainable in the long run; hence, they make money mainly on trading fees.
Centralized Exchanges that Make Money on Payments to List Tokens
This category of exchanges is the one to which our case study Y belongs. These are the least reliable exchanges, as they only list tokens against payment. This makes the listing process unbiased and speculative, as the exchange has no interest in offering a reliable and promising token, but potentially lists scams. Why is paying for listing an unfair practice?
Undermines Market Integrity
Paying for listing undermines the integrity of the market by allowing projects with questionable legitimacy or insufficient merit to gain exposure to investors. Instead of listing tokens based on their intrinsic value, projects can essentially buy their way onto exchanges, leading to a proliferation of potentially unsafe or fraudulent tokens.
Exacerbates Speculation
Listing fees contribute to speculation within the cryptocurrency market. When exchanges prioritize listing based on payment rather than project quality, it encourages speculative trading behavior rather than investment based on fundamental analysis. This speculative environment can lead to market volatility and expose investors to greater risks.
Favors Wealthier Projects
Paying for listing disproportionately benefits wealthier projects that can afford high listing fees, creating an uneven playing field for smaller or less financially endowed projects. This favors established players and inhibits the ability of innovative but financially constrained projects to gain traction in the market.
Compromises Investor Protection
Exchanges that prioritize listing fees over project quality may compromise investor protection. Investors rely on exchanges to conduct due diligence and list reputable tokens that meet certain standards of transparency, security, and compliance. When exchanges prioritize profit over investor protection, they expose investors to greater risks of fraud, market manipulation, and financial loss.
Erodes Trust in Exchanges
Paying for listing erodes trust in exchanges and undermines their credibility as impartial marketplaces. Exchanges are perceived as gatekeepers responsible for vetting projects and safeguarding investor interests. When exchanges prioritize listing fees, it raises questions about their motivations and integrity, damaging their reputation and credibility within the cryptocurrency community.
Encourages Rent-Seeking Behavior
Paying for listing encourages rent-seeking behavior among exchanges, where the primary focus shifts from providing a reliable trading platform to extracting maximum revenue from listing fees. This rent-seeking behavior distorts the exchange's role as a facilitator of fair and efficient markets and compromises its commitment to serving the best interests of traders and investors.
In summary, paying for listing undermines market integrity, exacerbates speculation, favors wealthier projects, compromises investor protection, erodes trust in exchanges, and encourages rent-seeking behavior. As such, it is widely regarded as an unfair practice that undermines the principles of fairness, transparency, and meritocracy within the cryptocurrency ecosystem.
Decentralized Exchanges
Unlike CEXs, decentralised exchanges (DEXs) operate differently in order to lend tokens. In fact, DEXs are built to operate in a decentralised manner, offering an often permissionless listing process. This certainly makes listing more inclusive and transparent than listing on fee-based CEXs, but it also raises issues regarding the reliability of listed tokens.
So, how do tokens get listed on DEXs?
Permissionless Listing
Decentralized exchanges often follow a permissionless listing approach, meaning that any token adhering to the exchange's technical standards can be listed without requiring approval from a centralized authority. This approach fosters inclusivity and allows a wide range of projects to participate in the decentralized exchange ecosystem, regardless of their size or status.
Community Governance
Many decentralized exchanges implement community governance mechanisms to determine which tokens are listed on the platform. Community members, including token holders and stakeholders, may participate in governance processes such as voting or signaling to propose and decide on listing new tokens. This democratic approach empowers the community to shape the exchange's token offerings and ensures a more decentralized and transparent listing process.
Liquidity Pools and Automated Market Making Algorithms
Some decentralized exchanges utilize liquidity pools and automated market making algorithms to bootstrap liquidity for newly listed tokens. Liquidity providers can contribute assets to these pools, which are used to facilitate trading and ensure liquidity for the listed tokens. Automated market-making algorithms dynamically adjust token prices based on supply and demand, helping to maintain stable and efficient markets for newly listed tokens.
Decentralized exchanges (DEXs) offer a promising alternative to centralized exchanges, promoting inclusivity and transparency in token listings. With permissionless listing and community governance, DEXs empower stakeholders to shape the exchange's offerings democratically. Additionally, liquidity pools and automated market making algorithms enhance trading efficiency. However, it's crucial to acknowledge associated risks, including lower liquidity and market depth, regulatory uncertainties, and potential for fraud.
Fake Exchanges
Now, let us look at the last category of exchanges, which are, for all intents and purposes, fakes and scams. With the advent of cryptocurrencies, in fact, more scams are emerging, such as the one analyzed in the KK Park case study. Some criminal organizations create fake exchanges, including dashboards, statistics, and charts, but in reality, they are just a 'fake shop window,' and once the money has been deposited, it can no longer be withdrawn. But how can you check if an exchange is fake?
Unrealistic Promises
If something is too good to be true, it probably is. Be careful if an exchange offers you unrealistic profit promises. Every investment has inherent risks, and no exchange or platform can guarantee safe returns. Also, consider that even 'only' 10% per year is a very good return on investment, coveted by most traders and investors. Therefore, stay away from platforms that promise high returns on investment.
Lack of Regulation
The most reputable exchanges often display proof of reserves, the regulations to which they adhere, and the jurisdictions in which they can operate. In contrast, fake exchanges do not adhere to regulations, and a quick online check can reveal that they are not properly registered.
Poor Website Design and Functionality
Fake exchanges are commonly designed with a poor and limited web experience. Often, some buttons or links do not work, grammatical errors are present, there is no active customer support, and trading interfaces may be inaccurate or rarely updated. Thus, a poorly designed site is a clear red flag that this may be a fake exchange.
Opaque Ownership and Team Information
Another clear element to be verified is the legitimacy and transparency of the team. Is the team clearly doxxed on an about us page? Does the team have experience in tech/crypto projects before setting up the exchange? Does the team really exist? These are just a few questions to ask to verify that the exchange is not fake. The most popular exchanges also leverage the personal branding of their team, helping to make the exchange's narrative more solid and authoritative. If you are trading on an exchange that does not show the team behind it, it is probably fake.
Unsolicited Offers and Spam
Fake exchanges often try to incentivize you in every way to make more deposits and investments on the platform. This includes aggressive marketing, exaggerated spam emails, proposals for unmissable offers, high returns, and so on. Be skeptical every time an exchange tries to offer you a new purchase and deposit of money. Most reputable exchanges will never incentivize you to make investments but will leave you free to operate rationally and independently without manipulative influence.
Lack of Security Measures
The most secure exchanges place a lot of emphasis on security. In contrast, exchange fakes often ignore advanced security measures, such as two-factor authentication (2FA), cold storage for user funds, and clear proof of reserve showing platform assets. Fake exchanges do not care about the security of users' funds because they will be the ones who steal them.
Negative Reviews and Reputation
Perhaps the most effective way to get feedback on the platform is to check what other users are saying about it. Online reviews are the best tool to check the reputation of the exchange. If it is a fake exchange, in fact, with a quick search you will find numerous comments from other users who have been scammed and can no longer withdraw their assets.
How Do Tokens Get Listed On Exchanges? A Future Outlook
In this PlasBit research, we showed how tokens are listed on exchanges, highlighting different listing processes depending on the exchange:
- Some centralized exchanges list tokens only under payment and are the most speculative and unfair.
- Some centralized exchanges list tokens based on quality and reputation, and are the more trustworthy ones, which only make money on trading fees.
- Some centralized exchanges are clearly fakes, and once users deposit money, it is stolen.
- Decentralized exchanges list tokens more inclusively, but at the same time the risks of running into a token scam are much higher.
Moreover, given the unreliability of some centralized exchanges, partnering with them compromises credibility, as shown by crypto analyst ZachXBT on Twitter. This research shows that trading on an exchange that agrees to list tokens under a fee carries numerous risks. You can run into numerous token scams, rug pulls, manipulated trading activity, and more. In addition, our case study regarding "Exchange Y" also shows that some exchanges accept payments in tokens. This means that once the token is listed, the same exchanges will sell the tokens by dumping the price and taking profit on the backs of unsuspecting users. In this way, exchanges like "Exchange Y" make a profit three times: both from the upfront payment in $ received by the project that wants to list itself, from the payment in tokens that they will sell immediately after the token is listed, and from the users' trading fees. In short, from the case study of "Exchange Y", we can draw one conclusion: The only one who really gains is the exchanges, while the users and the project are the ones who, in most cases, lose money; in the case of an exchange that lists the token based on the payment.
Before we conclude our exploration, we would like to explain why this educational research article is needed. At PlasBit, we are increasingly concerned about the emergence of crypto scams and unreliable exchanges. We see speculative and manipulative exchanges spreading, misleadingly incentivizing users to invest in unsafe products.
This behavior, in our view, is unacceptable. And this is exactly why we created our platform. We are keen to remember our values, which we believe should be shared and taken as an example. We do not accept payment to list tokens, we do not create tokens, we do not ask for investment, and we are 100% self-financed. This makes us free from outside influences, and allows us to focus on what really matters to us: The security and financial freedom of individuals. We do not share personal user data, we do not report to tax authorities, we have VIP customer services, and our products allow you to trade anonymously, maintaining your privacy. We want to provide a secure hub in which people can manage their funds without fear of seizure or collaboration with corrupt governments.
In conclusion, before investing in any emerging token, check the reputation of the crypto exchange. If the exchange accepts payments to list tokens, then avoid investing. If the exchange lists the token based on its reliability without receiving a payment, then you can consider it safer and more trustworthy. Remember to be alert to the risks of ending up on a fake exchange, and double-check all possible red flags before depositing money. Likewise, if you opt for a DEX, be aware that the inherent risks are much greater because there is no effective control over the listing of tokens.
