Intermediation Friction, within crypto markets, describes the economic and operational costs, delays, and inefficiencies introduced by intermediaries in the process of facilitating digital asset transactions. This friction includes trading fees, slippage, latency, regulatory overhead, and the capital required to maintain liquidity providers or custodians, impacting overall trade execution quality for RFQ crypto and institutional options trading.
Mechanism
This friction arises from various factors: the need for trusted third parties for custody and settlement, the costs associated with market making and providing liquidity on centralized exchanges, the latency inherent in traditional financial infrastructure when interacting with crypto, and the regulatory burden placed on regulated intermediaries. Each layer of intermediation adds a cost, either explicit (fees) or implicit (market impact, delay), to the transaction flow.
Methodology
Addressing intermediation friction involves leveraging decentralized finance (DeFi) protocols, optimizing smart trading algorithms, and establishing direct peer-to-peer or peer-to-dealer relationships. Methodologies include direct-to-protocol interactions for liquidity, using layer-2 solutions to reduce gas fees, and implementing sophisticated execution algorithms that minimize reliance on costly intermediaries. For RFQ crypto and institutional options, the strategy often involves seeking out venues or structures that offer direct access to liquidity pools or employ capital-efficient collateral mechanisms, thereby bypassing traditional points of friction.
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