What is a maker-taker market?

After looking into how a bitcoin wallet works, I felt that it was time to take the exchanges apart. But I kept coming up against the phrase “maker-taker trading”. You probably know what it is, but I didn’t, so I hit the search bar and this is what I found:

Back when I worked in the financial markets, exchanges were places where traders bought at one price and sold at another and hopefully made money on the difference. The traders paid a fee for the privilege, but customer orders (end buyers such as private individuals or investment funds) didn’t, and jumped to the head of the queue.

fx trading

Things have changed. The advent of high frequency trading and the proliferation of illiquid securities and assets led to the need to increase trading liquidity in certain markets.

“Maker taker” trading was designed to incentivize market makers (those who post possible trades) to provide liquidity, so that market takers (those that accept those trades) would have an assurance that their orders would be met. Market makers are those who are willing to buy or sell at a certain price. They publish their willingness. Market takers are those who actively want to buy or sell. They go looking for a suitable published proposed trade, and accept it. Market makers provide the gasoline for the market. Market takers step on the pedal so that the gasoline is used up.

Not all bitcoin exchanges have adopted this trading system, but it seems that most of the large ones have, including Kraken, Coinbase, Coinfloor, and itBit. In fact, itBit charges no maker fees at all, and Gemini, Coincheck and BTCC offer to pay (= a net rebate) dealers for posting bids and offers.

In the securities industry, maker-taker trading is coming under fire for allegedly distorting market pricing, and for possibly creating conflicts of interest. Most stock exchanges require brokers to route their clients’ trades to the best available price. Under the maker-taker system, market “makers” are more likely to take their bids and offers to the exchange that gives the best rebate, rather than the best price. Plus, effectively “paying” people to trade goes against the free market philosophy underpinning most official trading forums. And the model can lead to different settling prices than on a fee-based exchange.

Yet it is unlikely that this unease will spill over into bitcoin exchanges just yet. At the moment, liquidity seems to be a priority, and the maker-taker system encourages liquidity by incentivizing the posting of trades. As liquidity increases, it’s likely that the maker-taker model will come under more scrutiny. But by then it’s likely that trading technology will have advanced to the point that exchanges and traders need to operate under different rules anyway.

How does a bitcoin wallet work?

As we’ve seen already, there are many different kinds of bitcoin wallets (also called bitcoin clients). Each has different characteristics and functionalities, but each works in basically the same way: they store your public and private keys.

Your bitcoins – or rather, the pieces of code that represent them – are not actually stored in your wallet. They are stored on the blockchain, which in turn is stored on node computers all around the world.

bitcoin wallet

What your wallet contains is your bitcoin address, which is the same as your randomly generated public key (a long string of numbers and characters). Anyone can see this, it’s public information. The wallet also contains the private key that goes with that address/public key. Without the combination of the two keys, you can’t use your bitcoins. Actually, most wallets contain several addresses, and hold the public and private key pairings that make each of them work.

Obviously, most bitcoin wallets today do a lot more than that. They also relate your public and private keys to the bitcoins that match those keys, and display the list of related transactions and the current balance in a clean user interface (ie. a nice, easy-to-understand format).

But it’s important to understand that the wallet doesn’t actually contain your bitcoin. It contains permission to spend your bitcoin. And if you lose access to that permission to spend, then you effectively also lose your bitcoins, because you no longer have access to them. That is why it is so important to keep the keys secure.

Some wallets, especially the older ones, are full node wallets. This means that you download the entire blockchain, and act as a relayer or transmitter of transactions, even those that you had nothing to do with. You receive transactions from nodes and pass them on to other nodes, and thus contribute to the updating of the bitcoin network. While no actual work on your part is involved (the transmitting is done automatically), it is onerous – the blockchain occupies approximately 40GB of memory.

Most wallets, however, are “thin wallets”, or an SPV wallet (which stands for Simplified Payment Verification). If you have a wallet on your mobile phone, it’s almost certainly one of these, and an increasing number of desktop wallets are also offering this option. SPV wallets do not download the entire blockchain, they only download block headers. There are concerns that this weakens the security of the network as a whole, since they cannot tell the difference between a block with valid transactions and one with invalid ones. (Segregated Witness offers a potential solution to this problem, but the project is still at the testing phase.) But they rely on nodes to check the transactions for validity, and assume that after a certain number of blocks have been added on top, a transaction can be counted on to be correct.

Wallet technology is evolving rapidly in terms of efficiency and functionality, so this overview does not hope to cover all wallet types, but the basic principle is the same for most: wallets hold your keys, not your bitcoins, although the distinction is actually not that relevant for the average user. Bitcoin wallets are a fundamental piece in the path to increase bitcoin use beyond geeks and techies, as it is the only face of bitcoin that most will ever see. Wallet ease of use and security will increase confidence in transactions, while at the same time encourage more use cases. With more users comes even more innovation, and the entire sector – from front-end wallets to back-end miners and including the many applications in between – benefits.

What is Segregated Witness?

Segregated Witness (Segwit to its friends) was first unveiled at the recent Scaling Bitcoin workshop in Hong Kong in December of last year, where the bitcoin elite gathered to discuss the need for an increase in the block size, as a possible solution to the controversy surrounding the hard fork vs soft fork debate.

Pieter Wuille, the originator of the idea, at the Scaling Bitcoin workshop
Pieter Wuille, the originator of the idea, at the Scaling Bitcoin workshop – image via Coindesk

It was well received (although consensus would be too much to hope for), as it removes the need for a contentious hard fork. How does it do that? Through the rather ingenious idea of removing some of the data in the block to make room for more transactions. The size of the block would not change. Its internal structure would.

How? By replacing the signatures. Each transaction consists of two main components: the data (amount of bitcoin to be transferred, and where to), and the verifying signatures. Since the signatures “only” validate the previous ownership and the owner of the receiving address (although I’m not sure that “only” is the correct term, that sounds pretty important to me), they can be stripped out of the transaction itself. This makes the transactions smaller. That way, more transactions can fit in a block (apparently two or three times as many), without the block needing to increase in size. No hard fork needed.

But how can miners process the transaction block if there are no signatures? Because they’re still there, they’ve just moved position. The “removed” signatures are incorporated into a structure of hashes (compressed encrypted information) called a Merkle tree. This “tree”, now separated from the transaction data, is then further condensed and stuffed into an underused code space in the transaction block (reminder: bitcoin transactions are grouped into blocks which are then processed by the miners – one block contains many transactions, and the problem is that as the number of transactions increases, the block size limit acts as a cap on growth).

The beauty of this idea is that “older” nodes that have not yet upgraded to the newer Segregated Witness version will still be able to process transactions. The transactions won’t make a lot of sense since they’ll be missing some data, but they will comply with the protocol, will be deemed valid and thus can be passed on to the miners. The majority of miners will need to upgrade to the new protocol to be able to understand the new block structure, but the network can keep functioning while the rest catch up. With a hard fork, the whole network needs to upgrade at the same time to avoid the blockchain splitting.

Of course, the proposal is not without controversy. Some worry about the impact on investment-intensive mining that a “rushed” solution would have. Others claim that for it to last, it needs to be implemented with a hard fork – this would make the code cleaner and more efficient, but at the same time does not solve the problem that a hard fork is almost impossible to achieve when there isn’t full consensus. Segregated Witness does not solve transaction bottlenecks that are due to the logistical complications of quickly transmitting 1MB blocks around the network. Nor is it a long-term solution.

Yet it could be a good intermediate step, and it could lead to unexpected technological developments completely unrelated to the block size. The new protocol is currently in the public testing phase. It’ll be interesting to see what turns up.

Segregated Witness apparently opens up all sorts of opportunities to re-think how the structure of the transaction code works, even bringing into play the design of the blocks themselves. A new style of proof, the possibility of including more complicated instructions, even re-purposing lightweight wallets – these and other Segregated Witness-related ideas could end up transforming the organisation of this still young concept, and opening up its potential to even more applications.

Bitcoin Classic – more of the same?

The block size debate takes a new turn, possibly a 360º one, to end up back where it started. Yesterday Bitcoin Classic was launched as a hard fork. Developed by a team that includes the original Bitcoin Core maintainer Gavin Andresen (one of the proponents of the now-irrelevant Bitcoin XT) and Bloq CEO Jeff Garzik (who had also proposed the apparently popular Segregated Witness idea as an alternative to a block size increase), Bitcoin Classic updates the current and standard Bitcoin Core protocol with a 2MB block size limit (vs 1MB).

Since this involves a hard fork (transactions that are accepted in the new version would be rejected by the old version, resulting in two different chains), tension is high and opinions are divided. On the one hand, you have those that believe that a bigger block size is urgently needed, and a hard fork will not be that disruptive. On the other, you have those who fear the uncertainty a hard fork will unleash, who would like to find a less abrupt change or who don’t think the block size should be increased at all.

The public approval has been notable, with many of the large bitcoin companies (such as Coinbase, itBit, Xapo, OKCoin…) expressing support. Just over the past two days, the number of nodes running Classic jumped from under 500 to over 700, while about 4,100 are still on Core.

via coin.dance
via coin.dance

Yet it is worth remembering that Bitcoin XT attracted almost 900 nodes soon after launch in August of last year, before fizzling out. And today a group called The Bitcoin Roundtable published their rejection of the new protocol. This group allegedly represents 90% of bitcoin’s hash power, although that figure has been questioned as some of the signers work for firms who have publicly backed Classic. Confusing.

For the software to officially “activate” and become the main bitcoin protocol, a certain volume requirement has to be met. Of the last 1000 mined blocks, at least 751 (or, to put it another way, just over 75%) of them need to have been processed with Bitcoin Classic.

According to coin.dance, of the last 1000 blocks mined today, none used Bitcoin Classic.

via coin.dance
via coin.dance

So, this may all end with another shrug of the shoulders as the debate continues unresolved. Or, the need for a consensus-based change may become more pressing with the public pressure and scrutiny. It would be great to get this resolved, as it will set the tone for bitcoin development going forward. Not just on the transaction limit issue. On the governance issue, which is almost even more important.

What can I use bitcoins for?

So, you know how to get bitcoins. But why? What can I use them for? Payments, obviously. But let’s go into a bit more detail:


One of the most obvious reason is to send money across borders in a low-cost, fast and efficient manner. It’s often called “frictionless” because it doesn’t encounter barriers along the way, like a traditional money transfer which has to go through banks and clearing houses. True, you have to get the bitcoins to start with, that is a type of friction, but this article starts from the assumption that you already have them. Banks often charge between 4 and 10% for cross-border transactions, usually with a fixed component which can push the percentage even higher if the transfer is small. Using a money transfer business such as Western Union or MoneyGram would be more expensive, especially if the recipient or the sender doesn’t have a bank account. Furthermore, international transfers usually take a few days. Bitcoin transfers incur no or very low fees, irrespective of the amount, and can be in the receiver’s bitcoin wallet within minutes.

Total number of daily transactions over past two years, via blockchain.info
Total number of daily transactions over past two years, via blockchain.info

Buying things

Bitcoins can also be used to buy things. The number of businesses accepting bitcoin grew over 30% in 2015, having more than doubled in 2014. That year, Microsoft added bitcoin as a payment method for US-based customers. Dell also started accepting bitcoins last year, and in January 2014 Overstock became the first general retailer to accept the virtual currency from over 100 countries. In Europe, leading ecommerce company Showroomprive started accepting bitcoin in September of last year. Coinmap shows most of the online and offline stores that accept payment in bitcoin. Paying in bitcoin even in offline stores is so easy: the check-out tills usually have a QR code that you can scan, which makes the payment a question of just a few taps.


And if what you really want to buy with bitcoin is only available at an online store that doesn’t accept bitcoin, there are always bitcoin gift cards. Purse.io lets you exchange your bitcoins for others’ unwanted Amazon gift cards (apparently there is such a thing). Gyft lets you buy gift cards for a wide range of stores with bitcoin. Or, Xapo and Coinbase both have debit cards linked to a bitcoin wallet. You can pay with your “card”, which automatically deducts and converts the necessary amount from your stock of bitcoins.


The low friction of bitcoin, and its divisibility, make it ideal for microtransactions (within sidechains or similar, to minimize transaction costs). Changetip and other platforms make it easy to leave small amounts to journalists, bloggers, commenters, artists, etc. This democratic form of monetization of content could well issue in a new era of creative business models.

by Jan Vašek
by Jan Vašek


Most of the bitcoins that have been mined, however, are held for investment. The price is volatile, but has been as high as just over $1000, and just a few years ago was as low as $10. At the time of writing, the market price is approximately $400. Bitcoin enthusiasts see use and acceptance increasing over the next few years as the advantages become more apparent, as more apps make use even easier and as regulation removes uncertainty.

As an investment, bitcoin carries some advantages. It is useful (you can use it for efficient and low-cost payments), and it has a limited supply. Thus, if demand goes up (because of its usefulness) and the supply remains controlled, the price of bitcoin relative to other currencies should also go up. And, your bitcoin investment is in your hands, especially if you keep it in an offline wallet. No political authority can confiscate it, no firm can wipe it off its books, and no hacker can reach it. No central bank can mess with its value by printing more, and no government can use a devaluation to make it worth less.

Bitcoin as an investment does come with significant risks. Its price is volatile, and it is still illiquid. Changes to the protocol, law and even technology can have a material effect on its value, and may even make it unprofitable as a global payments mechanism, so I am not endorsing it as an investment vehicle.


If you have nerves of steel, you can try to buy and sell bitcoin, making a profit (or not) on the difference. Coinbase estimates that 80% of its bitcoin movements are from speculators, who trade bitcoin as a commodity in search of profit. A long list of exchanges can handle bitcoin trading – some of the largest are Bitfinex, Kraken, and itBit. (Note: some estimates claim that 90% of bitcoin day traders lose money, so this is not an encouragement to take it up.)

Sending money abroad, buying things, micropayments, investment or speculation – which is the “killer app” of bitcoin, which will push it into the mainstream? There are advantages and obstacles to each use case – in which will the advantages win? Perhaps in all of them, as activity ebbs and flows, solutions are found and new business models emerge. Time will tell.

The magic of the blockchain is that it’s not what you think it is

So, it’s intensifying. From dismissing bitcoin to grudgingly admitting that the blockchain might be interesting, to tiptoeing around more in-depth research, banks now seem to be rushing to experiment with or even outright buy the technology. Let’s take a look at why, and why we won’t see much change in how banks work any time soon.

blockchain - by Joanna Kosinska for Unsplash
by Joanna Kosinska for Unsplash

A large part of the banks vs bitcoin debate revolves around the nature of the blockchain. Bitcoin’s blockchain is decentralized (no-one controls it), permissionless (anyone can use it) and public (all transactions are there for anyone to see). Does that sound like something a bank would be interested in? Something that no-one controls and anyone can use? Something that openly publishes transactions? Not any bank that I know of, anyway.

But surely a bank could adapt it for internal use? Yes, but why would they want to do that? The blockchain works more slowly than a database, and is more expensive to run. If what they want is an efficient way to transmit value internally, a database is much more useful.

What if they want the “permanence” of the blockchain record of transactions? What if they need to know that each transaction, once included, is very difficult to modify, increasingly so the farther back in time it goes? The blockchain is more secure than a database, true, since if a historical transaction is modified, every single subsequent transaction block also needs to be modified. But what if the blockchain is controlled by one entity? What’s to stop it from changing whatever it wants? The system is secure because it is public. A private blockchain is not so secure.

So, why are banks looking at it? In part because of the hype. Blockchain talk is almost everywhere, and if others in your sector are looking into it, you don’t want to be left behind.

And there is value in the notion of a private chain. For a single entity, the expense of the blockchain doesn’t make much sense. But for a group working together, the transparency, security and automation could lower costs and increase efficiency. A supply chain could use a blockchain-like system to pass documents from one stage to the next, for example. The participants would be all entities involved in the process, that don’t necessarily trust one another, and that want the transparency and group verification that the blockchain can offer. Or, a group of banks could create a private chain through which they could enact certain transactions, such as the hand-over of loans, or the exchange of securities. Developer R3CEV recently trialled a chain-based transaction with the participation of a consortium of 11 banks. And the blockchain’s use in securities settlement is potentially fraught with legal barriers, but if they can be worked out, the gain in efficiency and liquidity will be huge.

So, as with most hyped-up innovations, the blockchain is unlikely to be the explosively disruptive force that the media makes it out to be. Its use in private situations is limited. The sector is buzzing with activity, though, as very bright minds research and experiment, for small startups and for large institutions. The results will no doubt produce even more innovation and use cases, some of which will surprise us all. The internet today is used in ways the original developers never imagined. But its impact is unquestionable. We could well see the blockchain acquire the same status: part builder, part destroyer and part transformative magician.