If you’ve heard of blockchain, then you’ve certainly heard the word ‘decentralize’. But, for many, the concept of decentralization remains elusive because its application changes depending on the industry in which blockchain is applied.
— Lucid Exchange (@LucidExchange) October 19, 2017
For example, you might ask yourself: what does decentralize mean for financial markets? Many blockchain startups such as Lucid Exchange, a decentralized exchange for securities, commodities, and currencies which announced the public token sale begins at the beginning of January 2018, have explored that exact question, and have come up with platforms that allow freer, cheaper, more transparent trading for both brokers and investors.
Decentralization: What does it mean?
Before jumping into the specifics of what a decentralized financial market will look like, let’s take a few seconds to understand what this term actually means.
Take transfer agents as a point of centralization, for example. In the financial stock market, transfer agents represent a centralization of information because each and every trade must be recorded by one of these agents. Now, imagine a network in which there is no single point of recording and instead, brokers can individually each input this information and then have it verified by other traders and investors in the network to assert that the trade has been made under these conditions.
That is exactly what decentralization is in the blockchain: a system in which a network of users can input and verify information that is added to the blockchain in order to create an immutable ledger of information.
Wouldn’t this process be more efficient for all of the stakeholders rather than having to wait for intermediaries to process demands?
Advantages to Decentralizing the Financial Market
So, what does decentralization mean for financial markets? The decentralized nature of blockchain brings a range of advantages to this market, mainly in terms of the benefits for both brokers and investors.
One of the key assets on which blockchain-based companies are trying to capitalise is the level of transparency that comes with this technology. Traditionally, the financial market is fairly opaque whereby investors are often unaware of exactly where their money is during trades and at what rate it was exchanged. The main reason behind this lack of transparency is the amount of intermediaries through which trades have to pass and the way in which trades are recorded: through manual input.
The beauty of blockchain is that it can effectively bypass middlemen such as transfer agents where information is recorded by one person.
On a platform like Lucid Exchange, brokers or investors themselves will be able to complete trades entirely. The transactions will then be verified by the network of agents using the platform and once a consensus is reached regarding the terms of the trade, it will be added to blockchain’s immutable ledger within 10 minutes. This means that every transaction will be recorded automatically and in real-time. Therefore, investors and brokers will be able to see when and at what terms a trade was completed.
Though this is a significant advantage for investors because they will have more control and visibility over their investments, it is also beneficial to brokers. In the traditional system, there is an information asymmetry between different firms that can lead to certain market advantages for some but not all brokers.
The limited transparency in our current financial market is one of the main drivers for the team behind Lucid Exchange because they believe that this platform can level the playing field for both brokers and investors. Lucid Exchange has even gone so far as to create a transparency protocol (LTCC) in which they usher in qualities of lucidity (or transparency), trust, community, and control that they hope will rule this decentralized financial market.
In the current financial market, intermediaries such as clearinghouses and transfer agents create bottlenecks that reduce the speed at which trades are pushed through. Intermediaries came to be important because of the trust that they inspire in investors, however, they slow down the speed of trades therefore causing a potential decrease in return on investments due to settlement delays.
By decentralising the financial market, Lucid Exchange is trying to help investors turn as high of profits as possible through the use of smart contracts. Since smart contracts self-execute as soon as the terms of a trade are met, they render clearinghouses redundant.
With smart contracts, a broker or an investor will enter in a smart contract in which peers can outline their terms at which the trade should go through and what should happen after that point. Once the contract is agreed on, it is binding and it is nearly impossible to default on the terms.
Traditionally, clearinghouses ensure that exchanges are fulfilled according to agreed upon terms, however, with smart contracts, clearing houses are no longer necessary. Without clearinghouses and transfer agents manually recording trades as mentioned above, the process will be streamlined allowing for faster rates of trades.
Perhaps the most appealing of all benefits for investors and brokers is that a decentralized financial market will lower costs across the board. Both investors and brokers are called on to pay various fees and conversions in addition to the costs accrued by settlement delays. Many of the costs associated with trades are in relation to intermediaries, transfer fees, and potentially currency conversions.
A decentralized financial market eliminates these extra costs and fees. As outlined above, smart contracts and the blockchain automatically-updating ledger will circumvent clearinghouses and transfer agents that offer costly services and create settlement delays. Often, settlement delays lead to lower profits especially with derivatives trading because where prices of underlying assets can greatly fluctuate in the one to three days that it for a trade to be completed.
Through the use of smart contract technology combined with blockchain self-updating ledger of information, Lucid Exchange has found a way to eliminate the majority of these costs. The only cost of trading on this peer-to-peer platform will be those associated with creating a smart contract. In order for investors or brokers to enter in a trade on the platform, they will simply have to acquire Lucid tokens (TRD) that will be put into smart contracts as a method of powering the platform. Trades will then be completed and updated in real time for all stakeholders to see.
So, What Does Decentralized Mean for Financial Markets?
Basically, a decentralized market will allow for peers to trade more freely and more profitably. All investors and brokers will be able to trade with the same advantages and will be able to see all exchanges made and at what terms as it is happening.
Find out more here.
About the Author – Emie-Claude Lamoureux