For centuries, the exchanges of London, New York, Frankfurt and Tokyo have dominated the buying and selling of equities, commodities and other asset classes. Although technology has improved over the years and people can engage with these markets from the comfort of their own home, the core premise of a centralised exchange has remained the same. The dawn of Blockchain has the potential to radically disrupt the way traditional exchanges operate and the way in which clearing services carry out their functions. The ‘Distributed Ownership’ nature of blockchain could be transformative through the effective use of distributed ledgers.
Given cryptocurrencies didn’t even exist a decade ago (unlike their traditional fiat exchanges which have operated for more than 200 years), existing exchanges are less evolved and unable to execute in heavy trading conditions, compared to more established equities. Brownouts and service blackouts are a reflection of the immaturity in crypto markets. Many exchanges experience service disruptions because they haven’t create an ideal load balancing architecture or high availability contingencies.
Despite these initial discrepancies, the design of Decentralised Cryptocurrency Exchanges (DCX) could provide insight into the future of equity trading and how people engage with markets to claim ownership of their assets. As it stands today, centralised exchanges are governed by laws and regulations in the countries where they are registered. Participants have to abide by a set of rules that may forsake the control of their assets, use of private data, or even risk devastating security breaches. It’s no coincidence that crypto liberalists avoid centralised platforms when building blockchain infrastructures.
Decentralised platforms, on the other hand, are still at the starting gate, in terms of development maturity. Regardless, they have the foundations to be adaptable and scale well, due to their inherent distributed architecture. Instead of having the oversight of national governments and regulatory bodies, they are governed by communities, and can adapt to exceed the resilience of the most advanced centralised platforms. By definition, this technology isn’t hardened from an IT or security perspective, compared to mainstream exchanges. For example, Nasdaq can process one million transactions per second (tps), where most crypto exchanges struggle to process up to 100,000 tps- however DCXs offer a viable alternative that enables tradable assets without the vulnerabilities of centralized control.
Cutting out the middle man
There are those who argue that introducing middle-men into the crypto supply-chain would help to facilitate widespread adoption. But crypto liberalists prefer to eliminate their function, even if they serve to increase ease-of-use, stability, reliability and other features that may not be easily accessible in their absence. Exchange services, for example, can be viewed as a classic middle-man service, directly in conflict with this core ideology. These intermediary services inevitably become the catalyst to global adoption where cryptocurrency trading needs to reach mass-market potential. Furthermore, decentralized exchanges can be accessible to anyone in the world. Challenges however, remain in the areas of market volatility, regulatory compliance, and security best practices before this can take place.
There are also legal issues, as investors suffer when an exchange is shut down due to non-compliance. The issue here is the single point of failure when centralized services store large sums of wealth, and sensitive information. Until relevant legal structures and safeguards are created, mainstream consumers will hesitate to trust the Blockchain as a repository for their money. Then there is looming threat of protecting personal wealth from hackers, phishing attacks, malware, and zero-day attacks, adding further Fear Uncertainty and Doubt (FUD).
“The wild west”
In many ways the discussion regarding regulatory oversight and protective legal controls cuts to the core of the Blockchain debate. Crypto libertarians dream of a world free from big brother, and are willing to accept the risks that come with that. Will there be a balanced equilibrium of regulations that protect consumers in the wild west of virtual currencies? Will governments allow their central banks be sidelined as virtual currencies grow from infancy to maturity?
The relationship between free markets and collective responsibility has been one of the driving economic and political forces in history. The advent of Blockchain technology has contributed yet another dimension. The impact of decentralised services on existing financial systems and regulatory oversight remains to be seen. In the meantime, stakeholders have never had a greater opportunity to take ownership of their financial future, even if that path remains volatile.
Aaron Hurst & Gabriel Dusil