How MARKET Protocol Differs From Traditional Derivatives Exchanges

Collins Brown
May 15, 2018 · 4 min read

Derivatives represent the largest store of value in the world, with some estimates suggesting the combined value of all derivatives surpasses US$1 quadrillion.

The derivatives market encapsulates a number of different types of trades including over-the-counter and exchange futures, options, forwards, and swaps. The largest derivatives exchange is the Chicago Mercantile Exchange (CME), whose volume of contracts executed lies in the billions per year.

Despite the massive size and popularity of derivatives, the nature of existing exchanges and market capabilities incite a number of inefficiencies and shortcomings. The issues faced by legacy exchanges can be addressed and solved by a decentralized alternative like MARKET Protocol.

Built on the Ethereum blockchain, MARKET Protocol ditches a centralized exchange in favor of an ecosystem of dApps and smart contracts, in which the public has full control to view and execute actions on the protocol. This brings full transparency to an otherwise opaque industry. Every single derivative, ongoing or closed, will be viewable forever on the public Ethereum blockchain. This eliminates any fear of the possibility that what is shown on the frontend does not match the backend.

This blockchain-based approach also eliminates the role of middlemen and trusted third parties. Derivatives exchanges typically rely on clearing firms to confirm trades and handle customer funds. Sufficient measures are not in place to ensure that the firm operates correctly. This dilemma was made very clear in 2011, when clearing firm MF Global announced a US$1.2 billion shortfall.

When MF Global declared bankruptcy, over 33,000 traders were locked out of trustee controlled funds.

Along with the removal of middlemen, MARKET’s decentralized approach removes inefficiencies or inequities perpetuated by the exchange itself through inclusivity to all traders. Centralized exchanges greatly limit the populations eligible to trade due to outward regulations and inward restrictions.

Not only must traders on these markets match certain levels of verification and accreditation, they still often require a broker to place trades for them. Anyone in the world can communicate with the Ethereum blockchain, which similarly means that anyone can interact with MARKET Protocol.

In addition to the inclusivity presented, this decentralized approach also greatly empowers traders in the freedom to trade exactly what and how they wish to trade. Entities like CME and CBOE choose only to list commodities believed to earn volume-listing based on values such as the open interest and market activity of the commodity.

MARKET Protocol, on the other hand, is universal. Traders have the full capacity to open contracts in relation to any commodity. Whether a niche locality or global output, traders maintain the unwavering right to trade whatever they believe to be the most profitable derivative.

MARKET Protocol also offers support for a wide variety of currencies to be used as collateral. This includes the more than 600 tokens listed on Coinmarketcaps that use the Etherum network. This additionally includes the asset-backed tokens provided by Digix, such as the DGX stablecoin, which is backed by gold.

Derivatives exchanges, in comparison, typically only accept USD as collateral. Even in the case of cryptocurrency derivatives exchanges, the currencies accepted as collateral remain very limited. For example, the leading cryptocurrency derivatives exchange, BitMEX, only accepts Bitcoin as collateral.

MARKET Protocol also insures against forced liquidations. Every order executed specifies dates and values for closing the given contract. As there is no fluctuating margin component, forced liquidations do not take place whatsoever. This protects traders on both ends of a commodity from squeezes, where prices can artificially explode upwards or downwards when forced liquidations occur.

In extreme circumstances, the outcome of such events can carry heavy implications. For example, a large sale of Ethereum on GDAX in June of 2017 triggered a short squeeze where long futures were force liquidated, leading to more and more ETH sales and even more forced liquidations. Ultimately, ETH experienced a flash crash, dipping momentarily to US$0.10 as the entire buy book was eliminated.

During times of huge volatility in Bitcoin, BitMEX traders often find themselves unable to place and close contracts. In some instances, individuals are unable to access the site entirely, simply due to the hardware behind the exchange failing to keep up with request volume. As MARKET is built directly upon the blockchain, all contracts created and matched are verified and fulfilled by the Ethereum network. There is no risk that open operations cannot be performed and new trades cannot be placed.

Lastly, derivatives exchanges operate similar to a network of digital IOUs. That is, when trades take place, values behind the trade — both the collateral and the commodity, do not necessarily trade hands. As mentioned earlier, such a system can lead to dire consequences, such as insolvency. On the MARKET Protocol, when contracts open, funds are transferred from the traders to the smart contract itself, where funds are frozen in escrow on the blockchain. At the close of the contract, the contents of the trade are transferred to their respective owners.

Given all these differences, there is certainly a case to be made that decentralized derivatives exchanges, pioneered by MARKET Protocol, represent a worthwhile system of trading that has the potential to disrupt the quadrillion dollar derivatives market. MARKET Protocol represents an exciting and empowering opportunity to trade with more freedom and ownership than has ever been possible, especially for traders that have been victim to the faults of legacy exchanges.

To learn more about MARKET Protocol, visit, read our whitepaper, and join the ongoing discussion on Telegram.

MARKET Protocol

Powering safe, solvent & trustless trading of any asset |

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