In 2008, when Bitcoin was announced, Satoshi Nakamoto said that they developed “A Peer-to-Peer Electronic Cash System” with the goal of inventing what many people failed to create before: digital cash.
A decade later, despite all that it promises, Bitcoin and crypto currency have gained a bad rap from some market insiders because of its volatile nature.
This is because in addition to the risks ascribed to unregulated markets like scams and pump-and-dump schemes, when the intricate and complex aspects of technology are applied to the already complicated market, it opens up concerns over uncharted issues like hacking infiltration.
The volatility and low liquidity of crypto has become its greatest weaknesses, ultimately resulting in the dramatic crash of crypto prices in recent history.
The solutions aren’t necessarily standardised. Mature market instruments are essential for any market to help manage volatility, increase liquidity, and hedge downside risks. The most fundamental umbrella solution that we can turn to falls under derivatives, but that too poses its own plethora of inherent risks.
Risk has always been a foundation of derivatives. At its core, derivatives offer market players a vehicle to transfer risks into a different entity as a form of hedge. Thus, it provides derivatives an important role to play in maintaining a healthy crypto currency ecosystem and managing price risks.
Integrating blockchain into the financial industry
What have we learned from the recent crash of cryptocurrency market and how do we move forward from here? One thing that we can point out is that current crypto-derivative marketplaces are far from perfect.
OTC derivatives lack proper industry standards and centralised exchanges entail security, transparency, and position transferability concerns.
One institution whose main thrust is to address these problems is DUO, a decentralised platform that enables issuance, trading, and settlement of tokenised digital derivatives. DUO Network was founded in 2017 as a Singapore-based blockchain project initiated by FinBook Pte Ltd.
With an extensive experience and a deep technical know-how on the nature of derivatives, DUO seeks to reintroduce blockchain and create a transparent and autonomous derivative marketplace, through collateralised smart contracts and distributed price feeds.
They call this framework Collateralised Autonomous Token (CAT). What it does is define a set of standards for the issuance, redemption, and settlement of crypto derivatives. With this initiative, DUO hopes to successfully reintroduce blockchain technology into the finance framework by protecting the interest of the traders first and foremost.
“The trillion-dollar financial derivatives market is currently constrained by low transparency and inefficient settlement,” said DUO Network CEO, Jerry Li, “in need of innovative solutions to unleash more potential.” In addition, Jerry said “DUO Network aspires to democratise derivatives market and empower individuals’ investment capability through blockchain technology.”
In a nutshell, blockchain operates as a digitalised vetting system that determines the authenticity and defines the value of crypto currencies while operating as a digital checks and balance.
The advent of blockchain technology is celebrated because of the power it holds to disintermediate and democratise finance so much so, that according to Don & Alex Tapscott, authors of Blockchain Revolutions (2016), “The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually anything of value.”
What is essentially a network of automated notes, building derivatives on blockchain technology is DUO’s answer to the problems that pre-existing derivatives entail, ultimately addressing their inefficiencies with a new framework for crypto derivative contracts that utilises blockchain.
How will this change the game exactly?
For starters, it is a consensus among market insiders that successful derivative markets are often manifestations of the depth and maturity of the underlying asset class. As a response to high volatility and low liquidity, Collateralised Autonomous Token is a smart framework that safeguards traders through its tokenised smart contract design.
This means each derivative contract trades as an immutable token with payoff terms fully captured and enforced through the smart contract.
DUO’s solution is game-changing precisely because it answers what makes pre-existing derivatives problematic. Problems on the lack of proper industry standards, and security, transparency, and position transferability concerns are straightened out in DUO’s framework.
Therefore, in an acute and immediate sense, it can help protect traders from the risks of crypto’s volatile and unprecedented behaviour. But in the grander, more long-term sense, it has the potential to inspire the larger financial industry to further explore and consider virtual currencies.