P2P Cryptocurrency Exchange: A Catalyst for Trustless Transaction of Derivatives

The emergence of cryptocurrencies as a new asset class has raised expectations for the shift of other financial assets to blockchain.

Security tokens, derivates and non-fungible assets can leverage trustless and transparent execution environment of distributed ledger. However, there is a need to overcome some critical obstacles in order to advance adoption of the technology.

One of the biggest concerns limiting blockchain adoption is trust. Furthermore, cryptocurrency exchange platforms serve as third party custodians. These exchanges operate outside of the mainstream financial system, resulting in the need for a trustless trading environment that provides a bridge between cryptocurrency assets and traditional financial assets.

The global derivatives market is huge. Given the low-end estimate of the market size at $544 trillion, the opportunity for peer-to-peer (P2P) trading is profound.

The derivatives market usually comprises a barrier to entry for most retail investors. They are unable to gain a direct access to options contracts and other derivates traded on large exchange platforms. This leads to the need for retail investors to go through third party brokerages. Eventually, investors have to pay high fees and might even fall prey to fraud or general misconduct on the part of the broker.

A shift towards P2P exchange development results in more transparency and makes intermediary functions redundant, thus acting as a necessary improvement.   

Digital transformation – which incorporates digitization of financial assets and placing them on the blockchain for more transparency and trustless trading execution – is gaining mainstream adoption. P2P exchange platforms can effectively remove middlemen and fee-seeking intermediaries from trading of derivatives.

Furthermore, blockchain driven smart contracts enhance trust and functionality of P2P exchanges. It has become easier to assess trustworthiness of the parties involved in a transaction. Additionally, an immutable ledger, which keeps track of every transaction, coupled with a smart contract, which automatically triggers an action and verifies the authenticity of data, is a boon for an ecosystem where trust and accuracy of documents is paramount.

Trustless and automated trading environments, as a result of P2P exchange development, provide retail investors with access to the global derivatives market. Decentralization of investment paradigm for all kinds of derivatives such as stocks, commodities and bonds can significantly transform the investment ecosystem.

The transition of traditional assets to the blockchain is gaining adoption. Automated execution, more transparency and trustless nature of immutable distributed ledgers combined with smart contracts have substantial potential to bring profound, positive change to derivatives market.