Blockchain in Crypto Trading: How Do Decentralized Instruments Work?
In cryptocurrency trading, everything is based on price movements, with market participants’ success depending on their ability to predict and quickly respond to this dynamic environment. Forecasting, however, is not always that easy, especially when it comes to high volatility. Even experienced analysts disagree in their assessments — while some of them predict that Bitcoin (BTC) will hit $100,000 in a year and a half, others say that it may drop to $3,000 or lower.
Today, next-gen decentralized instruments can help simplify the complex process of exchange trading by helping traders conduct an impartial analysis, properly hedge risks and choose a trading strategy to fit the context of price dynamics. How is blockchain useful for a trader, which applications allow for trading cryptocurrencies without having any experience, and why could brokers be left without work?
Prospects for using blockchain in trading
Decentralized finance (DeFi) has become one of the most active blockchain sectors in 2019. Pilot projects — i.e., stablecoins, decentralized payment networks, credit and insurance platforms and investment tools, etc. — showed that blockchain can be effectively integrated into the financial ecosystem.
At the same time, despite the authorities’ ambiguous attitude toward digital currencies, blockchain technology quickly found influential supporters, including world banks and exchanges. Specifically, blockchain’s potential is being studied by Nasdaq as well as stock exchanges in Australia, Japan, the United Kingdom, Germany and South Korea.
The use of distributed ledger technology (DLT) in trading can increase the level of security, simplify and speed up the bidding process, and reduce transaction costs. All-in-one platforms that simultaneously automatize trading, analysis and investment portfolio management form a separate niche in the market. Here are some examples of disruptive blockchain solutions that offer trading without brokers, commissions or even experience.
New technologies are replacing traditional brokers. Today, users have the opportunity to freely trade real cryptocurrencies on exchanges, while many banks prefer automating processes to brokers and financial intermediaries.
Peer-to-peer (P2P) solutions have also attracted the attention of global market players. On Oct. 3, Cointelegraph reported that Vanguard Group, a large independent investment company, is developing a new way to trade currencies, bypassing the large banks, which are seen as monopolies of the market. The platform, which plans to leverage blockchain for transaction costs reduction, has reportedly been operating for two months, with several transactions successfully processed.
If successful, the project will be able to impact the international currency market that has a daily turnover of $6 trillion, as transaction cost optimization can be a weighty argument for various investment companies amid falling revenues due to lower commissions and stricter regulation.
According to Campbell Adams, a former senior forex trader at Deutsche Bank, trading without intermediaries is like the Holy Grail for investors. Theoretically, the opportunity to cut fees by trading currency directly may look very attractive. However, the platform will require a large number of users to ensure sufficient liquidity, the expert noted.
Adams also added that such a decision may have a greater impact on the trading of swaps and forwards rather than on the spot market. This is because in ordinary life, the needs of investment companies to buy and sell the same amount of currency rarely coincide. Meanwhile, a spokeswoman for Vanguard told Cointelegraph that the project is still at the pilot development stage:
“Vanguard is currently piloting a project focused on improving the efficiency and reducing risk of FX hedging. Given the project is still in the pilot stage, we can’t comment further.”
Today, derivatives and similar products are typically traded on specialized centralized exchanges such as the Eurex Exchange or New York Stock Exchange. Each exchange provides a market for a set of financial products, keeps trades available to relatively small groups of participants and provides control over the safety of funds. The exchange acts as a central authority ensuring that trading is conducted in accordance with international regulations.
However, users of such platforms often face the problem of low performance — after all, for market makers and traders, milliseconds matter. The smaller the delay is, the faster the market participants’ reaction is. Seeking higher speeds, traders even move their servers or offices closer to the exchange buildings.
In addition, high performance is a must for any financial system when it comes to efficiently calculation of margins and risk management. Full automation is also required to support the operation of traditional stock exchange instruments. To solve this issue, today’s progressive companies use smart contracts. However, even existing blockchain networks are faced with the problem of low bandwidth.
Vega Protocol, which has recently received $5 million from investors, including Pantera Capital, is now developing a new blockchain protocol that is said to outperform existing solutions in speed. To achieve such indicators, the team is using its own proof-of-stake consensus algorithm, which allows to process 1,000-4,000 transactions per second. Vega is designed to be interoperable compared to similar solutions. Ethan Beard, senior vice president of Ripple’s Xpring platform, told Cointelegraph:
“Other layer two solutions are focused on a single network and diversifying the assets on a platform in an efficient way has not been solved. We believe Vega has an opportunity to deliver a decentralized derivatives platform that can interoperate with multiple underlying assets.”
In addition, an extended smart infrastructure will be created on the basis of the Vega Protocol blockchain, whose members will be able to vote for adding new products, modes or settings. Speaking with Cointelegraph on what distinguishes Vega Protocol from other blockchain platforms, a Pantera Capital representative said:
“The team understands the challenges involved in creating new markets and have designed a protocol to address them. They also know what it takes to get real institutional flows on a trading platform and are committed to building a protocol for liquid, capital-efficient markets that leave no one behind and operate within existing compliance and regulatory frameworks.”
Trading bot for housewives
As cryptocurrencies appeared, traders came across an attractive, but highly complicated and time-consuming, way to make profit. To succeed, a cryptocurrency trader should not only understand the market but be able to navigate a constantly changing environment. This requires being involved in the trading process 24/7, which is not always possible for an average user.
Some platforms have developed automated trading bots, but in order to take advantage of them, a trader must have programming skills — another barrier to entry into the world of crypto trading.
The developers of Gimmer found a way to simplify the cryptocurrency trading process as they claim to have a product to save users’ time. They claim their trading bot is so easy to use that even an inexperienced trader can succeed in trading cryptocurrencies.
Gimmer is an automated cryptocurrency trading bot, which doesn’t require programming knowledge or a deep understanding in the field of cryptocurrencies. It has a user-friendly interface and the ability to connect accounts from various crypto exchanges. One can follow the most successful strategies of experienced traders and buy them for later use, or rent preconfigured bots.
Another disruptive option available in the platform’s demo version allows for simulating the trading results according to the chosen strategy for the past period of time — i.e., based on already known price movement charts.
The blockchain technology used in the Gimmer platform makes access to trading tools universal and safe. Users’ funds are stored exclusively on a decentralized platform, without leaving their accounts.
There are a number of trading bot providers that use blockchain for automating all the processes, including 3commas, TradeSanta, Cryptohoppers and others.
Crypto analogue of Dow Jones Index
Cryptocurrencies arguably represent the most dynamic market in the world, with dozens of different coins emerging and disappearing every day. CoinMarketCap alone has almost 3,000 digital currencies that are listed on exchanges and may be attractive for traders. New coins, which can show sharp growth in a short period of time, can be of particular interest to some.
However, monitoring and identifying such assets among thousands of others can be extremely difficult — and managing a portfolio of 10 such currencies can be a time-consuming process. Take, for example, a person with a high net worth who manages their own portfolio in their spare time. When trading in the crypto market, they will need to access the average price of the top-200 crypto assets quickly in order to get a macro view of the sector as a whole, without being distracted by tracking each coin separately.
The Cryptocurrency Price Index (CPI) project claimed it found a solution to this issue in providing users with a single cryptocurrency index powered by blockchain technology. All historical and current prices of 200-top cryptocurrencies are displayed on one screen in real time, which allows the trader to quickly make decisions when trying to establish a market snapshot.
At the same time, CPI said that it is more informative than existing currency indexes, like Dow Jones or Coinbase, as such solutions usually collect information from 20-30 companies, which does not always reflect the real state of the market. While such data may help when analyzing certain intervals, it has a little objectivity in the constantly changing market.
The latter factor leads to the loss of popularity of such trading instruments as the Dow Jones Index. In particular, traders of global stock exchanges are already opting for advanced indexes — for example, the S&P 500, which includes the value of 500 U.S. companies.
The CPI team claimed that unlike other similar indexes, the CPI blockchain will provide cryptocurrency traders with an extremely diversified range of assets across a wide cross section of cryptocurrency markets. As CPI founders claim, once fully operational in the fourth quarter of 2020, the platform’s index will become the standard value and benchmark against intraday volatility within the cryptocurrency market.
The project has recently won the endorsement and full support of Emirati royal family members through their participation in the company’s board, bringing a global level of stability and recognition to the emerging class of DeFi protocols, which market commentators expect to disrupt the financial industry.
Decentralized liquidity pool
Emotions are one of the trader’s main enemies. As trading is getting more accessible than ever, more and more investors can become victims of decisions made under the influence of emotions. In the crypto sphere, this problem is especially acute due to the high volatility of the market, triggering panic sales as prices fall or fear of losing out kicks in. Professional investors protect themselves from such decisions by establishing a trading strategy and following through with it.
Related: Crypto Market Trading — Inside Look From Those Earning a Living Off It
Currently, not many in the cryptocurrency market are trying to solve this problem and help traders. Only a few platforms offer automated trading, but at the same they require programming skills and knowledge of the crypto market, thereby providing services for a limited number of traders.
For example, Spectre.ai introduced a number of trader protection algorithms that help control emotions, manage risks, recognize trading opportunities and even track the user's strengths and weaknesses. In particular, the service recognizes the weaknesses of traders and warns them when their actions can lead to an error.
According to the project developers, Spectre.ai is the world’s first trading platform built on the Ethereum’s smart contracts. Such technological equipment allows Spectre.ai to work without brokers and intermediaries, while maintaining all the advantages of a typical broker in addition to enabling users to trade directly from their wallets.
Notably, users can trade directly against a decentralized liquidity pool through a decentralized autonomous liquidity pool, which allows for trading without requiring special P2P matches. Users, therefore, can trade with a decentralized balance, which is available 24/7. The pool is fully owned by token holders, which allows the platform to instantly pay profits to token holders and maintain a high level of transparency.
Blockchain prospects in trading
In the future, the financial market may be transformed into a blockchain market, but so far only the first steps have been taken toward the widespread distribution of blockchain in exchange and over-the-counter trading.
Despite the potential benefits and possible prospects, the widespread distribution of the blockchain technology will take time and resources. Kyle Asman, a partner at BX3 Capital, suggested that there are a few factors hindering the global expansion of decentralized trading platforms:
"I believe that some of the decentralized trading platforms popping up today do have the potential to compete with traditional forex brokerages. The problem thus far for these decentralized platforms has been regulation and usability. Nobody has yet to receive universal regulatory approval to operate a decentralized trading platform, and until they do it will be tough to compete with a regulated entity. Also the platforms that have been popping up have not been user friendly at all, and until they become easier to use they will struggle to attract a userbase."
The experience of large banks and financial companies that are now actively integrating DLT into their infrastructure and invest in promising DeFi areas can be indicative. In the near future, the community will be able to evaluate the results of these experiments as well as the currently developing products, as Teemu Putio, an expert in compliance and an adjunct instructor at New York University School of Professional Services, believes:
“For me, the beauty of DEXes is that they will enable a new ecosystem of products and services to blossom in a way that the rigid set-up and fee-to-access structure of current exchanges prohibits.”