Blockchain’s potential to transform conventional systems and processes on online platforms is becoming a rapidly trending topic among investors and in financial institutions. This technology will be crucial to increasing efficiency and affordability of processes across various sectors.
Currently, the distributed ledger technology is blockchain’s greatest asset due to the level of transparency that it can provide. Though some remain skeptical about the technology, there is a great deal of enthusiasm for incorporating blockchain into a number of leading fields, namely the derivatives market.
Derivative contracts are used to effectively manage financial risks and hedge against possible fluctuations in product supply. These contracts don’t hold any inherent value; their value derives from underlying assets such as bonds, commodities, interest rates, and stocks. Though all industries have limitations, many of the constraints in the derivatives market can be alleviated through technological advances.
Blockchain is improving the derivatives market in two ways. Firstly, it is paving the way for new platforms to develop a next generation financial structure that will streamline processes in the market. Secondly, this technology will offer increased transparency, security, and convenience across transactions, including derivative-related transactions.
Blockchain enhances derivatives market through better streamlining and improved efficiency
The current processes used in the derivatives market are riddled with inefficiencies that cost stakeholders time and money. Blockchain will render these processes obsolete. By using blockchain technology, buyers, sellers and central clearing houses will have more control over their work, therefore, increasing the efficiency of the process.
This efficiency will be achieved primarily through the adoption of smart contracts. A smart contract is a critical tool in blockchain and cryptocurrency based platforms because it maintains a digital record of important information. These smart records will replace standard ledgers in the documentation of derivatives trading by recording and managing shared records in the cloud.
Post-Trade Processing: Decreased human intervention and improved accuracy
Post-trade processing is one of the most time consuming and challenging steps in derivatives trading. The incorporation of smart contracts in the derivatives trading process minimizes the steps necessary for post-trade processing. This also circumvents the need for staff involved in reconciliation, therefore, making the process cheaper. The automation of derivatives trade documentation will not only decrease the price of trades, but will also reduce rates of error and increase overall accuracy.
The increased efficiency and affordability of trading in the derivatives market, caused by an adherence to blockchain technology, will attract investors which, in turn, will bolster the overall progress of the industry.
Better transparency and risk management
The two greatest advantages that blockchain can provide to the derivatives market are increased transparency and improved risk management. Blockchain’s greatest asset is its inherent transparency whereby everything that happens on blockchain is recorded and cannot be modified unless the decentralised group of peers all agree to do so. Therefore, regardless of the action undertaken by an actor on blockchain, whether it is trading on a social marketplace, enabling talent acquisition or dealing with derivatives, transactions remain transparent throughout the network.
Through this system, all stakeholders involved in a transaction can see what is happening in real time. Therefore, there is no need to externally keep track of records since blockchain does it digitally. This is where it becomes interesting for potential investors because it was previously not possible to have access to these accurate details in a timely manner.
The second advantage of using blockchain is the improved in risk management. With increased transparency, traders can access details about trades more easily, which allows buyers and sellers to make decisions about their transactions based on up-to-date information. Therefore, this can reduce the risk associated with a trade.
Cost reduction due to automation and security
Blockchain entering the derivatives market means that aging IT systems can be fazed out of the industry. The current systems in the derivatives market are expensive to maintain and are struggling to keep up with the rapidly evolving digital landscape.
As opposed to current systems, blockchain is a simple one that requires minimal maintenance and correction. The costs involved in the implementation and the maintenance of IT systems are thus reduced with blockchain. In addition, blockchain promotes an added sense of security within market, thus, reducing the costs that are generally involved in ensuring safety.
Increased liquidity for all other transactions
Blockchain’s participation in the derivatives market benefits the industry as a whole by improving liquidity. It does this by reducing maintenance and transactional costs, and increasing transparency.
Financial institutions can also hope to increase the liquidity of their assets by streamlining and improving their overall operations through the use of blockchain.
Opportunities to invest in blockchain based derivatives brands
A number of new startups in the derivatives industry are been conceived with blockchain as their foundation. For example, there is LucidExchange that is working to develop an open source protocol that will encourage true person-to-person (P2P) transactions within the derivatives market.
LucidExchange is currently offering tokens that will be used on the trading platform to investors. Due to blockchain’s promising future, investing in these types of platforms may cause profits to soar for investors.
Major player in the industry embraces the technology and further affirms its potential
This year, the Depository Trust and Clearing Corporation (DTCC) launched its plans to develop a blockchain based post-trade framework for derivatives. This new framework hopes to replace the current operation in its Trade Information Warehouse.
This is a significant milestone for the industry and for blockchain developers, as one of the most critical markets in the world has adopted the technology.
In conclusion, can blockchain really bring efficiency to the derivatives market?
The potential of blockchain has been brought into question numerous times. There have been many prominent individuals who have expressed doubts about the technology’s longevity, and the reliability of cryptocurrency. However, even today, blockchain continues to thrive and to disrupt industries proving to be a revolutionary technology.
By using blockchain technology, the derivatives market can profit immensely due to the increased efficiency and affordability blockchain can provide. As more industry giants start to embrace blockchain technology, there will be a wider scope for improvement, ultimately reducing limitations in derivatives trading.