Blockchain was built to primarily serve as a ledger for Bitcoin transactions. However, it has since been adopted for many uses – even major banks and government systems are adopting Blockchain technology. There have also been proposals to use Blockchain technology to build a decentralized stock exchange.
Understanding centralization and decentralization
Current financial markets and stock exchanges are centralized. Centralization’s main implication is that users’ assets and data are handled by a third party – in fact, the third-party acts as a custodian as will be explained later. There are also many undesirable elements of trading on a centralized platform now that investors know what decentralized platforms have to offer.
Unlike centralized stock exchanges, a decentralized exchange gives investors total control and custody over their assets and private information. This is because the third party in centralized exchanges is replaced with “smart contracts” which essentially are digital protocols.
So, is there a decentralized stock exchange?
No, there is no decentralized stock exchange at the moment. However, the world is closer to seeing one than you may anticipate.
Talks of a decentralized stock exchange have been circulating for a long time now and three companies are almost finalizing plans to build one. Binance, a leading company in the cryptoasset space, partnered with Neufund in a joint venture to build the world’s first decentralized stock exchange. Both companies would develop the Malta Stock Exchange, a subsidiary of Malta “the Blockchain Island”.
Under the partnership, the ICO developers at Neufund would be tasked with developing the platform’s skunkworks as well as developing its tokenized securities. Binance, on the other hand, will carry and list these tokens on its platform. This is expected to eliminate any obstacles to regulate the tokens and actually make them viable – the Malta Exchange Platform is already regulated.
This agreement was only reached 4 months ago and the plan is still in its pilot stage. Developers are hard at work to finalize things on the backend. On the frontend, however, there is an ongoing public offering of tokens that is currently on Neufund’s market – there are also plans to expand availability to the Binance platform. There is uncertainty about when regulations and listings may be finalized. If all goes as planned, however, the stock exchange should be up and running sometime in 2019.
What does a decentralized stock exchange have to offer?
Blockchain technology has gained unprecedented popularity for several factors including better security, higher transparency, fast transaction speeds, and efficiency. A decentralized stock exchange platform built on Blockchain technology is expected to offer all these and more.
As mentioned earlier, a centralized stock exchange platform such as the London Stock Exchange has a third party between itself and investors. This creates several problems. Firstly, investors are not in control of their assets. This means that their assets can be blocked without consent – this is common and it often results in huge losses for investors. Secondly, placing all assets in the control of one party creates an easy target for hackers. To this end, there are numerous cases of stock exchanges being hacked and investors losing their money as well as sensitive private information.
A decentralized stock exchange platform is expected to overcome all this in the following ways:
Eliminating third parties
As mentioned earlier, there will be no third parties in decentralized stock exchanges. Transactions will be facilitated through smart contracts. Smart contracts are programmed to execute transactions under certain protocols depending on the buyer-seller agreement. As such, there can be no breach of trust. This also overcomes other challenges such as blockage of investors’ assets.
The main strength of Blockchain technology is the security it affords users. Applications built on the Blockchain platform are protected by a series of computer nodes scattered all over the world – the platform itself runs on thousands of computer nodes across the world. As such, it is virtually impossible for hackers to get past the security protocols – there have been no cases of cyber attacks on decentralized platforms so far.
Additionally, the fact that there is no third party with access to investors’ private information means that users will enjoy greater privacy.
- Eliminating IOU Settlements: Investors will have custody over their assets using decentralized stock exchanges as IOU settlement plans will be eliminated. As such, investors will be at liberty to put their assets to any use.
- Expanding the Horizons: The advantages of a decentralized stock exchange platform go beyond convenience and security. Decentralized exchanges will incorporate a MARKET Protocol that will significantly expand investors’ access to financial markets. The MARKET Protocol will grant access to cryptocurrency markets while also maintaining all existing fiat financial markets. This is undoubtedly good news considering the numerous lucrative opportunities always coming up in the crypto markets.
- Obstacles: Building a decentralized stock exchange platform is ambitious, to say the least. As such, it doesn’t come as a surprise that obstacles are already coming up. They include:
- Transparency: The Blockchain platform is brutally transparent. This has its advantages but it may do more harm than good to the financial markets. A certain degree of anonymity is required to avoid panicking, which can result in partial or total collapse.
- Transaction: Transactions on the Blockchain network are handled by miners working remotely. These miners are motivated by their earnings. If this will be the case with stock exchanges, the investors will be essentially competing against each other to have their transactions processed faster for the right fee.
- Regulation: Few investors would be willing to trust an unregulated platform with their money and assets. As such, decentralized stock exchanges have to get approval and regulation from relevant authorities. This may prove difficult considering that most regulators are against cryptocurrencies and parallel financial systems in general.
Decentralized stock exchanges do not exist at the moment but plans are already underway to launch the world’s first DEX. If all goes well, then the Malta Stock Exchange should be operational come 2019. However, there are a lot of obstacles to overcome before this vision becomes reality.