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The next big leap for online trading


6 September 2021

Forget about crypto, blockchain is what it’s all about. In the past years, the crypto hype has overshadowed what seems to be one of the most disruptive innovations of the decade that just ingloriously elapsed. And by “disruptive”, we mean an innovation that disrupts business-as-usual, creates a product and a new market altogether, which frankly has not happened every odd year since electricity, cars or the internet.

The innovation

If blockchain was to be summarized in a few words: it’s a new kind of database. But obviously, there is more to it. A traditional database structures data like an excel sheet, accessible to any number of people. It is usually owned and managed by a business or appointed individual with total control over it and the data it holds.

The key difference between a typical database and a blockchain is the way the data is collected. Blockchain collects information blocks that have a determined storage capacity. When a block is full, it gets chained to the previously filled one, forming a chain of data.

The storage of all information is done in a distributed (shared) ledger using cryptography. Once the information is stored in a blockchain, it becomes an immutable database and is governed by the rules of the network. Peers participating in the network of exchanges share a single ledger where transactions are validated and the record is permanent and immutable.

The disruption

As an over-the-counter market that includes traders, banks, brokers and market makers, CFDs involve many moving parts that face the challenges of regulation, time and fees. The foreign exchange market is the biggest in size and non-centralized. It is multi-regulated and makes it challenging for actors involved in terms of compliance and strategy.

In addition to greater transparency, this would allow regulators to intervene faster in case of market or counterparty failures. Thirdly, blockchain has the potential to increase security in trading. Forex, for instance, is a very liquid market with large amounts of money moving around and vulnerable to cybercrime, manipulation or human error. The way data is distributed peer-to-peer and encoded in a chain encryption in a network that is distributed across multiple computers known as nodes means there is no single point of failure, and therefore it is practically impossible to manipulate or hack a blockchain.

A marathon with hurdles

Let’s entertain the idea of a not so distant future, where blockchain is widespread in Forex and CFDs. By 2035, the big stock exchanges are on a decline proportional to the advent of blockchain networks. What’s more, any record of ownership appears on the blockchain, making the goods attached to it instantly tradeable. Traders can customise their position size to their exact specifications, allowing them to manage their risk more with smaller deal sizes, a very popular strategy among scalpers and day traders.

Front-runners

In collaboration with the University of Copenhagen, social trading broker EToro has been at the forefront of research on bridging online trading and blockchain, studying the use of blockchain in the lifecycle of a leveraged trade. It published its first findings this year in a paper that draws observations for businesses.

According to the research paper, the main opportunity for integrating blockchain in leveraged trading is the creation of a level playing field for applications, users, and service providers, which can in turn generate healthy competition.

One of the challenges identified in the study is the risk of redundancy and lack of competitiveness if businesses assimilate processes executed with blockchain technology into a legacy environment. Their advice is to “build from the blockchain and up”, and not build into the blockchain.

Albeit promising, blockchain is not quite essential yet in the financial sector, not to mention the various barriers to adoption. Among those are that people associate it with cryptocurrencies and the bad reputation it might imply, the fact that it is an immature technology or the rigidity of regulators in their eternal catch-up behind technological advances.

Arguably, blockchain has the potential to alleviate the biggest pain points in the online trading industry and the causes behind much reputational damage; transparency and compliance.

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