Broker-less trading markets for cryptos and other assets being launched on the Blockchain are emerging as a kinder, fairer and potentially more lucrative market for traders. Decentralized exchanges are not only eliminating broker fees but also solving the main challenge of cryptocurrency exchanges, a lack of liquidity. An alternative to crypto exchanges, prediction markets are like manna from heaven, with at least one Blockchain trading platform providing deep liquidity pools.
Which Blockchain trading platform model is best?
What all Blockchain trading platforms have in common is the elimination of the broker. Traditionally, trading has been a zero sum game. When brokers match orders, they take the other side of the trade. If the trader wins, the broker loses, and vice versa. This model gives brokers an incentive to manipulate fees and trading outcomes, and delay payments. In the foreign exchange markets, 60–70 percent of retail traders lose money, and up to 80 percent abandon FX trading within a year.
Eliminating the middleman reduces all forms of financial fraud, a multi-billion dollar problem in a range of trading verticals every year. Both Blockchain exchanges and peer-to-peer prediction markets are designed to disintermediate the broker. Oto Suvary, Director of R&D at SPECTRE.ai(Speculative Tokenised Trading Exchange), writes:
“Because we remove B-Book brokerages and replace them with immutable smart contracts, we are addressing a major need with our prediction market platform by preventing many forms of global financial fraud.”
SPECTRE.ai has launched an alternative to the P2P prediction market model—an autonomous prediction market platform with a 24-hour liquidity pool, providing instant trade execution at the click of a mouse, similar to the $80 trillion foreign exchange market.
The Blockchain fully enables this permissionless market, producing a provably fair market on which to make trading predictions and settle outcomes. The use of smart contracts on the decentralized Blockchain means information cannot be manipulated or withheld by a central authority since those authorities no longer control the outcome. Immutable smart contacts make revisions, deletions and other forms of tampering impossible without the consent of all market participants.
Many different Blockchain trading models are being introduced, offering opportunities to trade in real-time across crypto-fiat currencies or on what date central banks will lift interest rates. Which Blockchain financial trading model is best? All three Blockchain models discussed below provide a useful but different service to traders.
Slow But Smart Prediction Markets
In a prediction market, the investor bets on a future outcome but does not own the underlying assets. These bets are based on binary “all-or-nothing” outcomes, providing the broker with more incentive to ensure he does not lose all his money. Digital binary options have quickly grown into a $200–500 million market.
They allow investors to forecast future price direction on fiat and, more recently, cryptocurrencies. With fees, you will need to win 55 percent or more of the time to make money. Also, remember the laws of statistical variance. Markets revert to the mean. The more times you bet, the more likely you will come out even, before fees.
The migration of prediction markets to decentralized Blockchain platforms is offering traders much more than liberation from high fees. Some binary trading platforms are allowing traders to choose what to bet on, while others are making traders part owners and paying them dividends.
The first models introduced by Auger and Gnosis operate similar to the sports betting markets but are not limited to any one market, taking bets on binary outcomes in sports, politics, financial markets, and many other areas. Both these prediction market platforms use the wisdom of crowds to decide on outcomes. They contend that individual investors are smarter than the billions of dollars in investment research produced each year, of which 90 percent is never read.
Liquidity and time value are currently very low, although even long range forecasts can be useful to currency traders. On the Auger beta market, 50 percent of traders expect Bitcoin to reach 5,000 by January, while 70 percent expect the pound to fall to parity with the Euro by the New Year. Meanwhile, Gnosis and Wedbush Securities are developing a market on which crowds forecast stock fundamentals. These crowd forecasting tools could eventually be integrated with the more traditional crypto-fiat exchange.
SPECTRE.ai is competing more directly with crypto exchanges with a prediction market providing the speed and liquidity of the FX markets. This prediction market platform allows traders to bet on price moves on a range of underlying financial assets, including cryptos, FX, equities, bonds, ETFs and commodities. The DApp store will allow other companies to create sports betting, working capital financing, ecommerce and other apps that interface with the SPECTRE.ai liquidity pool.
The prediction market platform has its own embedded, decentralised, autonomous liquidity pool (DALP). SPECTRE.ai provides 24-hour liquidity whereas Augur and other Blockchain prediction markets in beta are currently settling peer-2-peer bets on the order of days and even months. The liquidity pool allows SPECTRE.ai to offer Smart Option and Smart CFD contracts on not only FX but any asset, including many cryptos.
Low Volume Cryptocurrency Exchanges
Currently, owing to low liquidity, crypto exchanges are primarily used for transactional purposes. If you own cryptocurrencies, you have likely visited one of the one hundred or so decentralized crypto exchanges directly matching buyers and sellers. Most trade the majors, Bitcoin, Ethereum, or both, and a handful of other cryptocurrencies. Traders take ownership of the underlying assets, although more exchanges are offering derivatives such as forwards, futures, options and swaps. These risk management instruments, which allow traders to hedge risk and significantly lower the cost of speculative trading, are fundamental to a more liquid market developing.
Models are developing to allow traders to improve liquidity and trade in and out of currencies in milliseconds rather than minutes, in the same way they trade currencies on a fiat exchange. The market with the largest trading volume LocalBitcoins has a 5-minute average release time—not bad considering the trades are arranged over an onsite messaging system, but far from simulating an FX trading experience. The battle between P2P and decentralized exchanges is still being played out.
Liquidity in Perpetuity
Blockchain cryptocurrency trading platforms are developing unique models to build liquidity. One emerging solution is to develop hybrid exchanges with liquidity pools backed by fiat money to support liquidity. SPECTRE.ai has developed a tokenized exchange with perpetual liquidity.
As in other prediction markets, traders do not take ownership of the underlying assets and no brokers are used to facilitate or settle trades. Instead oracilized smart options produce fair outcomes across peer-to-peer trades, which are settled via smart contracts. Oracles are small bots that exchange information between the real world and the Blockchain. SPECTRE.ai’s alpha version is live.
Where does the liquidity come from?
On the SPECTRE.ai crypto currency market, traders trade against a liquidity pool funded by the proceeds of its initial coin offering (ICO). The DALP pool is owned by the masses, either via dividend tokens or utility tokens. The dual token structure is an industry first. DALP can be connected to a range of fintech apps, disrupting ‘adjacent’ industries which have middlemen and moral hazard issues.
These include, but are not limited to, betting, working capital finance, e-commerce applications, and micro-lending apps. SPECTRE.ai has signed an MOU with a major U.S e-commerce group building a decentralised application on the SPECTRE.ai D-App store to connect to the DALP pool.
The apps will be another source of liquidity, while the main liquidity stream will come from trading. When a trade is settled, irrespective of the trading outcome, two percent of the funds is divided between token holders, in the form of a monthly dividend, and the exchange platform, as a technology fee.
If the trader loses, the remaining 96 percent goes toward expanding the liquidity pool. The winner receives a return on investment of 75–93 percent (net the four percent fee), linked to volumes in the liquidity pool. When the outcome is decided, the contract automatically releases funds to the winners’ crypto wallets. Direct deposits to the exchange are not required.
As mentioned, SPECTRE.ai provides two tokens. The dividend token pays two percent of all trades on SPECTRE.ai and apps connected to its liquidity pool to investors. The dividend token pays out 2% on Smart Option contracts and a 2-20% spread on Smart CFDs. A special dividend will be paid out if the liquidity pool meets a predetermined threshold. The dividend token supply is fixed.
The utility token provides trader privileges. Token users can trade across all smart options and assets, including exotic contracts, receive payouts of 1–5 percent higher, and gain access to a special education platform. SPECTRE.ai, which states traders can improve their win rate from 35–50 percent to 60–70 percent through fundamental and technical education, uses education as another way of improving trading outcomes and volume, and thus liquidity. Like a central bank, SPECTRE.ai is authorized to buy back up to 15 percent of its token supply to increase token value. Three percent of platform fees are allocated to utility token repurchases.
SPECTRE.ai’s goal is to establish a liquidity pool of $5 million or more from the proceeds of its initial coin offering (ICO). This liquidity pool could support 1,000 traders a day with $300 in trades for close to a year, based on average win rates of 59 percent, as estimated by SPECTRE.ai’s risk management team. Win rates in the FX market are closer to 50 percent. When the market reaches $30–50 million in size, the average trade size will increase from $50 to $5,000–$50,000.
The SPECTRE.ai Token Sale
Investors participating in the SPECTRE.ai token sale will receive a fungible token that can be exchanged for the dividend or utility token.
The pre-sale, which starts October 27th , provides a 33 percent discount to early birds. The ICO hard cap is $30 million. Twenty percent of the proceeds of the token sale will go towards capitalizing the liquidity pool.
No market is a win-win but decentralized Blockchain markets can increase trader odds of winning and significantly cut their fees and losses.