The Blockstream announcement of a production sidechain devoted to inter-exchange clearing got us thinking about the deep questions of utility, financially speaking, that their sidechain or our Dex provides to the public. The Liquid chain they are proposing isn’t a competitor to the Omnilayer Dex per se, but it is a competitor to Tether which allows dollar movements between exchanges and for trade on the open market. A sidechain that has a well-made Dex is likely to emerge in the next quarter or two, probably the Ethereum Dex app will be out in a similar timeframe. It is going to be competitive, but to what end?
The elimination of counterparty risk.
From hence forth human civilization will be able to eliminate the dependency on social trust by making our businesses and economics an efficient procession of smart contracts.
The real competition is not between start-ups, it’s us collectively against the useful service of a Banco Estado, or Banco Central providing mobile money to all citizens, like Ecuador’s closed chain, or the competent apps released by publicly traded financial corporations with their own blockchain infrastructure. It’s early yet but the field is so small right now, some hundreds of millions, we haven’t even seen the second half of the first inning. Now is our time to make a splash and whatever land grabs we accomplish will be followed by a wave of incumbent entrenchments.
Modern financial trading sort of solved this problem by legally segregating the custodial and brokerage functions, but modern stock trading accounts are still trapped in a currency, in a banking system, in a tax code deal like IRAs, in regulatory limits. So looking at the tens of trillions in free invest-able capital floating through offshore bank accounts, the decentralized nature of Bitcoin-recorded assets lends a certain appeal which may well continue to find its self-fulfilling prophecy in higher prices for a while longer. The more efficient but still legally controlled adaptations of blockchain concepts by banks will be better to use but still captive in a strong legal sense.
Look for trends in volume that are up and to the right across the board.
There are a few components to the value that a good Dex provides:
- Reduction of opportunity cost due to having capital freely convertible into any of a multitude of denominations. This varies based on one’s country of residence – low value for US persons but higher value for Argentines, Chinese, Venezolanos ect.
- Liquidity produced by new market entrants with smaller capital that are able to trade due to SIM-chip compatibility. These are people who would never open a formal trading account with a Bitcoin exchange and have never had a bank account, but they have risk appetites just like you and me.
- Reduction in the trading spread for assets relative to their best alternative on centralized exchanges. Could bring the cost of trading down .15% on average.
- Reduction in fees to de minimus levels, .05% for liquidity takers, free for providers. Futures at .02% to open.
- Operability with decentralized applications on a reliable basis. Big volume driver.
- Arbitrage opportunities due to 10 minute lag – also effectively eliminates high-frequency trading.
So you add those things up and you tell me what the utility is. I’d say we’re talking about billions of dollars in savings for traders and applications. It’s a paced price-discovery mechanism with no counterparty risk and a total cost (fees+spread) of 8-15 basis points, at least half the cost of trading anywhere else.
Unfortunately for the VCs that have invested in start-ups at high valuations, the competitive basis comes down to two things: user acquisition rates and cost. We are competing on price gentlemen, and the leaner, more automated environments may well be able to set the price very low, lower than the proposed returns on your equity, maybe lower than the operating expenses of a company with a solid payroll.
I woudn’t want to bake my bread with fee revenue, I want to bake my bread with making those small spreads millions and then billions of times. Servers are cheap employees, hence the savings are passed on to the end-user.
It’s almost like trading algos are mining economic value through the processing order data and logics, worming through a search space of liquidity to discover price, yet price always seems to slip away. Trades stamping on the blockchain, block after block, locking in some profits and losses each turn.
A global commons of free trade: financial, commercial and social.
It’s gotta be simple to plug into… we’ve got that, technically speaking. We need a simple killer app for saving, but it’s easy to plug in Omnicore to build such an app.
It’s gotta be open to everyone… check.
It’s should be extremely low cost to use (optional)… a distributed protocol can afford to go lower, so check.
Here’s a crazy idea, what if a foundation formed to support crypto-finance projects managed to function on a cashflow-positive basis?
Here’s a crazy idea for the exchange business – what if exchanges made money on volume in liquid markets?
The top centralized exchanges will find themselves the dueling-pits for robots trying to carve out a nickle and the inter-exchange arbitrage will manifest on those minute timeframes but clear a settlement on-blockchain. Thus capital cycles a bit more slowly; though well-capitalized systems can optimize that.
Price discovery on-blockchains is going to be a really big thing. Imagine Gold: uncensored, and restricted currencies now more liquid than ever thanks to the advance of modern computer science.
Helping people worldwide to enjoy full use of their money.