By Deepanshu, founder and CEO of EthosX
With over $10 trillion traded daily, derivatives are a pivotal part of global financial markets. These sophisticated instruments are more than a tool for speculative investments; they also facilitate risk management and price discovery in the financial market.
Both exchange-traded and over-counter derivatives markets are huge. OTC derivatives, in notional terms, have outstanding notionals of anything between $600 trillion to $1 quadrillion.
Financial markets largely thrive on security and efficiency. This is why the emergence and widespread adoption of electronic trading has been so crucial to its growth. Its development made derivatives trading easier for both institutional and retail investors.
Today, anyone who wants to can conveniently trade at the global level without having to leave their home or office. And with blockchain technology becoming an increasingly prominent component of financial infrastructure, many experts believe its integration will only make things better.
To understand how, one must first recognize the problems of modern derivatives trading and the solutions blockchain technology brings to the table.
Inefficient, Opaque and Risky
Even taking into account all the advances in electronic exchanges, derivatives trading has been far from efficient. A notable symptom of this is the daily settlement failure rate, which can hit as high as 5% in some cases.
How could the market be so inefficient? Well, according to a 2020 paper (author, Randy Priem) on the risks, benefits and regulatory implications of using blockchain technology in the trading process, there are several reasons why.
