One of the age old debates in finance is whether or not markets are efficient. The efficient market hypothesis states that “at any given time and in a liquid market, security prices fully reflect all available information.” As a result, “attempts to outperform the market are essentially a game of chance rather than one of skill.” However, the waters are muddied by entities called dark pools as well as the existence of complex financial instruments like swaps and collateralized debt obligations (CDOs).
Dark pools are essentially private stock markets housed by large banks. Here, buyers and sellers trade away from the public view, typically in large blocks of shares. For some time, dark pools have dominated trading volumes in comparison with public exchanges like the NYSE, NASDAQ, and BATS. The question arises whether or not trades are taking place with information hidden from the public. What if prices in the dark pools don’t reflect those of public markets? Can public markets be truly transparent if the biggest trades are made in private?
In addition to dark pools, there is a whole array of complex financial instruments unavailable to the average retail investor. Derivatives products like swaps and structured products like CDOs are too complex for retail investors to handle, and they typically trade in blocks too large for individuals to purchase. These complex instruments have brought the world’s economies to their knees in the past with hardly any investors--professional or retail--knowing what was coming.
The combination of this potentially deadly duo means that capital markets are not as efficient or as transparent as they could do. The small guys are continually left on the outside while large, centralized bankers get increasingly more powerful.
One blockchain based startup, Sharpe Capital, is in the process of creating a proprietary financial markets protocol that addresses these very problems. The core component of the platform uses smart contracts to foster market efficiency and transparency.
The core aspect of the platform is a Trustless Ledger Service (TLS) that runs investment and asset trading. Because the TLS is implemented with an Ethereum smart contract, all trades are automatically visible to the public through the decentralized blockchain. The self-executing nature of smart contracts also ensures that each trade is executed down to the very detail, eliminating the risk that parties will manipulate the terms of the trade.
The smart contract is also open sourced, so the ledger service can be implemented by anybody, including existing firms and funds. The use of the TLS will inject a high amount of efficiency and transparency into financial markets because the prices and terms of all trades are public. There is no dichotomy between public and private trades; all trades are auditable by all parties. The open sourced nature of the platform also means the audience is unlimited, so theoretically, the entire financial landscape could be improved.
In contrast to traditional financial markets, this puts average retail investors on the same level as institutional investors. No longer will the “little guys” have to worry about their trades being front-run by high frequency trading firms, nor will they have to worry about getting ripped off when buying stocks on an exchange. By bridging the wide gap between retail and institutional investors, prices will be more accurate because trades are not being made on secret information, nor on secret marketplaces.
Though the crypto community has typically cringed at the thought of government regulation, the Trustless Ledger Service provides a single point-of-entry to analyze trades. This means that in their investigations, central authorities don’t need to force institutions or individuals to hand over sensitive information; all the data they need is logged on the ledger. Sensitive and private information is cryptographically secured. The TLS will certainly be a useful addition to the crypto markets, especially because cryptocurrency traders aren’t immune from accusations of insider trading.
The Sharpe Capital platform is an exciting prospect for all cryptocurrency enthusiasts. By creating a trustless ledger system, the team has found a way to make markets more efficient and transparent, allowing everyone to play on the same field.
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