Blockchain Meets Forex: Welcome To The Freedom To Trade


By Tong Quoc Dat | We have been losing trust in our ability to control any of our properties for a long period of time. That’s one of the reasons why technology has been replacing many roles in the modern workforce. It doesn’t only reduce the cost and operating time, but also removes (as much as possible) the role of the centralized middle-man and the damage that could be caused by human’s seven deadly sins. Blockchain applications based on smart contracts are opening a promising new approach to solve problems with centralized traditional businesses. This technology allows us to enhance our storage capacity, transmission, encryption rate, information transparency and security.

In the financial industry, investors have to deal with uncertainties not only from high volatility of price, but also from intransparency and risks associated with centralized brokerage firms.

Emerging cases of hacking and stealing millions of dollars from centralized financial exchanges – such as Mt Gox, Coincheck, Shapeshift, Bitfinex, etc – are raising an alert voice that calls for a solution to the old problems of the centralized business model in financial sectors that are lacking transparency by making up quotes, establishing high fees and leaving their systems/servers vulnerable to hackers.

Problems With Traditional Centralized Financial Brokers Traders who participate in financial trading activities are quite familiar with the term “financial brokers”, which entails financial liquidity providers such as banks, security firms and financial dealers. Those institutions have to maintain the huge cost of operating their centralized systems to bridge the demand and supply from the market. The mentioned cost then is incurred by traders under many forms such as spreads, swap and commission.

Traders have to bear a huge cost of trading, and this is one of the main things that contribute to the high percentage of loss from individual traders because the high trading fees eat up their profits. If there is 50-50 chance of guessing a tail or a head by tossing a coin, additional fees will make the 50-50 chance be in favor of financial brokers in a long run.

Furthermore, the technology used by traditional financial brokers is centralized storage, which may bear the risk of attack on the database including investors’ money. The hacking activities can be aimed at external and internal structures of brokerage firms, so it is hard to prevent them completely.

Decentralized Financial Broker Based On Blockchain

Thanks to the decentralized data storage feature, blockchain technology can help secure and transform transactions into irreversible records. Smart contract is a set of conditions or promises specified by digital forms and agreed by relevant parties. And by combining smart contract application and blockchain technology, it will be possible to solve the dilemma with traditional centralized financial brokers through the creation of decentralized financial brokers where demand and supply directly meet each other without any downtime, fraud or unauthorized interference.

Mechanism To Create A Decentralized Financial Broker Currently, a centralized financial broker needs to be based on several big financial institutions, which act as liquidity providers to provide liquidity to the market. This is the nature of brokers who play a role of so-called middlemen to facilitate the liquidity for traders and big institutions. Therefore, in order to cut out the role of middlemen, there is a substitute/ replacement/ alternative tool that acts as an automatic liquidity provider to guarantee liquidity to the traders all the time.

A decentralized financial broker, has come up with a unique approach by creating Mutual Pool, which acts as an instant liquidity provider. Its fund is contributed by retail contributors and big players in the financial market who want to play a role of market maker. In other words, now anyone can become a market maker or liquidity provider by contributing funds to the mutual pool. This is considered an innovation in the financial industry because in the traditional financial business, the role of market maker is taken by  big players or corporations .

When a trader wants to place a buy/sell order regarding any financial instruments, he/she basically concludes a contract with the mutual pool. The contract has all the measurable conditions to know which one is profitable or not, based on the price fluctuation of that financial instrument. When the conditions are met, the smart contract would settle the fund between traders and the mutual pool, based on price fluctuation and some conditions such as stop-loss or profit-taking.

Therefore, this is a true decentralized financial broker that enables contributors to choose sides of investing, let’s say traders or market maker. The whole system works automatically without anyone’s interference and enables transparency and hacking prevention.

This automatic financial broker also reduces most of the costs involved in trading including spread, swap and commission because there would be no upper layers of liquidity providers but only itself which is contributed from investors’ fund. The involved parties can deposit securely and withdraw all their funds in the blink of an eye by transferring cryptocurrencies.

The concept that blockchain meets forex seems like a great way to untie ourselves from the burdens we have created. Welcome to the freedom to trade.

About The Author Tong Quoc Dat is the CFO and Co-founder of Nami Corporation in Singapore. He studied computer science and finance in the US and has 10 years of working experience in finance and wealth management at banks such as ANZ, Sacombank and VPBank. He trades forex, commodities and stocks in his free time.