Source: https://fnlondon.com/
The world’s most powerful industry happens to be the financial services industry; it manages the global financial system by moving trillions of dollars on a daily basis, serves billions of people, and is the backbone for global economy.
State-of-the-art technology is advancing rapidly and the industries marginally connected with technology find it very tough to keep up with the change. New buzzwords like FinTech are coming in and becoming hot yet the storm of disruption is still brewing and yet to disrupt. As it turns out, when swiping credit card at a shop, there would be couple of intermediaries through which the money will pass until it finally ends up in the shop’s account. The transaction takes just a second to get clear but may take days to settle. Apart from this, there are a myriad of problems that have eclipsed the efficiency of financial services industry. For instance, transferring money cross-border is a long and risky affair. If anything goes wrong by any chance, money vanishes into thin air.
In the 21st century, is this really the kind of financial service one would expect?
This is Where Blockchain Comes In
After the financial crisis of 2008, a mysterious person/organisation named Satoshi Nakamoto proposed a revolutionary idea of peer-to-peer cash system, famously known as Bitcoin. This shook the world and till date, it does. The underpinning technology of bitcoin is what matters the most: The Blockchain. There have been multiple cryptocurrencies built on top of blockchain like bitcoin, ethereum, litecoin etc. Essentially, blockchain puts the intermediaries out of business, that is: all transactions will occur directly between two parties without any third party in the middle. If you had to purchase coffee from Starbucks using cryptocurrency, you’d transfer cryptocurrency from your crypto wallet to Starbucks’s crypto wallet. This transaction will settle almost instantly depending upon which blockchain you are operating upon. This indeed sounds radical, doesn’t it?
Even though blockchain evangelists may make blockchain appear as a panacea, it is not. There are inefficacies that haunt the present-day blockchain technology. However, it is only a matter of time they’d also be addressed with smart engineering and great entrepreneurship.
But what’s wrong?
Despite huge pitfalls in cryptocurrency trading market, almost everyone has still hopped onto the bandwagon with great amount of zest and little amount of knowledge. There are way too many cryptocurrency exchanges operating all over the world carrying out transactions worth billions of dollars everyday.
- Even though there are a lot of issues with crypto exchanges, they still happen to be the key entry points to enter the crypto space. Most of the crypto-exchanges are centralised, thereby violating first principle of the blockchain which touts for decentralisation. Because of this reason, a lot of the crypto-exchanges are vulnerable to SPOF attacks. Nobody in the crypto-space can forget the Mt. Gox attack. The funny part is that blockchain claims itself to be “unhackable”, yet the crypto-exchanges operate the same way a conventional database would.
- The cryptocurrency trading market is hands down not mature. It is not yet resilient enough to absorb large number of orders without changing its value. As a result, the value of cryptocurrencies keeps fluctuating. The reason why this happens is due to lack of liquidity as compared to traditional financial markets. Even though transactions occurring on blockchain get through with bare minimum fee, the transactions on crypto-exchanges charge about 1–10% above original price.
The world has seen an unprecedented rise of cryptocurrencies yet the trading framework is flawed. All the principles that the blockchain vouches for are violated when it narrows down to crypto-exchanges. The way out of this dilemma would be to reimagine crypto-exchange framework. Research and development are going on at full swing in this field and solutions will come up before we know it.