The Problems of Exchanges: Why the AbacasXchange is better?
First, let me start with a brief summary of exchanges. There are various exchanges for all types of commodities, products, services and securities. An exchange is nothing more than a marketplace where a buyer and seller can meet. The exchange should be conducted by an independent operator with no interest in the exchanged item. In practice, this is seldom the case as operators most assuredly cater to their biggest customers or are owned by those who profit most by their existence.
The primary goal of the exchange should be to facilitate a “fair and orderly market” and to provide a place where a buyer can buy and a seller can sell.
There are two primary categories of exchanges making the news today
1.Regulated Exchanges — Financial and Commodities Exchanges
2.Semi-Regulated Exchanges — Cryptocurrency Exchanges
Financial and Commodities Exchanges service a private club, typically banks and broker-dealers, who often own all or part of the exchange itself. This creates a conflict of interest that lawmakers and regulators seek to remedy. However, many of those who oversee the regulatory process were themselves senior executives in the investment community — not exactly arm’s length. Many practices such as High Frequency Trading (HFT) have been ignored at the expense of the investor who has no direct access to the marketplace as mandated by law. Exchanges such as NASDAQ commonly created system tweaks to rig the game in favour of their biggest clients — queue jumping, maker-taker pricing models, server colocation preferences. The list is endless. There has been no lack of scandals within this market segment — LIBOR Scandal, WM FIXING Scandal, HFT.
Cryptocurrency Exchanges, the bastion of the “new economy”, are the creation of the liberterians wanting to avoid regulation. In the process, they have undermined even more of the principles of “fair and orderly markets”. Crypto exchanges are fraught with conflict as they fulfil the role of a matching engine, custodian, broker-dealer, market-maker [at times], settlement agent and order manager. There is not a great deal of transparency in the present version of cryptocurrency exchanges. Several examples of scandals include MTGOX, Neo & Bee, BitFinex, andBitstamp .
Neither of these models has proven to be ideal for the investor.
What makes AbacasXchange different? There has been a great deal of talk about decentralized exchanges and it is in fact the goal of AbacasXchange. However, the world is not always black and white. Frequently, the truth is somewhere in the middle. In a similar fashion, the perfect exchange might not be one or the other, rather a hybrid of both.
Let’s understand the difference between purely centralized and purely decentralized.
- The Traditional Centralized Exchange implies that you must post collateral [cash or securities] in order to gain access to the market. This means that you must give up control of your asset [in the case of the cryptocurrency exchange] or you must promise to deliver the settled trade [in the case of the securities exchange]. The reason behind this style of exchange is to ensure that the buyer/seller would honour their agreement thereby mitigating delivery risk and maintaining trust. But what if the agent or exchange steals your cash [MF Global or MtGox]?
- The Decentralized Exchange implies that you can hold your asset in your wallet and execute the exchange once terms have been agreed. We can do this in concept today for cryptocurrencies (using functionality like multisig) but the fully decentralized approach does not hold up well for tokenized assets that represent securities like stocks, bonds and gold.
Both styles of exchange serve a purpose: The centralized exchange is efficient if everyone has fair and equal access to the marketplace and no central body controls the assets being traded [but this is hardly our reality as it is dominated by private interests]. The purely decentralized exchange approach will be OK for cryptocurrencies where risk of loss is well-known to the user.
But there is a better way.
The Hybrid Decentralized Exchange
In this incarnation of an exchange, we consider off-chain [centralized] and on-chain [decentralized] operations. An order manager is needed to construct and manage a smart contract. The role of the contract would be to deliver the “asset” at an agreed trigger. Three key off-chain activities include price discovery, order management and matching.
There are numerous challenges with decentralized exchanges — data and privacy laws, asset safeguarding and audit, accidental loss or theft, regulations and compliance. Can you imagine telling a client that if they lose their private keys, they no longer own their GOOG stock? Personally, I don’t want to be the one that proposes that ridiculous idea to the regulators or to our clients.
To this end, and with all due respect to other initiatives, there has been virtually no discussion about the off-chain operations which remain integral to the marketplace — Price Discovery; Order Management; Data Management; Loss Prevention; Legal, Regulation & Compliance; and Matching & Settlement. No decentralized initiative will gain mainstream acceptance without a clear understanding and roadmap to address these investor and regulatory challenges. You can’t just say ”Well, today I am going to build a decentralized exchange” and have the expertise to achieve that goal.
Why the AbacasXchange?
The AbacasXchange has:
1. A team that understands the markets — asset classes, regulations and delivery
2. A team that understands Exchanges — Price Discovery, Order Management, Execution & Settlement
3. A team that understands Blockchain — decentralization and distributed services
4. A team that understands how assets will evolve from dematerialized to blockchain-based
5. A wealth of partners to speed the time to market.
6. A transparent third party audit process that is visible to the client at all times
7. The “Fulfilled by Abacas” investor guarantee including asset servicing.
8. The Abacas Protocol, a standard for listing and maintaining assets.
9. No conflicts of Interest in its process or operations.
10. A new and exciting direct asset-for-asset trading model.
AbacasXchange has been planning for over three years, using more than 100 years of collective experience and intellectual property in technology and financial markets to produce a customer-centric hybrid DEX that promotes a fair, orderly and transparent market.
We are excited to share our vision for the AbacasXchange.