The emergence of cryptocurrencies as a new asset class has heightened expectations for the eventual transition of other financial assets on to the blockchain.
Derivatives, security tokens, and non-fungible assets can all benefit from the transparency and trustless execution environment of distributed ledgers. However, some critical hurdles need to be overcome to foster further adoption of the technology.
According to PwC’s 2018 Global Blockchain Survey, 45% of participating executives cited trust as a limitation to adoption. Additionally, cryptocurrency exchanges exist as third-party custodians in a market trend that runs contrary to the dynamic of centralized control.
These exchanges largely live outside of the mainstream financial system, leading to the need for a trustless bridge between crypto assets and traditional financial assets.
The global derivatives market is enormous. With a low-end estimate of the size of the market at $544 trillion (on a notional contract basis), the opportunity for decentralization and increased access for retail investors is profound.
The derivatives market typically contains a very high barrier to entry for most retail investors. Options contracts and other derivatives traded on large exchanges and OTC markets are not directly accessible to retail investors and require them to go through third-party brokerages. As a result, investors usually end up paying high fees and are susceptible to fraud and general misconduct on the part of the broker.