It took centuries for the financial industry to develop into the highly diversified markets and products we know today. Hand in hand with this development are levels of control, oversight and regulation that have segmented markets into national jurisdictions within centralized markets such as the NYSE or EuroNext. The advent of crypto has eliminated much regulation, eliminated insularity, desegmented markets, and ditched oligarchic structures in favor of global, decentralized, truly free markets.
The problems with centralized funding
Power is concentrated in the hands of a few in centralized financial structures. This leads to inefficient and inaccurate markets, such as the overvaluation of CDO creditworthiness that led to the 2007-08 crash. Prices and economics may also not match when jurisdictions differ in terms of regulatory principles.
A deeper regulatory problem is uneven enforcement. The lure of money and power can result in regulations being twisted or ignored entirely, creating unfair advantages and distorting true market value. Then market entry barriers can be overcome – laypeople, for example, are not even allowed to trade on futures markets.
Even when markets are accessible, there are complex levels such as brokers, clearinghouses, exchanges, etc., all of which act as buffers between people and markets. Keeping assets at a distance also makes it easier for a government to confiscate them from “undesirable elements.” It’s even a problem inherent in crypto exchanges; Assets are held on a balance sheet, with transactions offsetting as needed.
A consequence of this stratification and denial of access is the emergence of oligopolies in some markets. Companies use their status and power to charge exorbitant fees for market access. The advent of Neo Brokers brings changes, but they are incremental and not yet significant.
DeFi: what and why?
Considering all these shortcomings of traditional finance, is decentralized finance (DeFi) the answer? Does it even need an answer?
DeFi puts the power back in the hands of users and makes markets more democratic and decentralized – while pushing boundaries. Anyone with an internet connection can participate; no citizenship tests, location requirements, or ideological needs. DeFi is a fully globalized market.
The ability to directly own assets is a key element of decentralized exchanges (DEXs). Everything is stored on an international network so that governments and nefarious actors cannot take ownership; there is no need for prime brokerages.
Think of DeFi as infrastructure; It’s email rather than Gmail. A provider can fail, but the underlying principles and structures remain intact. DeFi could only be shut down by a fatal coding error in a smart contract or a complete collapse of a globally distributed blockchain.
Removing brokers and enforcement of regulations reintroduces purely economic incentives and takes away politics, ideology and social conditions. Add this to direct ownership and there is a lot less need for trust within the system; Financial logic is the driver and computer logic is the key to execution.
The imperfections of DeFi
DeFi is not the ultimate solution for financial markets. Some of the key services offered by Prime Brokerages include margin trading and automated trade execution. DeFi’s anonymity makes lenders reluctant to offer undercollateralized credit for trades. Merchants tend to maintain this anonymity and shy away from traditional KYC.
Automated trading like a stop loss or limit order needs a trigger. In a prime brokerage or CEX, this trigger comes from their own backend, but that cannot be transferred to the blockchain.
Fragmentation of DEXs is another problem. Although the DeFi space is not as fragmented as traditional finance, not all DEXs integrate with each other. In addition, margin capital – if it exists at all – is usually platform-specific.
Finally, the complex security and lackluster interfaces hinder newcomers. The community developing DeFi is hardcore and technology-focused – UI is a distant second consideration keeping Joe Public from trusting the systems.
Bring margin trading and automated trading to DeFi
These problems are not insurmountable; Primex is poised to solve major DeFi issues with its new protocol.
Margin trading is implemented through liquidity pools, which Primex calls credit buckets, each with a variable and regularly updated risk profile. These buckets can limit traders based on risk scores based on past and current trading performance and not KYC. Positions that are too risky are automatically liquidated. The incentives for participant behavior are economic – “Zero Trust” is introduced.
The role of Primex Keeper nodes also offers automated trading; the second strand of prime brokerage service currently absent from DeFi.
Primex also solves cross-DEX trading problems. Traders can use their borrowed capital anywhere within the DeFi space, erasing the limits that DeFi intends to remove. All of this is available on an easy-to-use, well-designed platform.
The future of DeFi
The shift towards decentralized, borderless, distributed financial systems with democracy at their core is progressing rapidly. Traditional finance still has a place in the world, but we can expect DeFi to play a more prominent role. Primex’s concepts – margin lending, risk management, cross-DEX capabilities, automated trading – position it as central to the future of DeFi.
Disclaimer: This is a company release. No HT journalist is involved in the creation of this content.
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