Throughout the last month I've been wrapping my head around the case for decentralized exchanges. I like BitShares but it seems to be lacking liquidity badly. This is because liquidity is inherently centralized, or put it another way difficult to achieve in a decentralized way. Centralized exchanges can provide far more incentive for liquidity providers.
Neo tries to tackle the problem with the speed of off-chain order matching and allowing complex orders. If you think about it, BitShares can execute stop orders by placing a limit order to counter the open position. The speed is useable. It is always possible to trade around the market price. But the volume is not picking up. Maybe exactly this will change now.
More and more decentralized exchanges pop up but still no one is connecting Waves, BitShares and Nxt asset exchanges with EtherDelta. The technical integration is difficult, but the economic integration would be more feasible. The first step to a integration could be a gateway exchange like BItFinex is building with EthFinex: orders on EthFinex can tap into the order book of BitFinex and vice versa. All that is needed is a bot who syncs orders as they come and go. This is called a arbitrage bot. Every exchange has arbitrage bots. They act autonomously and they indirectly price the risk of every exchange, asset and the regulatory hurdles with their spreads. From this point of view the system of crypto exchanges doesn't look so centralized anymore as it is criticized to be. Since funds can be moved around using distributed ledgers, there is a global liquidity pool emerging that due to bigger efficiency will give competitive edge over traditional financial markets. Even with regulation coming, the gains in terms of liquidity, cost and speed will turn into a growing customer base. While everyone is waiting the advent of digital autonomous organizations, the first one is already in operation. DAOs bring together centralized resources and give every entity a fair share guaranteed trough smart contracts. As well everyone is free to provide services to the Crypto DAO as a whole which is already existing. I'm talking about hedge funds, exchanges, payment gateways, credit cards, masternodes, lightning nodes, staking or breeding virtual cats. They all make money and therefore are part of and work for the Crypto DAO.
Crypto has lots of developers and every single one of them is rewarded by the network. Everyone gets rich as more and more individuals start focussing on the opportunities that the Crypto DAO offers and contribute their expertise.
Increasingly the crypto system will leverage of its efficiency over traditional markets and grow its reach by being able to serve niche markets efficiently that are too small to be covered by the big players. Gambling with magic internet money will grow into regulated marketplaces for financial services. At the moment more technological development is needed to reach a balanced agreement between law enforcement and the libertarians who run the networks. But libertarians might be outnumbered by opportunists soon and will loose the lead in the discussion. In every step of the bubble cycle, other outsiders step in and fuel the next push. End of December it was traditional finance who decided that it would be the time to integrate both worlds by issuing a IOU in the old world, representing the new world. By trading futures there will now be a liquidity bridge that more and more investors will use to move funds in between the systems on a institutional scale. And subsequently integrating via derived products that are traded on the other retail exchange system, e.g. Bitcoin ETFs based on Bitcoin Futures.
It's already not only Bitcoin that is traded on the stock market. It's not only Ethereum and Monero. It's a growing market. So far certificate emmitents bridge the systems by locking crypto collateral on the original chain. Their ability to move money in and out in realtime will grow and thus being a liquidity bridge.
While now derivatives of traditional assets are traded on crypto markets, in future more derivatives of crypto assets will be traded on the traditional markets. This is why the traditional market stakeholders can not leave their niche: regulations are different for brokers than for unregulated exchanges. Therefore they can interact separated by a legal condom.
But at the same time the product they can offer their customers trough derivatives will always be good enough for the most part. Crypto fitted itself into the financial system already and made connections that are lasting. As crypto grows these connections will shift power. The user will demand more access to services connected to the token. It has to be seen if every crypto transaction that user deem valuable can be simulated trough a derivate. I belive not.
The first step to get there is to connect a decentralized exchange to a centralized exchange. In other terms the centralized exchange acts as API that allows connecting the decentralized market to the other centralized systems. Centralized exchanges have a central order book for execution speeds which will always attract more liquidity from high speed trading. They will also be cheaper to run for these kind of purposes as they shift profits from retail traders to market makers by paying them a share in the fee paid by market orders. A central exchange tied to a decentralized project will provide itself as a bridge to the traditional markets. Everything that can be arbitraged will be traded what will strengthen the connection that bridges the systems. This is why I believe that more products of the traditional finance world will be tradable on decentralized markets. It's only that we haven't done it yet, not that we couldn't.
I bet there are inefficient markets for digital goods out there to start with, like trading IP adresses for Dollars. They can serve as the prototype for the general case of trading individual goods, requiring that they are of a common kind but unique in certain regard. All this implemented using decentralized markets. But also stocks. There is no reason why order books can not be distributed between all exchanges, creating a giant global liquidity pool. Stocks on distributed ledgers give the added advantage of easy voting as a shareholder.
It all starts with connecting your favorite decentralized exchange as a backend to a centralized exchange. For every decentralized exchange there is another tandem. Current market forces within the Crypto DAO will incentivize stakeholders to move in that direction. Decentralized exchanges open up to new ideas like dutch auctions, self-listing of assets. On a smaller scale this is no different to the issuance of obligations by private individuals sold on the market to take out a loan. This loan then can be backed by crypto collateral using stable coins like Dai as a new kind of derivative bridge to the traditional markets.