Decentralized forex trading is picking up pace as traders seek opportunities to diversify their portfolio within the crypto space. The adaptation of the blockchain technology is seen across numerous areas. Lending, borrowing, mortgages and the tokenization of stocks including pre-initial public offering (IPO).
Decentralized Exchanges (DEX) had more than $1 trillion in volumes last year compared to $115 billion in 2020.
Okcoin reported that there has been a significant rise in institutional demand for stablecoins, up 210% from Q1 2021. Jason Lau, COO of Okcoin said: "While stablecoins don't offer upside appreciation, they also open up access to DeFi yield opportunities and are an ideal mix of stability and liquidity, which is especially appealing to investors today."
Carry trading is a popular forex trading strategy. The aim of a carry trade is to capitalize over the interest rate differentials between 2 countries. CHF and JPY are popular for their ultra-low rates.
In cryptocurrencies, stablecoins are used for marginally higher yields. The Decentralized Foreign Exchange Protocol (DFX) offers such yields (yield farming). One strategy is to borrow USDC for 2.31% from Compound, purchase NZDS from DFX and deposit NZD stablecoin to DFX for a yield of 25.18%.
The Turkish Lira (TRY) offers a greater yield due to the current rates set by the Central Bank of the Republic of Turkey (CBRT). For TRYB, the stablecoin of the Turkish Lira investors may earn a yield of 83.35% in DFX.
source: DFX
As opposed to algorithmic stablecoins such as FRAX, both TRYB and NZDS are backed by physical assets. There are many platforms offering a spectrum of yields on stablecoins.
As the cryptocurrency markets are evolving, offering a greater range of products may attract more traders to the broker. It is important to note that as opposed to algorithmic stablecoins that may not be subject to regulations, stablecoins that are backed by physical assets may be regulated in future.
Spot Forex Trading in the Blockchain
Trading forex using blockchain technology has many benefits. Traditional trading platforms measure the settlements in days (T+1, T+2 etc.). Using the blockchain the time is measured in seconds (after the block is applied).
In other words, the settlement is immediate following the trade's execution.
Forex trading via the blockchain also means retail traders will maintain ownership of their capital. In an event of insolvency or should the Prime Brokers default, investors' funds are safe. It is probably among the greatest benefits of adopting the blockchain for traditional trading.
As noted in past articles the financial markets are in the process of evolving. Providing a regulated environment for decentralized forex trading may be highly desired in the years to come.
source: DeFiniti Network
DeFiniti Network is among the projects that brings decentralized forex to both retail and institutional traders. The platform also supports cash FX, NDFs, Swaps and forwards. The network offers 650tps but may increase to over 20,000tps according to the whitepaper.
HSBC and Wells Fargo announced they would begin using the blockchain for settling bilateral foreign exchange transactions. HSBC has already settled approximately $2.5 trillion in trades. The blockchain platform uses Baton Systems distributed ledger technology (DLT). Baton Systems is processing around $17 billion on average per day.
Forex Trading Can Be 24/7 in the Blockchain
Tomer Niv, a Crypto Investor at Entrée Capital and former Director of Global Crypto Solutions at eToro sees value in decentralized forex trading. "I definitely see value in decentralized blockchain-based infrastructure for FX trading," says Tomer.
"Blockchain technology offers an efficient way for financial transactions and settlements, and one of the most obvious use cases can be FX trading. It is mostly needed for remittance and global payments, where FX trading is at the core of the businesses.
"That is one of the reasons why we see many projects trying to disrupt this specific area, such as Ripple, Onyx by JP Morgan and even the recently-closed Diem project by Meta.
"The most interesting part of tokenized FX trading is the fact that the markets can be open 24/7, instead of 24/5 like the current FX market. The biggest challenge will probably still be liquidity, since there are many small cap currencies that require unique risk management.
"I believe that traditional FX traders will finally adopt decentralized trading once the pros will outnumber the cons, and it will happen once DeFi in general will gain more institutional traction.
"As for carry trading, integrating FX trading on DeFi platforms will enable even more options for “yield farming”, which is the web3 term for carry trading, because the assets in different DeFi protocols can be traded much more quickly and easily in order to execute trading strategies."
Transitioning from traditional forex trading into the blockchain will not take place overnight. Nevertheless, the pioneers may gain most of the retail attention.
