What is a decentralized market?
In a decentralized market, technology allows investors to trade directly with each other instead of operating from a centralized exchange.
Virtual markets using decentralized currency or cryptocurrencies are examples of decentralized markets.
How do decentralized markets work?
A decentralized market uses different digital devices to communicate and display bid/ask prices in real time.
In this way, buyers, sellers and dealers do not need to be located in the same place to trade securities.
Examples of decentralized markets
The Forex market
The forex market is an example of a decentralized market because there is no physical location where investors go to buy and sell currencies.
Forex traders can use the internet to check currency rates from different dealers from around the world.
The real estate market
Real estate is traditionally sold through a decentralized market, where buyers and sellers complete their transactions without first passing the process through a clearing house.
Types of securities
Some bonds and securitized products can also be purchased through decentralized markets.
The virtual markets
The advent of blockchain technology and cryptocurrency has created more opportunities where decentralized markets can operate.
Usually, virtual markets are not regulated, which their proponents consider a good thing.
The technology and medium – like decentralized currency – of a virtual marketplace gives investors a sense of security and confidence in their transactions.
The growth of markets using the decentralized currencies for financial transactions has led to discussions on ways to introduce potential regulation.
Should this occur, fans of virtual markets may see this as reducing their perceived current benefits of anonymity and direct control over their transactions.
What is decentralized currency?
Decentralized currency, peer-to-peer money and digital currency all refer to bank-free methods of transferring wealth or ownership of any other commodity without the need for a third party.
Most centralized and some decentralized markets use fiat currency – or physical money issued by a central bank, such as the US dollar.
Decentralized currency is mainly used in the virtual markets.
Two examples of decentralized currency are bitcoin – the ‘coin’ used on the Bitcoin platform – and ether – used on Ethereum.
Key issues
– A decentralized market incorporates digital technologies that allow buyers and sellers of securities to trade directly with each other instead of meeting in a traditional exchange.
– A common example of a decentralized market is real estate where buyers trade directly with sellers.
– A more recent example is the virtual markets and blockchain system, which uses cryptocurrency.
Advantages and disadvantages of decentralized markets
Advantages
– Some believe that decentralized markets can greatly reduce hackers because there is no single data resource that they can try to infiltrate; but that has recently been proven untrue.
– Decentralized markets can enable transparency between parties, especially if they use technology that ensures all parties share mutually agreed upon data and information.
– Many users of the decentralized virtual markets perceive their lack of regulatory oversight as an advantage – or freedom from third-party intermediaries.
– The absence of intermediaries can lead to lower transaction costs than in markets that are regulated.
Disadvantages
– However, a disadvantage of this lack of oversight may be that there are no authorities to monitor transactions, offer assistance or provide a legal framework.
– As more financial transactions are conducted through decentralized markets, they can pose challenges for regulators and legal enforcement.
In comparison, centralized markets provide regulators with a clear path to take action, if needed, on trades that may be suspicious.
What is decentralization and what does it mean?
No precept is more sacrosanct to crypto technologists than decentralization.
An idea born out of the Bay Area “Cypherpunk” movement of the ’90s, decentralization forms the philosophical backbone of Satoshi Nakamoto’s prophetic Bitcoin white paper.
More than a decade after its publication, Satoshi’s vision for a peer-to-peer, electronic cash system has captivated a generation of innovators and unleashed a wave of decentralized currencies and applications that are reshaping industries worldwide.
While decentralized technology presents an intellectual and commercial novelty for people living in developed economies, its utility is of revolutionary significance for the 50 percent of the world living under oppressive regimes.
In countries like Venezuela, where people use bitcoin (despite its volatility) to protect their life savings from hyperinflation and avoid authoritarian financial oversight, decentralization has enabled a censorship-resistant ecosystem of monetary exchange.
Risks of centralization
This alternative crypto-economy has become crucial for Venezuelans who rely on remittance payments from family members who have fled the collapsing nation in search of better opportunities abroad.
As remittances from Venezuelan expats have increased, President Nicolas Maduro’s corrupt and bankrupt government has strong-armed remittance markets in an attempt to grab desperately needed funds.
By introducing invasive remittance laws, which aim to redirect all Venezuelan remittance inflows through state-approved financial institutions, the Maduro government has devised a centralized system to aggressively tax all foreign remittances into the country.
The net result of Maduro’s money grab is crippling transfer fees that can rise as high as 56 percent for wire transfers sent from the United States, according to Alejandro Machado, a cryptocurrency researcher at the Open Money Initiative.
Venezuela’s Orwellian banking legislation also requires domestic financial institutions to disclose IP addresses, financial data, transaction amounts, and locations of all citizens accessing their banking services from outside the country.
Further, the Maduro regime has even gone as far as blocking access to Venezuelan bank accounts managed outside the country.
While Venezuelan financial censorship highlights the risks of centralization, it has inadvertently created a thriving underground economy powered by decentralized cryptocurrencies like bitcoin and Dash.
A liberating force
Because cryptocurrencies rely on peer-to-peer exchange mechanisms that move digital assets directly from one person’s virtual wallet to another, Venezuelan expats have been able to bypass state-controlled banking intermediaries and send bitcoin to their loved ones at much lower costs.
Decentralized technology has thus emerged as a liberating force for the Venezuelan people.
Unlike state-backed fiat currencies, which are minted by central banks, cryptocurrencies such as bitcoin are mined using so-called consensus mechanisms that approve transaction blocks and issue new tokens via the majority agreement of network participants.
Therefore, any addition or modification to the blockchain, the database ledger distributed across every computer in the bitcoin network, must be approved by the collective.
In theory, this protocol construction makes it impossible for a central authority to highjack the blockchain network and modify the database to advance its own selfish interests at the expense of the group.
Decentralized precedents
A cornerstone of an emerging global movement dubbed the Fourth Industrial Revolution (4IR) by the World Economic Forum, distributed ledger technology (DLT) has impacted the 21st century in much the same way that the printing press disrupted information exchange in Renaissance Europe.
Before Johannes Gutenberg’s printing press came on the market, the Catholic Church had a monopoly on publishing throughout Europe.
All Western manuscripts had to be copied by hand by monks, a difficult task that required years of intensive manual labor.
Meanwhile, books at that time were scarce, luxury goods, limited to wealthy aristocrats, churches, monasteries and universities.
Thus, intellectual capital was ultimately concentrated in the hands of the European elite.
But with the publication of the Gutenberg Bible in 1455, the first mass-produced book in Europe, the German inventor broke the iron grip of the Church on the written word and brought the power of low-cost publishing to the people.
In the same way that blockchain technology removes oppressive establishment intermediaries from transactional contracts between peers, Gutenberg’s printing press democratized Europeans’ access to information.
The revolution will be decentralized
With some 4 billion people either debilitated by financial exclusion, oppressed by authoritarian rule, or both, decentralized cryptocurrency has the potential to free them from suffering.
For example, in sub-Saharan Africa, where millions lack access to banking services, decentralization enables the unbanked to leapfrog the financial void and receive bitcoin remittance payments directly to their phone.
Likewise, no government controls the bitcoin network.
The fundamental cryptocurrency is a borderless digital asset independent of state rule.
That means authoritarian regimes in countries like Russia, China and Turkey lack the power to freeze a human rights activist’s bitcoin wallet in the same way they can seize their local bank account.
But with the rise of blockchain forensic tools like Chainalysis and Elliptic, repressive governments can now leverage big-data technology to track bitcoin transactions and expose the owners of virtual wallets.
This is relatively easy to do because the bitcoin network permanently records data points such as wallet addresses, transaction amounts and other signifiers to the public blockchain ledger.
While bitcoin is no longer ideal for censorship-resistant transactions, decentralized innovation has kept one step ahead of surveillance with the creation of privacy coins like Zcash and Monero.
Using complex cryptographic systems like zero-knowledge proofs and ring signatures, respectively, Zcash and Monero have enforced privacy rules in decentralized ecosystems.
As Eric Hughes, founder of Cypherpunks, wrote in his now-famous manifesto 26 years ago, “We cannot expect governments, corporations, or other large, faceless organizations to give us privacy out of the goodness of their hearts, “
