Derivatives trading is the largest market in the
world at an estimated 1.2 quadrillion dollars, with
a current growth rate of 30% per year. The cryptocurrency
market is growing at an even faster rate,
and is eager for a full derivatives ecosystem that exists
within the traditional financial systems. Current
growth in centralized cryptocurrency derivatives exchanges,
which is at $1 billion daily notional value3,
indicates massive potential for the industry.
Traditional finance is bogged down by heavy regulation,
excessive cost and censorship, among other
issues. The cryptocurrency world has inherited some
of these failings and added a few of its own, including
counterparty risk, account security, identity protection,
exchange centralization and exchange instability.
Taken together, these points of friction make it
inefficient and suboptimal.
Blockchain based financial systems challenge
the status quo by providing censorship resistance,
non-repudiation, counterparty risk reduction, and
many other desirable properties to financial contracts.
Cryptography and game theory offer an opportunity
to build regulatory benefits into blockchain
A trading system has efficiency and risk management
requirements that make it usable and practical;
however, these requirements are currently only
satisfied in centralized systems. Current decentralized
exchanges are unsuitable for trading and barely
acceptable for hedging risk. Leverj aims to satisfy the
requirements for practical trading in a decentralized
system by implementing a distributed exchange
protocol executing off-chain, yet verifiable on-chain.
By supporting derivatives contracts, classical hedging
strategies can be combined with financial applications
on Ethereum. The degree of centralization
may be tunable without compromise of the distributed
nature of the protocol. This leaves room to explore
decentralized variants of initially centralized
algorithms, both of which remain distributed.
Efforts to establish markets for leveraged cryptocurrency
derivatives have focused on centralized
exchanges that traders must trust as the custodians
of their funds. In an environment where even
the biggest (Bitfinex) and most security conscious
(Shapeshift) exchanges experience loss of funds to
hacking, a focus on security using blockchain and
cryptography becomes imperative.
While decentralized exchanges are nothing new,
most of them offer poor user experience, low liquidity,
and scant traction. Most of these systems subsequently
fail to be adopted at scale.
Leverj decentralizes the most security critical features
of derivatives trading by implementing them
in smart contracts. Leverj focuses on derivatives
trading and the supporting ecosystem. We plan to
build an ecosystem of features that will enable institutions
to move into the cryptocurrency world.