INTRODUCTION
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.
PROBLEM
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.
OPPORTUNITY
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 products.
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.
CHALLENGES
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.
SOLUTION
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.
LeverJ
