Using blockchain to power better derivatives trading
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HQ version here: https://drive.google.com/file/d/1Gv7LaesacsDV9a6XpC46E-fEo2EVhlHU/view?usp=sharing How blockchain can be used to improve transparency, security, pricing, and flexibility in derivatives trading. Includes how blockchain implementations of derivatives could have prevented the 07/08 Financial Crisis
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Using blockchain to power better derivatives trading
- 1. pixelalpha.io Using Blockchain to Power Better Derivatives Trading Alex Otsu Founder, CEO Private Sale Signups are LIVE: pixelalpha.io/login.aspx A Case Study:
- 2. pixelalpha.io Objectives Today, you will understand how derivatives: Play a role in capital markets Were involved in the '07/'08 financial crisis Can be applied to crypto portfolios Are improved using blockchain technology Still have some adoption challenges within crypto
- 5. pixelalpha.io Trading: Crypto’s Killer App $250b total market cap* $9b daily trading volume* *https://coinmarketcap.com
- 6. pixelalpha.io Trading: Crypto’s Killer App 0 50 100 150 200 250 300 350 400 2010 2011 2012 2013 2014 2015 2016 2017 2018 Crypto Market Cap, Billions USD Real Growth Trend Market cap growing exponentially at 116% YoY since 2010
- 7. pixelalpha.io Trading: Crypto’s Killer App 0 2,000,000,000 4,000,000,000 6,000,000,000 8,000,000,000 10,000,000,000 12,000,000,000 14,000,000,000 16,000,000,000 18,000,000,000 20,000,000,000 4-Jan-14 4-Mar-14 4-May-14 4-Jul-14 4-Sep-14 4-Nov-14 4-Jan-15 4-Mar-15 4-May-15 4-Jul-15 4-Sep-15 4-Nov-15 4-Jan-16 4-Mar-16 4-May-16 4-Jul-16 4-Sep-16 4-Nov-16 4-Jan-17 4-Mar-17 4-May-17 4-Jul-17 4-Sep-17 4-Nov-17 4-Jan-18 4-Mar-18 4-May-18 4-Jul-18 Average Volume Daily volume growing exponentially at 109% MoM since Jan 2014
- 8. pixelalpha.io Trading: Crypto’s Killer App $250b total market cap* $9b daily trading volume* Derivatives are the next stage in the market’s evolution *https://coinmarketcap.com
- 10. pixelalpha.io What are Derivatives? Insurance policy for securities
- 11. pixelalpha.io What are Derivatives? Insurance policy for securities Massively popular because they allow traders to hedge risk
- 12. pixelalpha.io What are Derivatives? Insurance policy for securities Massively popular because they allow traders to hedge risk NV of derivatives traded in 2017 was ~18x total value of all stocks ($1.4qd vs $79t)
- 13. pixelalpha.io What are Derivatives? Insurance policy for securities Massively popular because they allow traders to hedge risk NV of derivatives traded in 2017 was ~18x total value of all stocks ($1.4qd vs $79t) Size of crypto derivatives market: $200b/daily TODAY
- 14. pixelalpha.io What are Derivatives? Insurance policy for securities Massively popular because they allow traders to hedge risk NV of derivatives traded in 2017 was ~18x total value of all stocks ($1.4qd vs $79t) Size of crypto derivatives market: $200b/daily TODAY
- 15. pixelalpha.io What are Derivatives? Insurance policy for securities Massively popular because they allow traders to hedge risk NV of derivatives traded in 2017 was ~18x total value of all stocks ($1.4qd vs $79t) Size of crypto derivatives market: $200b/daily TODAY
- 16. pixelalpha.io What are Derivatives? Insurance policy for securities Forwards Futures Options Swaps RossPhoebe
- 17. pixelalpha.io Forwards Futures Options Swaps RossPhoebe What are Derivatives? Insurance policy for securities, but they can get complicated
- 18. pixelalpha.io Forwards Futures Options Swaps RossPhoebe What are Derivatives? Insurance policy for securities, but they can get complicated
- 19. pixelalpha.io Forwards Futures Options Swaps RossPhoebe What are Derivatives? Insurance policy for securities, but they can get complicated
- 20. pixelalpha.io Forwards Futures Options Swaps RossPhoebe What are Derivatives? Insurance policy for securities, but they can get complicated
- 21. pixelalpha.io Forwards Futures Options Swaps RossPhoebe What are Derivatives? Insurance policy for securities, but they can get complicated OTC
- 22. pixelalpha.io
- 23. pixelalpha.io Derivatives in the Financial Crisis Source: https://www.youtube.com/watch?v=WMwAyDnKjyk
- 24. pixelalpha.io Derivatives in the Financial Crisis Risky debt, non-standard reporting, ineffective insurance.
- 25. pixelalpha.io Derivatives in the Financial Crisis Risky debt, non-standard reporting, ineffective insurance. CDO A CDO B
- 26. pixelalpha.io Derivatives in the Financial Crisis Risky debt, non-standard reporting, ineffective insurance. Banks’ Promises
- 27. pixelalpha.io Blockchain for Better Transparency The blockchain provides a publicly accessible, immutable, and complete history of the assets stored on it.
- 28. pixelalpha.io Blockchain for Better Transparency The blockchain provides a publicly accessible, immutable, and complete history of the assets stored on it. In cases of asset backed securities (ABS), the history extends to the creditworthiness of each asset producer as well. This is more data than financial institutions currently have access to.
- 29. pixelalpha.io Blockchain for Better Transparency The blockchain provides a publicly accessible, immutable, and complete history of the assets stored on it.
- 30. pixelalpha.io Blockchain for Better Security Non-custodial trading means no centralized pool of funds
- 31. pixelalpha.io Blockchain for Better Security Non-custodial trading means no centralized pool of funds
- 32. pixelalpha.io Blockchain for Better Security Non-custodial trading means no centralized pool of funds
- 33. pixelalpha.io Blockchain for Better Security Non-custodial trading means no centralized pool of funds
- 34. pixelalpha.io Blockchain for Better Security Non-custodial trading means no centralized pool of funds
- 35. pixelalpha.io Blockchain for Better Security Non-custodial trading means no centralized pool of funds
- 36. pixelalpha.io Blockchain for Better Security Non-custodial trading means no centralized pool of funds
- 37. pixelalpha.io Blockchain for Better Security Non-custodial trading means no centralized pool of funds
- 38. pixelalpha.io Blockchain for Better Security Non-custodial trading means no centralized pool of funds PixelAlpha takes it a step further with Intelligent Data as a Service
- 39. pixelalpha.io Blockchain for Better Security Non-custodial trading means no centralized pool of funds PixelAlpha takes it a step further with Intelligent Data as a Service
- 40. pixelalpha.io Blockchain for Better Pricing
- 41. pixelalpha.io Blockchain for Better Pricing Derivatives products create more consistent asset pricing More important than ever with cryptoassets
- 42. pixelalpha.io Blockchain for Better Pricing Derivatives products create more consistent asset pricing More important than ever with cryptoassets
- 43. pixelalpha.io Blockchain for Better Flexibility
- 44. pixelalpha.io Blockchain for Better Flexibility NYSE: 2,400 stocks listed since 1792 Crypto: 1,641 tokens freely tradeable since 2013 *Source: https://www.nyse.com/2017-year-in-review
- 45. pixelalpha.io
- 46. pixelalpha.io Blockchain for Better Tokenomics PXA is the only token designed to gain value as platform use increases.
- 47. pixelalpha.io Blockchain for Better Tokenomics PXA is the only token designed to gain value as platform use increases. Settlement only, value correlates with volume.
- 48. pixelalpha.io Blockchain for Better Tokenomics PXA is the only token designed to gain value as platform use increases.
- 49. pixelalpha.io Blockchain for Better Tokenomics
- 50. pixelalpha.io Blockchain for Better Tokenomics
- 51. pixelalpha.io Blockchain improves the derivatives experience in every way
- 52. pixelalpha.io Blockchain improves the derivatives experience in every way Transparency Security Pricing Flexibility
- 53. pixelalpha.io Blockchain improves the derivatives experience in every way Transparency Security Pricing Flexibility But there are still many challenges…
- 54. pixelalpha.io Community to the Rescue: AML/Compliance
- 55. pixelalpha.io Community to the Rescue: Fiat on/offboarding
- 56. pixelalpha.io Community to the Rescue: Liquidity Amazing advisors who are introducing us to large-scale market players who provide liquidity as a service.
- 57. pixelalpha.io Community to the Rescue: Liquidity Amazing advisors who are introducing us to large-scale market players who provide liquidity as a service. Adrian Facini Head of Product at IEX, the exchange from “Flash Boys: A Wall Street Revolt”
- 58. pixelalpha.io Community to the Rescue: Liquidity Amazing advisors who are introducing us to large-scale market players who provide liquidity as a service. Hongxuan Zhang Quant developer, Math PhD, and experienced trader in the Chinese market.
- 59. pixelalpha.io Questions? Major Topics: Derivatives primer Blockchain advantages over traditional trading Transparency Security Pricing Flexibility Challenges + partners Email: kao@pixelalpha.io Telegram: @alexotsu Sign Up: https://pixelalpha.io/login.aspx
Editor's Notes
- PixelAlpha is a derivatives exchange for cryptoassets
- Start with getting an understanding of derivatives, how they have been used (responsibly and irresponsibly) in traditional capital markets, and how blockchain can make the whole trading experience better.
- For context All started w/ the 07/08 financial crisis. Bitcoin dev’d to create hard money safe from institutions. But turned out people just wanted to trade coins. Derivatives are part of any stable ecosystem, so founded PixelAlpha to help it mature.
- Entering a new era of trading. BUT how will we make sure crypto trading doesn’t fall victim to the same greed traps as 07/08? What we are exploring today.
- Email democratized communication, first thing people did w/ internet, made serious usecase for internet.
- Including 4800% growth from Nov 2017 – Jan 2018
- Right now, there is only any money to be made when the markets are going up. Derivatives change that.
- Brief introduction
- How popular are they?
- In traditional space This very simple concept means that institutional players can enter an asset class because they have the capability to manage risk. 1.4qd is FIFTEEN zeros
- Example thesis: Buying diverse altcoins now because you think they will increase in value faster than BTC. BUT you know the altcoin market tends to follow BTC, so if its price decreases so will your altcoins. So you short BTC, so if its value decreases you recoup losses there, but if altcoin values increase more than BTC you are still profitable.
- Most derivatives are… friends
- These 4 are predictable, well studied, and have a lot of public information around them
- But there is a whole other class of derivatives which can and have had enormous consequences.
- https://www.thebalance.com/credit-default-swaps-pros-cons-crises-examples-3305920 $45 trillion in swaps in 2007
- Visual for how AAA rated assets were made out of subprime loans. Simplified version coming later. Important part is what you’re getting at the end is totally abstracted from how it starts
- The debt backing the CDOs was mortgage arranged into risk tiers, but was split up in such a way that it became essentially impossible to price. Debt was insured by CDSs, which were never tested.
- Two equally priced CDOs during crisis leadup. Both marketed and sold as secure debt. What’s the difference between them?
- The only thing that was underpinning the CDOs prices were that the banks promised. This meant the credit default swaps (insurance) were mispriced, so when all the loans defaulted AIG, Bear Stearns, JP Morgan, etc had to be bailed out. Caused $12.8t in losses by some estimates. So how can blockchain be used to do this better?
- We move from an opaque system to one where the information about the underlying assets is completely accessible. More eyes viewing = more accurate pricing. Additionally, blockchain gives us more granular levels of data as citizens start having pub key IDs associated with them so institutions can see payment history, likelihood, etc.
- Alice’s payment history stored. New “Token” (Alicecoin) made and dynamically represents creditworthiness, which is all verifiable. Same for B,C,D. Package their debt as single product, everything is seen so pricing + insurance is easier. Simple change means FC is avoided
- CDOs/CDSs are uncommon for retail From here, pertains to derivative exchanges as a whole There have been a lot of compromised exchanges in the short history of crypto because their fund pool was centralized. PixelAlpha has two key advantages: Non-custodial trading and AI user authentication. First non-custodial:
- Each wallet is distributed by PXA, but only users have access to private keys. In margin call situations, internal code executes sell orders to unwind balance back down to risk-adjusted levels. Everyone is in control of all of their funds
- But still one more problem: blockchain’s greatest strength is also its greatest weakness. Private keys are both first and last line of defense.
- To address this, we developed iDaaS, which is a multifactor AI enabled authentication system. Creates heatmap around usual activity and requires additional information if something is out of place. Even if your private key is compromised, you won’t lose your funds.
- Cryptoassets are more freely tradeable than any other asset ever because of decentralization This means there has been (and still is) TONS of arbitrage across exchanges Crypto’s more interesting challenge: more exchanges = more price variance
- A dominant derivatives platform would normalize asset prices across all the exchanges.
- PixelAlpha pulls from more than 100 exchanges in order to find the nearest right price Price is recorded on chain to create a reliable record
- Flexibility = ability to trade on any asset. Current centralized exchanges will not be able to keep up with the sheer volume of tokens that are going to be traded.
- In 2017, 88 IPOs listed on NYSE. For comparison, over 1000 coins were added in the same time. 12x growth rate. Decentralization was the ONLY way forward.
- General market architecture. Note: everything goes back to our TrueMarket API, which means that each trade is asset agnostic. Any asset that has enough market data on it to get a price can be traded. This way, platform can be flexible – can trade low leverage illiquid assets like OTC OR high frequency high liquidity ones like a trader.
- Issuing tokens on blockchain allows us to have a fixed supply, variable value asset that favors early adopters Most tokens are just coupons slapped to a blockchain and sold as “investments”. You aren’t crazy, most tokens really are useless.
- Derivatives settled: one person goes long, one short. Difference in value on the losing side is given to the winner.
- We convert that on the open market, so we are both buyers and sellers of our own token.
- Blockchain improves: transparency, security, pricing, and flexibility. But still face many challenges. For that, we turn to the community. Example of the amazing community and breadth of projects in the blockchain ecosystem.
- For institutional clients to be comfortable trading, they need to know the other users are compliant with all trading laws. Because crypto enables anonymity, exploring a datashare with compliance platforms like Civic
- At the end of the day, most people still hold fiat, want to recognize their profits in fiat, want to pay with fiat. We are partnered with AAA to give users a way to do exactly that in a way that is compliant, transparent, convenient