The complex pipes that maintain moving derivative transactions are about to obtain a major increase in the effectiveness of DEFI, according to Crypto Valley Exchange.
The “Smart Clearing” protocol of Crypto Valley Exchange will reduce the capital requirements for derivative merchants by fixing the guarantee levels in light of the price correlations of negotiated assets. In doing so, this could make it more competitive with the Crypto of the consumer financial markets trying to replace, according to CEO James Davies.
Service is a new vision of a secular problem in DEFI: how to sufficiently mitigate the counterpart risk in an environment without confidence.
Traditional financial markets such as CME and Nymex rely on employees to be a confidence counterpart for each buyer and seller. They require guarantees, but barely 100%. The Defi markets, on the other hand, certainly do not have a confidence intermediary, and therefore cannot afford to require less than complete guarantees.
This system works, but barely well. More collateral requirements mean that traders have less capital to deploy elsewhere. Davies claims that this seriously limits market growth.
“This is the only place where the whole crypto is much more conservative than Tradfi,” said Davies. “We are really, really undersized in this space, and it is because the clearing is necessary to create this efficiency.”
He underlined the apparent madness to require a complete margin for transactions involving highly correlated assets, such as forms of oil.
“If I had to go there, say (Exchange commodities) Nymex as oil company and you wanted to buy petroleum and sell fuel to throw, and you asked me to put a total margin on both parties, I don’t care, because these things are 90%correlated,” said Davies.
He thinks that the same logic should apply in DEFI. “Ethereum is not going to 10,000 the day Solana goes to zero,” he said. Due to the correlation, a merchant bets that ETH will increase compared to soil should not need to publish a complete guarantee.
In his story, compensation is the missing part in DEFI’s efforts to engulf traditional finances. If the protocols acquire an ability to better manage the risk, and also do so transparently, on a blockchain, so that everyone can see what is happening and how, then they will become competitive with the financial rails they are trying to replace.
“You cannot simply build a PERPS DEFI platform for, say, treasure vouchers or goods, face Nymex or face CME, and you expect to win when you have to locate so much more guarantee than you would do to discuss these platforms.” Said Davies.
If the Crypto real asset sub-sector (RWA) keeps its promise to bring tokenized versions of everything on the chain, according to Davies, Defi will need a solution to the compensation efficiency problem like this. Institutional investors do not compensate for the requirements for the triple of collateral capital to which they are used to-in particular on correlated trades, he said.
The first user is Crypto Valley Exchange himself. Already, the future and options based on Arbitrum Dex perform the term orders dated through its intelligent compensation. Other capacities arrive later this year to support the markets of raw materials beyond the crypto, and Davies hopes that other protocols are also connected to intelligent compensation.
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