The complex pipes that maintain derivatives in motion are about to obtain a great impulse of defi efficiency, according to Crypto Valley Exchange.
The “Intelligent Compensation” protocol of Crypto Valley Exchange will reduce capital requirements for derivative merchants establishing guarantee levels in light of the correlations of the negotiated assets in the price. In doing so, I could make Defi more competitive with the main Crypto financial markets that try to replace, according to the CEO James Davies.
The service is a new version of an ancient problem in Defi: how to mitigate sufficiently the risk of counterpart in an environment without trust.
Traditional financial markets such as CME and NYMEX depend on the cleaning are a confidence counterpart for each buyer and seller. They demand some guarantees, but just 100%. Defi Markets, meanwhile, definitely lack a trust intermediary, so I cannot afford to require nothing less than a complete guarantee.
This system works, but just good. More guarantee requirements means that merchants have less capital to deploy elsewhere. Davies states that this severely limits market growth.
“This is the only place where all cryptography is much more conservative than tradfi,” Davies said. “We are very, very underlined in this space, and that is because compensation is necessary to create this efficiency.”
He pointed out the apparent madness of requiring a complete margin for trades involving highly correlated assets, as oil forms.
“If I had to go, let’s say [commodities exchange] Nymex as a oil company and wants to buy oil and sell fuel for airplanes, and asked me to leave a complete margin on both parts, I would laugh at you, because those things are correlated in 90%, “said Davies.
He believes that the same logic should be applied in Defi. “Ethereum does not go to 10,000 the day Solana is going to zero,” he said. Due to the correlation, a commitment to the merchant that ETH will rise in relation to Sol should not need to publish complete guarantees.
In his narrative, cleaning is the missing piece in defi’s effort to engulf traditional finances. If the protocols obtain the ability to better manage the risk, and also do so transparently, in a block chain, so that everyone can see what is happening and how, they will become competitive with the financial rails they try to replace.
“You cannot simply build a percip platform defi to, for example, treasure bonds or products, face NYMEX or face CME, and wait to win when you have to block much more guarantees than you would do to negotiate on those platforms.” Davies said.
If the real world asset (RWA) asset of Crypto offers his promise to bring tokenized versions of everything in the chain, according to Davies, he will need a solution to the compensation efficiency problem like this. Institutional investors will not support the requirements for triple the collateral capital to which they are accustomed, especially in correlated operations, he said.
The first user is Crypto Valley Exchange itself. The future and options based on referee Dex execute futures orders dated through its intelligent compensation. More capabilities are at the end of this year to support basic products markets beyond cryptography, and Davies also expects other protocols to connect to intelligent cleaning.
