Counterparty risk refers to the situation where one of the parties in a financial transaction fails to fulfill their commitments. In the traditional market, stocks, bonds, and derivatives carry counterparty risk. In addition, the delivery risk is considered in trading any physical goods or resources.
Underestimation of counterparty risk led to the 2008 financial crisis. Banks lent mortgages to subprime borrowers who couldn’t pay off the loan, triggering adverse market events. The traditional finance system is centralized and aims to mitigate counterparty risk by introducing regulations through governments and institutions, and that is why, in 2008, many of the accountable parties for the crash faced jail and hefty fines.
It is a slightly different situation in the cryptocurrency markets. Although blockchain networks are fixed ledgers that can’t be maliciously altered, counterparty risk is still present in many aspects of the cryptocurrency industry. Moreover, the industry is still very underdeveloped, leaving a lot of space for any type of fraud or inefficiencies.
Infrastructure and applications built on a blockchain technology base are emerging at an astronomical pace in 2022. Users can trade, store and stake their funds on hundreds of platforms. However, those platforms can differ in their architecture, such as centralized, decentralized, or hybrid structures, and can all be compromised due to the lack of cybersecurity best practices. Even with the best cybersecurity framework in place, platforms are still at risk and this is why cybersecurity teams in crypto need to be monitored 24/7.
Blockchain technology cannot be altered, but the applications built on blockchain technology are vulnerable to cyberattacks – a typical attack is a reentrancy attack, which occurs when a function makes an external call to another untrusted contract. The untrusted contract then calls back to the original function in an attempt to drain funds.
Since crypto’s inception, there have been countless hacks attempted on centralized and decentralized exchanges. In 2014, hackers stole over 850,000 BTC from Mt.Gox, a centralized exchange worth $460M. There are also innumerable examples of hacks and rug pulls for decentralized exchanges, which is a practice of fraud where an organized cell pumps up the price of a token and sells as many of the tokens as possible against the AMM liquidity pool before their price drops to damaging numbers. Conversely, regulation forbids these types of malpractices in the traditional finance world, and accountable parties are investigated and dealt with accordingly by local law enforcement.
When it comes to liquidity aggregation and counterparty risk, there are several aspects of the process that could impact counterparty risk, such as the quality of security of the counterparty platform we are trading against, the smart order router architecture, and the settlement solutions.
The automated nature of smart contracts can eliminate some of the transaction risk points where counterparty risk still exists. Blockchain technology allows smart contracts to work without the need to trust any party except the smart contract itself. Therefore, the security of a smart contract is a vital component when it comes to counterparty risk in DeFi.
In DeFi, there are several forms of counterparty risks. Adverse selection and principal-agent conflict are two of the most typical prevalent cases in DeFi.
Adverse Selection: Adverse selection describes a situation wherein sellers have more information about a product’s quality than buyers or vice versa. In other words, it’s a situation in which asymmetric information, also known as information failure, is used.
Interest rates are transparent, open-source, and substantiated on the borrower side. Moreover, since the lending code is immutably stored on the blockchain, the methodology described perfectly translates to the final product. On the lending side, the present state of DeFi means that only overcollateralized loans can be made; adverse selection becomes purely a function of accurate collateral value, which is less of a concern when assets are liquid.
Principal-Agent Conflict: The principal-agent dilemma is a conflict in priorities between a person or organization and the representative authorized to act on their behalf. An agent may operate in a way that is not in the principal’s best interests. This conflict originates from a misalignment of incentives between those who invest in the platform, such as liquidity providers or lenders, and those who control it.
In this situation, a few active investors influence most platforms’ governance with high governance token stakes that have an aligned, long-term interest to support best practices for the platform’s health, much like the shareholders of a big firm. While many platforms transfer all risk to end-users, for example, by offering to exchange tokens without serving as a counterparty, others may take on some risk to ensure the platform’s long-term viability.
To better align objectives, a principal-agent problem may necessitate modifying the incentive structure, enhancing data flow, or both.
Post-crisis laws need to be centrally cleared or bilaterally minimized using approved regulatory methods to limit counterparty risk. However, smart contracts and distributed ledger technologies may provide an easier answer.
The ability of exchanges and liquidity nodes to source liquidity across blockchains effectively, compliantly, and transparently remains a critical concern as the virtual asset, and the token market expands into a multi-trillion-dollar business. Today, even large multibillion-dollar exchanges rely on inefficient, delayed, and costly liquidity sources with considerable counterparty risk.
FLUID was created to disrupt these inefficient and opaque virtual asset liquidity providers with a blockchain-based frictionless solution that replicates institutional level liquidity aggregation in the global FX markets using best-in-class MPC wallet overlaid with blockchain technology. FLUID will achieve this by implementing mature A.I. and Machine Learning technologies into practice that the team developed in the past.
FLUID is also deploying a solution to address the issue of order cancellation in cross-exchange transaction execution, removing counterparty risk.
The capacity to do so opens up new win-win prospects for exchanges, liquidity nodes, and other pools of cross-chain liquidity, including increased operational efficiency, lower costs, increased capital utilization, improved end-user experiences, and new product development frontiers.
Korea's premier crypto and blockchain event, Korea Blockchain Week, saw crypto enthusiasts from around the world converge in Seoul for inspirational keynotes, panel discussions, pitch competitions, investor meet-ups, and world-class networking opportunities.
The year 2021 was unquestionably a turning point for the cryptocurrency industry, with Bitcoin repeatedly reaching its record high, albeit with some significant losses. Ethereum, the second-largest cryptocurrency by market capitalization, experienced some of this too, as it climbed to its highest price yet.
The crypto industry is constantly evolving, but there are still some challenges that it has to tackle for institutional adoption. Crypto exchanges do have issues, many of which can ultimately hurt users.
The recent decline in the cryptocurrency market has shocked many, including seasoned professionals. The phrase "DeFi Summer" is developing meaning in 2022, 180 degrees out of sync with the heady times that gave rise to the phrase just two years prior.
This week’s FLUID Live featured FLUID’s CEO and President, Ahmed Ismail, and Head of Marketing and Communication, Matias Jeldrez, who addressed our community’s queries regarding the TGE and FLUID Rewards.
A stablecoin is a cryptocurrency whose value is linked to another asset class, such as a fiat currency or gold, to stabilize its price.
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Liquidity aggregation is not a new concept in the financial industry. On the contrary, it has been used as a solution to tackle fragmented liquidity for many years across conventional financial systems.
Over the last decade, artificial intelligence has snowballed, and no business or industry today is immune to its influence and pervasiveness. This is more evident in the financial services industry, which is constantly evolving and realizing that AI is a transformational technology.
The DeFi industry has the potential to disrupt the TradFi industry by using blockchain-based applications and services to replicate banking, investing, and trading activities. Many TradFi services already have a DeFi counterpart, and more are on the way.
Blockchain-based technologies have surged in popularity over the years. Time and time again, efforts have been made to promote awareness of this relatively new phenomenon. The decentralized finance (DeFi) sector is undeniably thriving, with the total value rising from $700 million in December 2019 to over $200 billion at the beginning of 2022.
The internet that we know today has traversed a long way since its inception. Web1, the first internet, had a physical infrastructure of cables and servers that allowed people and computers to communicate with one another. The ARPANET Network of the United States government sent its first message in 1969, but the web that we know today didn't exist until 1991, HTML and URLs allowed people to browse between sites.
Over the past 48 hours, the FLUID team has been closely monitoring the current climate and the impact FLUID can play in helping to reduce huge volatility in the face of black swan events such as the UST downfall.
FLUID has compiled a list of the most important headlines from the past couple of months, including Kraken's new operating license in Abu Dhabi, Ukraine's cryptocurrency legalization, and New York's two-year crypto mining embargo.
Despite Dubai's popularity as a trading epicenter, the UAE government has sought to transform the city into a global hub for digital asset trading. According to Bloomberg, the Dubai Multi Commodities Centre (DMCC), the UAE's largest deregulation zone, had built up an administrative structure for crypto companies in March 2021 and had already recognized 22 crypto-blockchain entities.
FLUID, the ultra-low latency liquidity aggregator that uses AI quant-based models to tackle inefficient fragmented liquidity in virtual asset markets, has announced it will integrate the LERC20 standard of Lossless to power its $FLD token with hack mitigation capabilities of detecting fraud, freezing fraudulent transactions, and reversing stolen funds.
The term liquidity has various financial meanings that are often used interchangeably and can be very confusing; it could refer to the ease of how an asset is exchanged for another without affecting the market price, how much liquidity a company holds, aggregating liquidity from different sources, or providing access to liquidity.
FLUID LP – FLUID’s DeFi solution – will utilize Polygon as its commit-chain to provide ultra-low transaction fees at speed.
FLUID is a game-changer for the virtual assets industry in liquidity aggregation and provides high throughput, ultra-low latency and costs, and zero counterparty risk through AI quant-based solutions
Cryptocurrencies saw values soar in 2021 when some investors sought a haven from the inflationary pressures. Additionally, retail consumption spiked across the industry, with data revealing that global crypto use had increased by more than 880 percent last year.
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Trading technologies have evolved significantly over the years. The traditional finance trading technology evolved from a simple electronic order book to an ultra-fast, interconnected, AI-supported unified liquidity, allowing investors and institutions to facilitate advanced trading strategies.
Virtual assets are known for their volatility. Even though the virtual asset market is considered volatile, with the recent digital assets trading and investments boom, many institutional investors seek greater involvement.
As the DeFi industry exceeds growth forecasts, it has now significantly attracted more interest from financial institutions and regulatory bodies.
FLUID is the trading system that consists of an AI-based smart order routing protocol and cross-chain liquidity aggregator enabled by FLUID’s proprietary hedging pool providing high throughput at ultra-low costs, ultra-low latency, and zero counterparty risk.
Most present-day centralized crypto exchange platforms use custodial trading.
Liquidity is the measure of ease to which a cryptocurrency asset can be exchanged/traded into another crypto asset or fiat currency.
Regulation of exchanges and more broadly the infrastructure enabling the trading and exchange exchange of virtual assets has been a widely discussed hot topic that has over 2021 and 2022 graced many government bills.
It’s no secret that the crypto-verse moves at blazing speed with many projects finding success in disrupting the disruptors. So while DeFi protocols like yield farms and DEX’s were at a high last year, the flood of multiple similar platforms have prompted the rise of DEX aggregators like 1inch and 0x.