5. Decentralized Market

5.1. What Is a Decentralized Market?

A decentralized market is a market structure that consists of a network of various technical devices that enable investors to create a marketplace without a centralized location. In a decentralized market, technology provides investors with access to various bid/ask prices and makes it possible for them to deal directly with other investors and dealers rather than with a given exchange.

Key Takeaways

A decentralized market is a market, usually digital, where buyers and sellers can supersede the traditional method of trading within an exchange, instead dealing directly with each other. A common example of a decentralized market is real estate, where buyers deal directly with sellers. A newer example would be cryptocurrency and the blockchain system. Decentralized markets lack oversight, which can be seen as a benefit or a disadvantage. A benefit would be that costs can be low since there is no intermediary. A disadvantage would be that there are no governing authorities to monitor transactions, offer assistance, or provide a legal framework.

5.2. How a Decentralized Market Works

The foreign exchange market is an example of a decentralized market because there is no one physical location where investors go to buy or sell currencies. Forex traders can use the internet to check the quotes of various currency pairs from different dealers from around the world.

Important

In a basic sense, a decentralized market is where a variety of assets are bought, sold, or traded.

Real estate, for example, is traditionally sold through a decentralized market, wherein buyers and sellers complete their transactions without first funneling the process through some sort of clearing house. Bonds and securitized products can also be procured through decentralized markets.

The advent and rise of blockchain technology and cryptocurrency have created more opportunities for decentralized markets to operate. Through such technology and mediums, buyers and sellers are afforded a sense of security and trust in transactions without the need for a central clearinghouse to monitor and affirm the transactions.

5.3. Why Decentralized Markets Are Used

Among the perceived benefits of decentralized markets is the fact that it can greatly reduce the possibility of hackers compromising accounts or transactions because there is no single data resource they can attempt to infiltrate.

Decentralized markets can allow for transparency between parties, especially if they use technology that ensures all parties share mutually agreed-upon data and information in the transaction.

The concept of decentralized markets, in a basic sense, might not be new. As more financial transactions are conducted through them they can pose challenges for regulators and legal enforcement. By comparison, centralized markets give regulators a clear path for taking action, if necessary, regarding suspect transactions that may occur.

With the examples of blockchain and cryptocurrency, the absence of regulatory oversight of decentralized markets is often cited as a benefit by advocates for those technologies.

The continued growth of decentralized markets for financial transactions that use cryptocurrency has led to discussions on ways to potentially introduce regulation and enforcement. For some advocates of decentralized markets, this may diminish some of the benefits they sought for anonymity and direct control over the transactions they engage in.