Picture this: you’ve invested in a commodity through a broker and since then, the value has appreciated significantly. You decide that you want to sell your shares and cash out, but at the last moment part of it goes missing – leaving you with less than what you could have had. Sound familiar?
This is exactly what happens in derivatives trading. With settlement delays, brokerage fees, transfer agents and hidden fees in the background, the commodities trading sector often works in favour of brokers and financial institutions rather than investors. A blockchain startup called Lucid Exchange offers a solution through smart contracts that puts the power back into the hands of investors when trading derivatives.
Fees of Over-the-Counter Derivatives Trading vs. on Lucid Exchange
A few of the major costs associated with derivatives trading are outlined above, but let’s take a deeper look at these to understand how Lucid Exchange can help reduce trading fees.
Brokerage Fees & the Trust Factor
If you’ve ever invested in the stock market through a broker, you know which fees I am referring to. Brokers take a commission on every trade made by an investor. For example, if you want to buy a stock or commodity, you can either get charged a flat-rate by the broker or a percentage of total assets invested. Essentially, the broker takes a fee every time he or she does something in your portfolio – so, by that logic you are charged a premium once when you buy and once when you sell regardless of your return on investment. Keep in mind though that fees vary depending on the brokerage firm or financial institution.
At this point, you might be asking yourself why we use brokerage firms in the first place. Some would say that it is because it’s a neutral third party that we trust will do the right thing with our money. But, when there are episodes such as the 2008 Global Financial Crisis, it might be time to ask ourselves whether or not investor money is actually being used for its intended purposes. And, more importantly whether or not we should trust intermediaries to care for our hard earned money.
Lucid Exchange takes care of these two problems at once through a peer-to-peer derivatives trading platform that eliminates all transaction fees. The startup has developed a platform through which investors can effectuate trades free of cost by entering into a smart contract that will self-execute the terms once the set conditions have been met. Lucid Exchange creates a new face for the commodities trading sector with trust at its core. This is because they believe that transparency and trust are lacking in traditional system used in the commodities trading sector. The operations of their platform are based on a trust protocol of transparency, community and control so as to ensure that investors money is invested as it was originally intended.
If you are trading derivatives, settlement delays might be costing you more than you think. Though as an investor, you may decide on the value of the underlying asset at which a derivative should be traded, all of the contracts are executed manually by the brokers. If brokers are expected to put each trade through for every portfolio, then you can understand that there is a delay between the moment at which the underlying asset reaches a desired value, and the time at which the trade actually goes through. This means that depending on the direction and the magnitude of the fluctuation, the returns on investment can also vary.
Through the use of smart contracts, Lucid Exchange is able to eliminate this problem. The terms of a smart contract, such as the value at which a derivative should be traded, are coded in. Therefore, once the value has been reached, the smart contract will self-execute at that exact moment and fulfill the conditions outlined in the contract. Derivatives will therefore be traded at the desired value and there will be no uncertainty regarding your returns.
Transfer Agent & Hidden Fees
If you haven’t heard of transfer agents yet, then it might help you understand what those extra costs are going towards. For every trade that is completed in the derivatives market, a record is made manually and it is not uncommon for a fee to be charged. These fees are often part of the hidden fees that investors can be charged. Though it may not be a large amount of money, fees add up quickly and begin to chip away at profits.
Since Lucid Exchange is based on blockchain technology, investors using the platform can benefit from the technology’s built-in assets: its transparency and decentralisation. Each time transactions are processed on blockchain, a record will be automatically added to the technology’s immutable ledger in real-time. Simply put, blockchain will circumvent transfer agent delays and fees by automating the entire recording process, in addition to increasing transparency. Investors will be able to see when, with whom, and at what price their derivatives were traded, meaning there will be no surprises or hidden costs when trading in the commodities sector.
The Future of the Commodities Trading Sector
Lucid Exchange is leading the path towards a freer and cheaper method of financial trading. The only cost associated with using the platform will be those associated with acquiring Lucid Coins (TRD), which will be put into smart contracts to power trades. An important thing to note about Lucid Exchange is that they are in the process of registering with the U.S. Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) in order to become the first blockchain based derivatives exchange platform.
By using Lucid Exchange, investors will finally be able to see when their trades go through without paying astronomical fees – and that idea is what drives the team behind the project.