Managing Derivatives on a Blockchain. A Financial Market Professional Implementation

Abstract

This paper presents the implementation of a derivative market on a public blockchain. Managing derivatives on a distributed system requires a careful re-design of the derivatives business model. The implementation presented here provides many of the features financial professionals are used to, notably a management of collateral which is liquidity efficient. By exploiting consensus settlement and smart contract automation, our blockchain derivatives are easier to manage and carry less default risk than their traditional equivalent, a feature that becomes crucial in a permissionless system, where legal recourse may not be available. The business model and the technology described in this paper can be exploited also by permissioned blockchains to design financial markets that are more robust than the centralized, paper-based markets we have today.