Employing Decentralized Trading Protocol (P2P) to Optimize Assets Allocation
9 Pages Posted: 23 Nov 2020
Date Written: September 5, 2020
"As it is the power of exchanging that gives occasion for the division of labor, so the extent of this division must always be limited by the extent of this power", (Adam Smith, 1776, Book 1, Chapter. 3). This paper deals with innovations in technology that have the potential to increase the power of "exchanging" by making decentralized P2P barter trading protocol operational in certain markets. The unprecedented growth of the market in terms of the variety of goods and services, the number of traders and the locations in which they trade make decentralized trading protocol ("exchanging") more important than ever. Economic theory suggests that the optimal "exchanging" system is a decentralized P2P barter trading in state contingent claims on current and future consumption or in securities that represent such claims. Until now decentralized trading protocols were not possible and global trade is carried out through centralized fiat money as a medium of exchange. Fiat money contributes to a market of monopolistic competition due to the power and opportunistic behavior of governments that issue money and of central banks that manage the money. Blockchain and decentralized trading technologies make it possible to replace centralized fiat money as medium of exchange where the media of exchange are tokens registered on blockchains. The tokens represent claims on current and future consumption. Decentralized trading protocols implemented on blockchain the distributed ledger technology are still in nascent stage, but once applied even to a small and limited segment of the market they are likely to expand and to contribute to optimal asset allocation in the market as a whole.
Keywords: exchange, decentralized trade, P2P transactions, fiat, token, blockchain
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