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Nov 02

Trading Automation: How Technology Is Redefining The Crypto Trading Business

Reading Time: 6 mins

 DeFi is on the rise, and although some investors might have missed the latest shifts, crypto trading is growing up. Wall Street brokers are often quick to dismiss DeFi instruments and protocols as wannabes, imitating legacy protocols, but that misses one important fact. DeFi insists on true decentralization and genuine value, and with that ethos the arena has grown from a mere couple of million dollars invested in rising DeFi tokens a few years ago, to a whopping $100 billion today.

Disparaging DeFi also misses the fact that it does indeed imitate legacy financial products and service providers, taking the logic and best practise it can from the centralized arena, with one important twistit doesn’t need those banks, brokers, or other vested interests that have traditionally held all the power.

It’s inevitable that in the waning of legacy money management (where banks get rich and investors get the minimum), decentralized projects definitely will look like digital versions of traditional behaviour, but there’s nothing sinister about that.

What there is, is some confusion with “crypto”, “DeFi”, “trading”, and “yield farming” being used interchangeably in the press, but new DeFi is pretty simple to understand. The word “DeFi” is an umbrella term, used to describe younger emerging tokens. Short for  “decentralized finance”, DeFi is crypto, including Bitcoin, by definition.

Bitcoin became the darling of Wall Street, however, and the most prominent reason for global regulators to introduce extensive AML and KYC legislation for digital exchanges. The new investors in decentralized ledger tokens reject that kind of bubble behaviour, and the accompanying regulation by central authority, and they just say “DeFi”.

The separation between DeFi and crypto is purely semantic, and it tries to distinguish between earlier cryptocurrencies like Bitcoin, and newer tokens that represent smarter protocols, as well as a fierce insistence on working speed and privacy. Although legacy brokers liken DeFi tokens to C-rated junk bonds at timesbig risks and big rewards, in a novel arena feeling its way forward for genuine application and valuedismissing computational technologies (which is what cryptocurrencies are) in comparison to known assets is a mistake, as Bitcoin has shown us all.


Ethereum’s Technology Is Building Billions

Talking about “DeFi” as though it’s a new crypto thing is incorrect, because the DeFi arena basically exists on the Ethereum blockchain, and that’s been around since 2015. Ever the sleeping giant, Ethereum is waking up. In many ways a better computational construct and a purer blockchain than Bitcoin for enthusiasts, Ethereum never felt the fanfare that Wall Street heaped upon Bitcoin. While Bitcoin was out wowing the crowds, the Ethereum project has been quietly growing its legitimate and far more extensive application.

In fact, DeFi presents almost as a revised Bitcoin model, with lessons learned and a new way forward, but it’s really more a case of the Ethereum blockchain finally gaining critical mass in application. Even Heath Tarbert, the current chairman of the US’ Commodity Futures Trading Commission (CFTC), has commented on “how impressed” he is with “Ethereum, full stop. Period.” Ethereum’s giant potential value on the back of its growing smart applications has been coming for a long time.

Why is DeFi so popular right now? Well, in a nutshell, especially for those who spurned the Bitcoin madness, DeFi is providing real returns and financial independence (from centralized authority). By developing smarter automation and faster processes, DeFi is bringing refined technology to the fintech arena, technology that constantly seeks simplification in automation.

Modern developments allow the token owner to manage their financial affairs on a P2P basis, without KYC and other regulations, and without the costs of third parties that define the centralized, legacy arena.

The financial services sector has been a big driver and adopter of technology, and today even fiat transactions are heavily automated in the bank’s processing, and as heavily digitized until paid out as cash. Automation’s role in the legacy arena, however, is that of aide to a central authority who ultimately approves and facilitates the transaction on hand.

DeFi, on the other hand, employs automation differently, and it allows for a host of familiar yet wholly decentralized and digitized versions of legacy phenomena, such as credit, insurance, and dividend payments.


The Basic Automation Behind Crypto Trading

DeFi exudes a particular stack of shared protocols, it’s built on a public blockchain, and it insists on putting technology dead center in financial transactions. That means no brokers, just smart contracts. Smart contracts are the blockchain component that has allowed the emergence of working cryptocurrencies from the very beginning.

Eliminating the need for human oversight (and fees), smart contracts allow for a completely decentralized ledger, and they make it impossible to steal crypto tokens from intelligent people.

Smart contracts are the automation that lies beneath DeFi transacting, and they’ve been a lynchpin of cryptocurrencies since they first emerged. Although smart contract “automation” requires users to validate a transaction, this makes it both wholly transparent, and difficult if not impossible to corrupt.

The blockchain technology behind crypto has other unique security features too, not found on other computer files. Network consensus exists in crypto trading, because blockchain files are always stored across multiple devices spread across the network.

Moreover, of course cryptography puts the “crypto” in cryptocurrencies, and along with the smart contract architecture and decentralized nature of blockchain, it’s allowed crypto trading to enjoy innovative advances over legacy trading protocols since the first token was listed. Crypto trading on the back of blockchain technology can shorten settlement times, lowers transactional fees by eliminating intermediaries, and it limits fundamental risk too, as blockchain transactions ultimately need to be pre-funded.

No matter the leverage and other instruments in play with crypto trading, blockchain transactions require funds to be present in order to transact, eliminating any possibility of the moneyless, rigged paper shuffling by trading intermediaries in legacy circles.  

This aspect of the blockchain has other implications for the automation now shaping crypto trading. The new DeFi universe is now copiously dotted with liquidity poolsavailable but owned tokens that the owners pool together for use by others within an ecosystem. The decentralized crypto exchanges employ market maker-based automated systems, while also leveraging that liquidity to feed trading.

Order books are being replaced by (pre-funded) liquidity pools for both assets in a trading pair, something that heightens legitimacy and security in crypto trading, at least in comparison to the paper thin tolerances accommodated by the legacy arena.


The Technology Allowing for Crypto Trading Automation

Because of the blockchain, crypto trading has some immediately smart attributes, like the fact that crypto trading is all contained within one ecosystemthe blockchainfurther securing trading, and eliminating the need for various parties to enable or investigate transactions across multiple platforms.

More than that, it allows for a host of ever smarter technologies to emerge that are also now a given component of crypto trading. Can we get to single-click cryptocurrency trading? Possibly. When the blockchain is a single, end-to-end platform that eliminates all of the money handlers, brokers, and other parasitic intermediaries, as far as we can tell so far, anything is possible.

Automated trading’s reach goes beyond exchanges, and in the cryptosphere many projects are currently looking for traction by providing faster and more convenient ways for users to transact, not just trade coins on an exchange. For example, the Maker Protocol is an Ethereum dapp and DAI is its stable coin.

With a market cap of billions, it was a new DeFi front runner, and allows users to earn DAI through the leverage of their collateral assets, such assets needing to be approved by Maker Governance (the Maker development community). 

It’s the local fresh produce market, digitized, on the blockchain, allowing for buy and sell, barter and swap. Ethereum’s value is finally emerging in adoption and development, and the smart contract construct is allowing for more and more secure automation in crypto trading.

Ethereum has its competitors (like EOS), but as the second largest cryptocurrency by capitalization, and with the current flurry of DeFi development trading on Ethereum’s fundamental utility, it’s unlikely anyone will arise to knock Ethereum off its perch. If anything, the world might one day see Ethereum top Bitcoin, although it was never Ethereum’s desire to be a viciously traded, top-dollar asset, but rather, simply a better way of doing things.  


Peripheral Developments That Will Aid Automation

There are other notable developments in the crypto trading arena too. The OX protocol, for one, is allowing for an off-chain order book, with on-chain settlements. A potentially very useful addition to the trading arsenal, it can alleviate a current malaise for DEX traders.

Exchanges built on the Ethereum blockchain mean that trades and orders are all taking place within a smart contract, which unfortunately also means that every order, money movement, or deposit made needs to be a blockchain transaction. With OX in play, users can sort their affairs off-chain, only having to effect settlements on-chain.

While not automation per se, protocols like OX, Stellar, and Bitshare are working around crypto trader issues, and wholesale automation is already technically possible. AI is everywhere too, something exciting to contemplate when considering what it might do for the trading of digital assetscrypto bots might actually start to show legitimate performancebut also something unknown.

When AI is expected to outperform our intelligence, being the potential sum of all of our intelligence, eventually, we can know very little about where trading automation might be in even five short years’ time. What we do know, however, is that automation is an ultimate goal of sorts. The twin drivers of our immediate future by wholesale consensusautomation and the customer experienceare likely to manifest as the desire for extreme convenience in trading, making automation a prime focus, and this in turn resulting in a high level of customer satisfaction.

Crypto trading aka DeFi yield farming aka crypto investing, is maturing, paying dividends, and gaining mass. DeFi liquidity pools are already a smart leap forward from the blunt HODL strategies and herd behaviour of crypto trading even a mere five years ago. Automation will increase as AI suffuses a now more sophisticated and dynamic arena, and will soon encompass analysis, ordering, and settlements, heading ever onwards to the goal of completely hands-off automation in the crypto trading space.


Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.


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