The explosion of new digital assets over the last year has seen a new problem emerge in the growing blockchain landscape: how to centralize a purposely decentralized environment. One of the main issues of such a disparate ecosystem is that despite all the participants using blockchain technology in one form or another, there are often many steps and hurdles to executing cross-chain transactions.
While the decentralized nature of the blockchain is one of many significant benefits of the concept, for investors, the lack of standardized exchange mechanisms often raises more barriers than those that are brought down by the activity itself. For digital finance to become a viable alternative to established banks and institutions while drawing in institutional investors, cross-chain transactions must be facilitated. Otherwise, the entire digital finance system risks being turned into another network that raises costs for stakeholders and investors alike, eliminating many of the perceived blockchain benefits like speed, automation, and reduced transaction fees. (See also: Does Blockchain Technology Pose a Threat to Netflix?)
Making Sense of a Fragmented Network
The numerous benefits of blockchain are only now being explored, with many companies exploiting the advance to bring innovation to swathes of different industries. The digital finance industry has made great strides since the relatively humble beginnings of bitcoin. For instance, since the release of the first cryptocurrency, trade finance has already been revolutionized.
Just the other day, the first house purchase was officially closed with a bitcoin transaction. Besides these gains, 2016 marked the first successful cryptocurrency trade finance deal between Irish agricultural cooperative Ornua and Seychelles Trading Company which is a food distributor. The deal, which covered approximately $100,000 of butter and cheese exports, was facilitated by Barclays and Wave. It effectively transformed deals that depended on Letters of Credit while reducing overall trade finance costs. (See also: China Moves Forward on Bitcoin Exchange Closures.)
Nevertheless, these strides represent just a small fraction of the prospect and promise of blockchain technology. However, none of them are working to solve the major looming problem to cover a massive explosion of cross-chain transactions and digital asset fungibility. To delve deeper into the cross-chain conundrum, take for instance NEO, the coin by AntFinancial made popular for its open source blockchain available in China.
To purchase NEO, one must first acquire bitcoin and then buy NEO. There are numerous risk factors in such a transaction, starting with the fact that the time to execute a trade from fiat currency to bitcoin could result in losses before NEO is even part of the equation.
Should it be a particularly volatile trading session, the transaction costs may pale in comparison to the potential financial injury arising from massive directional swings in either digital currency. What is notable, though, is that these types of transactions now command nearly 25% of the entire daily transaction volume in the crypto-asset environment, according to CoinMarketCap.
Transactability Paves the Way for Institutional Players to Enter
For institutional investors, these cross-chain hurdles pose a huge obstacle to large-scale allocation and investment. When single investments range in scale of millions to the billions at stake, an institutional investor or fund expects absolute security and transparency.
Lightning Network has come up with a novel solution which involves two parties making a smart contract swap arrangement to handle a trade without a third party or taking money off the chain which is costly and time-consuming. However, it lacks the sort of depth that would be required by an investor of serious scale. Enter Legolas, the new bank-backed exchange designed to deliver the assurances demanded by institutional players.
Developed by CEO Frederic Montagnon, the co-founder of TEADS, which earlier this year was acquired by Altice, Legolas intends to allay many of the fears preventing more widespread crypto-asset adoption by institutional investors. With backing and advising from noted Harvard-educated quantitative fund manager Elie Galam, this new model of accountability is designed to help meet the demands of this burgeoning group of investors.
Backed by Luxembourg-based BankQix, Legolas plans to bring accountability by publishing all its transactions in a public blockchain, helping alleviate concerns about theft and overall transparency. Apart from its commitment to investor safety and security, the exchange is able to handle larger transactions beyond the scope of existing exchanges without fears of front-running or other potential forms of manipulation.
Furthermore, with the ability to convert large amounts of fiat currency with relative ease thanks to BankQix, Legolas has built a system that centralizes fiat-to-crypto transactions alongside cross-chain transactions. Together, these activities hope to reduce the multi-stage process that typically defines investing in ICOs and other blockchain-related assets.
Cross-Chain Transactability is an Imperative
For the era of digital finance to truly blossom, it must be able to accommodate investors of all shapes and sizes alongside transactions that bridge chains without requiring multiple stages. While the space is proliferating for now, it will require greater levels of adoption to really bring the industry to the mainstream.
The inability to easily perform cross-chain trades has proven to be a significant hurdle to more widespread institutional acceptance. With a solution on the horizon, cross-chain transactability paves the way for a more liquid crypto-asset marketplace to grow and thrive while making digital finance a relevant substitute for more traditional systems.