What Is a Decentralized Market?
In a decentralized market, technology enables investors to deal directly with each other instead of operating from within a centralized exchange. Virtual markets that use decentralized currency, or cryptocurrencies, are examples of decentralized markets.
How Do Decentralized Markets Work?
A decentralized market uses various digital devices to communicate and display bid/ask prices in real-time. In this way, buyers, sellers, and dealers do not need to be located in the same place to transact securities.
- A decentralized market contains digital technology, which allows buyers and sellers of securities to deal directly with each other instead of meeting in a traditional exchange.
- A common example of a decentralized market is real estate, where buyers deal directly with sellers.
- A newer example is the virtual markets and blockchain system, which use cryptocurrency.
Click Play to Learn What a Decentralized Market Is
Examples of Decentralized Markets
The foreign exchange (forex) market is an example of a decentralized market because there is no one physical location where investors go to buy and sell currencies. Forex traders can use the internet to check the quotes of currencies from various dealers from the world.
Real estate is traditionally sold through a decentralized market, wherein buyers and sellers complete their transactions without first funneling the process through a clearinghouse.
Types of Securities
Some bonds and securitized products also may be procured via decentralized markets.
The Virtual Markets
The advent of blockchain technology and cryptocurrency have created more opportunities in which decentralized markets may operate. Typically, virtual markets are not regulated, which their proponents believe is a good thing. The technology and mediums—such as decentralized currency—of a virtual marketplace afford investors a sense of security and trust in their transactions.
The growth of markets that use the decentralized currencies for financial transactions has led to discussions about ways to introduce potential regulation. Were this to occur, fans of virtual markets may see this as diminishing their perceived current benefits of anonymity and direct control of their transactions.
What Is Decentralized Currency?
Decentralized currency, peer-to-peer money, and digital currency all refer to bank-free methods of transferring wealth or ownership of any other commodity without needing a third party. Most centralized, and some decentralized, markets use fiat currency—or physical money issued by a central bank, like U.S. dollars. Decentralized currency is used primarily in the virtual markets. Two examples of decentralized currency are bitcoin—the "coinage" used on the Bitcoin platform—and ether—used on Ethereum.
Advantages and Disadvantages of Decentralized Markets
- Some believe that decentralized markets can greatly reduce hackers because there is no single data resource that they can attempt to infiltrate; though recently this has been proved untrue.
- Decentralized markets can allow for transparency between parties, especially if they use technology that ensures all parties share mutually agreed-upon data and information.
- Many users of the decentralized virtual markets perceive their lack of regulatory oversight as a benefit—or, freedom from third-party handlers.
- The absence of intermediaries could result in lower transaction costs than in markets that are regulated.
- A disadvantage of this lack of oversight, however, might be that there are no governing authorities to monitor transactions, offer assistance, or provide a legal framework.
- As more financial transactions are conducted via decentralized markets, they can pose challenges for regulators and legal enforcement. In comparison, centralized markets give regulators a clear path for taking action, if necessary, regarding trades that might be suspect.