With the adoption of blockchain technology, forex trading will evolve to become decentralized. How so?

The future of forex trading could become decentralized with crypto blockchain technology. Considering that there are thousands of circulating crypto coins, including stablecoins, traders can transact currencies in the form of stablecoins, just like the US Dollar or Euro.

Decentralized Forex Trading

 

What are Blockchain and Stablecoin?

Blockchain is a technology used as a digital storage or data bank system connected with cryptography. Blockchain can also be called a secure and trustworthy digital ledger because it has four primary characteristics: decentralized, consensus, immutable, and transparent.

This ledger consists of blocks containing transaction information to form a chain. That's why this technology is called the blockchain. Its use is highly interconnected with Bitcoin and other crypto assets, including stablecoins.

Stablecoin itself is a digital currency similar to other cryptocurrencies like Bitcoin and Ether. It is created with the same purpose as any other cryptos: a fast, transparent financial system that operates without centralized authorization.

But what distinguishes stablecoin is that its value is pegged to conventional instruments such as the US Dollar, Euro, gold commodities, and other assets whose prices tend to move more steadily than the general cryptocurrencies; even Bitcoin.

 

How Can Blockchain Adoption Improve Forex Trading?

The decentralized nature of blockchain technology can enable innovation in forex trading, such as decentralized and peer-to-peer exchanges. In general, here are some impacts of blockchain technology adoption on the world of forex trading:

 

Accelerating Transactions and Reducing Trading Fees

Undoubtedly, the distributed ledger technology of blockchain can reduce transaction time. In addition, blockchain can reduce the foreign exchange transaction fees commonly charged by brokers and banks. With blockchain technology, third parties or centralized authorities will be eliminated because all transaction processes can occur without their involvement.

 

Improving Security

The current brokerage system is highly vulnerable to cybercrime and market manipulation. This results in serious security problems and allows hackers to disguise themselves as traders. However, blockchain technology is capable of reducing this risk with hashing encryption before sending sensitive transaction data.

 

Using Smart Contracts

The use of smart contracts in forex trading has the potential to have a significant impact. Smart contracts are a term for programmed contracts where each agreement is recorded in codes on the blockchain. This eliminates the need for intermediaries and ensures all parties can trust the contract's execution.

In the forex market, smart contracts can automate trade execution, reduce the risk of fraud, and increase transaction speed. This is because smart contracts are transparent and secure, ensuring all participants have equal access.

 

What are the Benefits of Trading Stablecoin Compared to Forex?

Stablecoin is a regulated instrument stored in a separate account and can be accessed by anyone with internet access. There are several advantages to trading stablecoin on the blockchain compared to the currency market.

Eliminating the role of currency pairs, like in forex, will help reduce commission costs. For example, if you buy USDC stablecoin in Euro, you don't have to wait for the spot execution process to receive US Dollars. The transaction takes place instantly.

 

Earning Interest from Stablecoin

In conventional forex trading, traders can earn interest from Carry Trade. Essentially, Carry Trade is a way of trading that prioritizes profit from the difference in interest rates between traded currency pairs rather than profit from changes in the exchange rate of those currencies.

When applying Carry Trade, a trader buys a currency with a higher interest rate and sells a currency with a lower interest rate. To maximize profit, a Carry Trader buys a currency with the highest interest rate and sells a currency with the lowest interest rate.

However, with stablecoins, you can also earn interest in different ways. There are three ways you can take to gain interest from stablecoins:

  • Yield Farming. Yield farming can be done by lending stablecoin to protocols that offer liquidity rewards. This involves using your stablecoin to earn interest from other crypto assets.
  • Staking. This involves locking your stablecoin assets in a wallet for a specific period to earn interest. During the lock-up period, the stablecoin assets cannot be used.
  • Earn Compound Interest. In theory, this system works like a regular savings account. You can deposit assets such as stablecoins, Bitcoin, or Altcoins without a lock-up period or deposit limit like staking. Then, your assets will earn compound interest that can be withdrawn anytime.

 

Final Word

Decentralized markets can allow traders to see increased trading volume more transparently. Institutional traders no longer have to worry about trading in the spot market. They can use stablecoins to profit from price fluctuations without buying a specific currency pair like conventional forex trading. In other words, decentralized trading could be the next evolutionary step in forex trading.

 

Decentralization is not only beneficial for exchanges, as it is also applicable in the broader scene of the finance industry. You could learn anything about it in Defi Explained: Your Guide to Decentralized Finance