liquidity pooling

In recent times, cryptocurrency participants have been pursuing the idea of pegging tokenised assets to instruments which exhibit higher price levels of stability. This is understandable as the cryptocurrency market has experienced extreme price volatility as compared to conventional markets, making it difficult for participants to rely on traditional investment schemes, businesses to accept payment rails utilising the blockchain and upcoming cryptocurrency businesses (those in particular who have funded their operations on ICOs) to hold on the fiat value of their liquidity. As well as the store of value problem, market makers require quick liquidity transmission between exchanges to capitalise on arbitrage opportunities. Through this exploition of arbitrage opportunities, the market becomes more efficient and improves price determination. 

Banking Transmission Inertia

One of the primary motivations of SDR projects is to provide an instantaneous (or close to) method of collateral transmission between exchanges, hence improving liquidity between locations and creating more depth to the market. The cost (in both time and money) of such activity is drastically reduced when the multi-currency denominated blockchain token is utilised. This is due to the inherent sluggishness of using traditional banking networks, which take several days to clear accounts, are not operational on weekends, charge fees and unfavourable foreign exchange rates (when applicable).

Foreign Currency Settlement Dependency

Transmission of liquidity between different geographic regions inherently requires exposure to foreign exchange risk, particularly when traditional banking rails are utilised. The most dominant fiat traded currency pairs on cryptocurrency exchanges are US dollar (USD), Japanese Yen (JPY), South Korean Won (KRW), Euro (EUR) and British Pound (GBP). It is no surprise that 4 of the top 5 currency pairs correspond to the SDR composition (with the Chinese Yuan not present due to political bans on cryptocurrency mining and trading) as they are the currencies of the world’s strongest economies. Hence the SDR as a reserve asset token can provide a more representative store of value for global trade and resolve the risk of running into unfavorable foreign exchange exposure. 

Speed of Blockchain

Even though cryptocurrency exchanges are accustomed to the speed of blockchain token transmission, traditional market places still incur high delays when settling between exchanges and brokerage services. Here the SDR (built on a familiar central banking standard) may show promise in both settling remarketed orders between institutions at high efficiency and reduced cost. In addition, the SDR can provide primary and secondary market participants a method of pricing traditional assets in an international reserve basket, giving more clarity to the performance of instruments relative to the global economy. 

SDR Multi-Currency Settlement Rights

One major advantage the SDR has against other alternative stablecoin projects is its inherent ability to claim a settlement right on its underlying fiat currency constituents. Here, holders of the SDR may redeem their tokens for the corresponding fiat basket. This has major implications for those participants trading on multi-exchange platforms in multi-currency denominations. Users of the SDR will also appreciate its lower foreign exchange volatility, which can be used as a safe haven in the event of uncertain market conditions.