Decentralized Financial Markets v.1
Introduction
There is a set of technologies grouped under the term Web 3 that enables the transfer of value between internet users in a secure, decentralized, and private manner, with the power to modernize financial markets.
The thesis proposal focuses on the implementation of blockchain technology in the microstructure of the Mexican financial market. Specifically, it proposes to evaluate whether such an implementation is viable in technological and cost-benefit terms for the Mexican Stock Exchange (BMV), in order to determine whether it would be possible to change the current market microstructure and what implications it would have.
This proposal was presented to advisor Guillermo Zamarripa during the First Meeting with Guillermo Zamarripa and is an evolution of Decentralized Financial Markets v.0.
Blockchains
Blockchains refer to the databases that record the transaction history and store the smart contracts.
Decentralized Networks
Decentralized networks refer to a set of users who transact with each other according to a set of preset rules. These rules can establish what asset will be traded (USD, etc.), what the consensus mechanism will be, among others.
Execution of Complex Functionalities: Code Characterized by Financial Contracts
Among the aspects to consider as essential for the operation of a system like the BMV are clearing houses, central counterparties, the order of stock sales by brokerage firms (in compliance with regulation), and HFT algorithms. This is why these functionalities must be replicable through the execution of smart contracts. See Code for the discrete steps of financial asset trading.
Smart Contracts
Smart contracts refer to software that exists for the purpose of storing value in a neutral agent within a decentralized financial market. This type of software guarantees that 2 or more agents can preset conditions — in principle to do, give, or refrain from doing — that, if satisfied, will trigger a transfer of value.
Automated Market Maker
Additionally, it is proposed to evaluate whether the BMV could migrate to a decentralized platform, where a set of preset rules is established and algorithms such as Market Makers are used. This would represent an advantage in terms of not requiring intermediation, transparency, and immediacy. See AMM Algorithm for a detailed analysis of the algorithm.
One of the advantages of a digital financial market is the use of algorithms as Market Makers, which represents an advantage in several ways:
- No intermediation required: A sell order can be executed without the need for a trader or any other intermediary.
- Transparency: It can be guaranteed that the price is public and unique at every moment.
- Immediacy: As long as there is liquidity, the transaction can be executed immediately.
Research Objectives
In summary, the thesis focuses on analyzing the microstructure of the Mexican financial market and evaluating whether it makes sense to change it through the implementation of blockchain technology. The specific objectives are:
- Identify the main challenges for the adoption of this technology in an exchange like the BMV.
- Quantify the cost of implementing a blockchain solution for the transaction volume that exists at the BMV on a public Blockchain.
See also Challenges in Structuring a Decentralized Stock Exchange for the identified challenges.