Crypto Garage, Inc., the recently launched company developing blockchain financial services and also a subsidiary of Digital Garage, Inc. announced that it has executed a trade for its peer-to-peer crypto asset derivative contract protocol based on the Bitcoin blockchain.
Blockstream, a leader in blockchain technology and financial cryptography, and Crypto Garage entered into a derivative contract that locks the future bitcoin price in order to hedge price fluctuation risk.
Crypto Garage developed a P2P derivative technology based on the Discreet Log Contracts that Thaddeus Dryja from MIT Digital Currency Initiatives proposed.
This contract is a smart contract applied to the Bitcoin blockchain and requires the agreement and posting of collateral by both parties. The agreed terms and collateral are defined on the Bitcoin blockchain. Since settlement is cryptographically secured, this contract minimizes counterparty risk, such as breach of contract and other contract termination events.
The bitcoin price for the maturity date is determined by the ICE Cryptocurrency Data Feed, as agreed upon by both parties in advance. A third party, generally referred to as the Oracle, automatically broadcasts the bitcoin price from the data feed to settle the trade.
The current contract structure for peer-to-peer crypto derivatives trade is in principle based on a traditional ISDA agreement. This causes counterparty risk, as collateral and margin are exchanged based on mutual trust. Furthermore, managing an ISDA/CSA agreement is a complex and costly operation which requires industry-specific knowledge.
More players are expected to execute P2P derivatives, where they can see the benefits of reducing counterparty risk and operational costs. In the last few years, most of the crypto market activity has been speculative, but with the development of P2P derivatives, we aim to provide an instrument that manages the risks of crypto and helps the transition to a more stable and mature crypto market.
Future works include the addition of various types of derivative contracts, and support for Liquid Bitcoin (L-BTC) and Issued Assets (Stablecoins and other tokens on the Blockstream Liquid Network).
Furthermore, Crypto Garage plans to launch an application in 2019 that creates a derivative-based smart contract in which the terms are agreed upon by both parties within the application.
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