📪Decentralised Economy

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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.

Key Takeaways

  • 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.

Examples of Decentralized Markets

Forex Market

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

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.1

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.2

Advantages and Disadvantages of Decentralized Markets

Advantages

  • 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.2

Disadvantages

  • 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.2

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Difference between Centralization and Decentralization:

Basis

Centralization

Decentralization

Meaning

The concentration of authority at the top level is known as Centralization.

The evenly and systematic distribution of authority at all levels is known as Decentralization.

Delegation of authority

There is no delegation of authority as all the authority for taking decisions is vested in the hands of top-level management.

There is a systematic delegation of authority at all levels.

Suitability

It is suitable for small organisations.

It is suitable for large organisations.

Freedom of decision making

There is no freedom of decision-making at the middle and lower level.

There is freedom of decision-making at all levels of management.

Flow of Information

There is a vertical flow of information.

There is an open and free flow of information.

Employee Motivation

Employees are demotivated as compared to decentralization.

Employees are motivated as compared to centralization.

Conflict in Decision

There are least chances of any conflict in decision as only top-level management is involved.

There are chances of conflict in decision as many people are involved.

Burden

The burden of work is not shared and only one group carries the burden.

The burden of work is shared amongst all levels.

There cannot be complete centralization or decentralization in a practical world. Absolute centralization means each and every decision is taken by the top-level management, which is not possible. Similarly, absolute decentralization implies no control over the activities of subordinates, which is also not possible. So a balance should be maintained between centralization and decentralization. A proper balance between dispersal of authority among lower levels and adequate control over them should exist.