The Impact of Distributed Ledger Technology on Asset Trading – 3 Examples

The Impact of Distributed Ledger Technology on Asset Trading – 3 Examples

Oct 5, 2023 4 minutes

Distributed Ledger Technology is changing the way assets are being traded today. Read how settlement is accelerated and trust is created in a decentralized way and what advantages smart contracts and tokenization have.

Table of Contents

Distributed ledger technology (DLT) has the potential to fundamentally change the way assets are bought and sold, and increase efficiency and transparency in financial markets.

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What Is Distributed Ledger Technology?

Distributed Ledger Technology (DLT) uses independently operating computers (nodes) to save, share, and synchronize information on a decentralized basis. It is sometimes also referred to as blockchain technology. The term originally comes from Bitcoin. The blockchain is the DLT that underlies the most famous cryptocurrency. The “chain” on a distributed ledger arises from an encrypted sequence of data blocks that have been verified and validated by a decentralized network.

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DLT leads to fundamental differences compared to traditional databases that keep information in a central location. Here are three aspects where these differences emerge:

1. Settlement Becomes More Efficient

With DLT, the trading and settlement of assets are no longer separate steps. This is known as atomic settlement. Settlement takes place immediately, not with a two-day interval (T+2) like on conventional stock exchanges.

All parts of a transaction are executed together or not at all. Incomplete execution, which could lead to discrepancies, is prevented. Accordingly, the term “atomic” refers to the indivisibility of atoms. In a similar sense, atomic settlement describes indivisible transactions or all-or-nothing transactions. There is no longer any counterparty risk, making collateral management more efficient. Capital and liquidity costs potentially decrease.

2. Trust Can Be Established Decentrally

Implemented as a private blockchain, DLT is used for a network that is closed to the external world. This means that only previously approved and onboarded participants can perform actions in a trustworthy, sometimes even regulated, (e.g. SDX) environment.

In a public blockchain, however, anyone can participate without restrictions. A public blockchain is an open network and the opposite of a private blockchain. Security and trust in transactions are not guaranteed centrally, but by the decentralized nature of DLT – control of the data remains with users – and by smart contracts.

Smart contracts can perform similar functions to banks and exchanges, such as lending or trading. A smart contract enables the contracting parties to interact directly with each other without first establishing a common basis of trust or interposing a trusted entity. As soon as certain conditions are met, a code is automatically executed, for example triggering a payment. Since smart contracts run on DLT, they cannot be manipulated.

3. Additional Types of Assets Become Tradable

Both digital securities and cryptocurrencies can be described as tokens. The latter are a form of payment token. In the case of the digital securities, these are asset tokens. These tokens document ownership based on the DLT property rights in the digital world. DLT will make it possible to create asset tokens based on assets that previously could not be traded on a stock exchange, or only with great difficulty, such as real estate, carbon offsets, and art.

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Five Advantages of Tokenized Assets

Making physical assets tradable is just one benefit of so-called tokenization. Here are five more:

  1. Divisibility: Tokenization allows assets to be divided into smaller units, making it easier for investors to access them. For example, an expensive painting could be divided into many smaller tokens, creating shares for every budget.
  2. Liquidity: Traditional assets such as real estate are often not very liquid. Tokenization allows these digital tokens to be traded on specialized trading platforms. This opens up the market for these assets.
  3. Automatization: By using smart contracts on DLT, transactions can be automated. For example, dividends or rent payments can be automatically distributed to investors based on the conditions formulated in the smart contract.
  4. Efficiency and transparency: DLT provides a transparent and immutable record of transactions. This reduces intermediate steps and creates trust.
  5. Global accessiblity: Tokenization allows investors worldwide access to assets that might otherwise be geographically limited.
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SDX: Finger on the Pulse of Digital Assets

In 2018, SIX recognized the revolutionary nature of distributed ledger technology (DLT) and started its journey with SIX Digital Exchange (SDX). As the name suggests, the goal was to build a fully integrated platform for the issuance, trading, settlement, and custody of digital assets – and to do so in a secure and regulated environment. Since 2021, SIX has had equivalent licenses for SDX as a trading platform and central security depository as it has for its traditional infrastructure. But today SDX is far more than a digital exchange. SDX is an infrastructure that forms the foundation of an entire ecosystem for digital assets.

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