AirSwap is rolling out some pro tools to attract institutional investors to its decentralized exchange (DEX) for ethereum tokens.
Revealed exclusively to CoinDesk, the company is this week launching an interface for so-called over-the-counter (OTC) block trading. While to date AirSwap users have been signaling their intent to buy or sell a certain amount of tokens at a certain price on a take-it-or-leave-it basis, the new front end includes a chat feature so traders can negotiate the terms privately. Large, sophisticated investors often prefer trading this way rather than broadcasting a large order that could move the market.
The new interface also includes an identity verification system, with the ID checks performed externally by Wyre, a regulated money services business (MSB). This helps institutional players such as broker-dealers to comply with regulations that require them to know who they are trading with.
Put together, these features should address the worries that have kept DEX-curious institutional investors at bay, bringing a large amount of capital into this market, AirSwap said.
“It essentially allows your more flexibility on price and the ability to know your counterparty, assess with whom you’d like to do business more directly,” co-founder Don Mosites told CoinDesk of the new service, adding:
“With the OTC tools, this unlocks a totally new world of liquidity. This is going to enable trades of any size to happen with the AirSwap network.”
While institutions have been dipping their toes in the crypto markets for some time, it may seem odd that these highly regulated entities would take an interest in decentralized exchanges, given that such platforms were born out of anti-establishment, cypherpunk ideals.
But according to AirSwap, and some of the broker-dealer and hedge fund representatives who attended a demo day at the startup’s Brooklyn, N.Y., office last week, DEX appeals to such players for a practical reason.
Unlike the centralized exchanges where most cryptocurrency trades take place, a DEX, by definition, allows investors to control custody of their private keys.
That’s not to say all institutions want to handle custody themselves, as hardcore crypto users do. But some would prefer to choose the third-party custodian rather than handing that role to cryptocurrency exchanges, which are notoriously bad at protecting user funds.
In this way, it’s telling that BitGo, the multi-signature wallet provider, recently added support for AirSwap’s AST tokens (which traders must stake in order to advertise their intent to trade on the DEX’s bulletin board). BitGo has been courting high-end custody clients recently, and it said supporting AST was likewise a response to demand from hedge funds and other institutional investors.
Institutional and retail
AirSwap claims its DEX, which fills orders via smart contracts on ethereum, offers a more efficient way to conduct OTC trades, which today are often negotiated over Skype and can take days to settle. But the roadblocks to the institutional use of DEXs are significant.
A lack of accountability is one of the deal-breakers for big-money investors, according to Preston Byrne, an independent blockchain consultant. Most DEXs offer scant options for negotiation or recourse against bad actors.
“That’s one of the reasons you have big counterparties in transactions. It’s an insurance policy,” Byrne said.
Further, in practice decentralized systems are often less efficient than centralized platforms, which Byrne said makes investors wonder:
“Why are we paying the decentralization penalty if we’re not getting all the functionality of an OTC trade, which is individually negotiated and varies somewhat from the current market price?”
The new features AirSwap is adding are designed to address those concerns for institutional investors, whom the company has been courting since its founding last year. But it may also come in handy for projects that are seeking to get their tokens in the hands of everyday consumers.
For example, when the journalism startup Civil launches in October it plans to integrate AirSwap’s widget, which facilitates the purchase of tokens from a third party’s platform. (More than 16 blockchain projects that use ethereum’s ERC-20 standard tokens, from the adult entertainment platform SpankChain to the prediction market Augur, are integrating AirSwap widgets directly into their platforms for this purpose.)
During the first year, the only way to buy Civil tokens will be through a know-your-customer (KYC) process for consumers that proves the buyer is a reader or participating journalist who knows how to store and use cryptocurrency.
Civil CEO Matt Iles told CoinDesk AirSwap’s new KYC capabilities, coupled with its atomic swaps and price discovery mechanisms, suited his project’s efforts to grow a closed ecosystem without sacrificing liquidity.
Looking to the future, there will be ways for Civil readers to earn tokens for supporting a newsroom, sharing content, or helping to refer new members to a newsroom. As such, the OTC block trading functions could apply down the line to experts looking to convert those rewards into a more diversified portfolio.
“We’re both trying to pioneer what this consumer token world could look like,” Iles said. “AirSwap is interested in exploring this consumer space with us as something that is going to grow and become a larger part of their offering.”
Image of AirSwap co-founder Michael Oved (L), trading with investor Michael Novogratz (R), as AirSwap advisor Maxime Bucaille (standing) looks on, via Lucas Hoeffel