Crypto derivatives platform Deribit is launching a new external custody solution to help with faster collateral transfers and reduce auto-deleveraging risks in tumultuous markets.
On May 14, Deribit announced its full integration of the new solution, developed by London-based digital asset infrastructure provider Clearloop.
Deribit going live w/ external custody solution for institutional traders Let's say client wants to sell covered calls but doesn't want to keep 1 BTC per 1BTC call sold on exchange. They can keep in their own custody, and sweep to trading to auto-marginhttps://t.co/YybiWLdWv3 — Su Zhu (@zhusu) May 14, 2020
The custody solution is designed to remove the need for asset managers to move their crypto from secure cold storage into hot wallets on exchanges in order to trade.
While introducing perceived security risks, transferring collateral between wallets and exchanges that can incur delays of up to one hour, depending on the time needed for confirmation on a given blockchain network.
Delays can further be compounded due to withdrawal times after the trade is settled.
Clearloop offers a solution for off-exchange settlement between parties by intermediating trades and removing self-custody risks and providing asset managers with a segregated and insured custody solution.
ClearLoop ensures that both the client and the exchange have enough assets allocated to cover it before it is opened. It then instantly settles between parties once the trade has been closed.
By making the transfer of client collateral faster, traders will be better protected against the risks of auto-deleveraging and other downsides associated with market inefficiencies.
It points to the market mayhem this March:
“On-chain transaction costs increased up to 5 times, and wait time for rapid confirmation was approx. 20 minutes. In fast-moving markets, traders are unable to add or move their margin fast enough to meet margin calls or take advantage of arbitrage opportunities. This limits their ability to trade, exaggerates price move, and can lead to significant trading losses.”
By enabling faster reaction times, traders will ostensibly be able to execute significantly higher volumes per transaction, as well as avoid limitations on the value of the crypto that can be stored in hot wallets.
The company stresses that with its solution, assets never leave the custodian environment and that all off-exchange deposits and settlements are closed within milliseconds.
Source: Cointelegraph | Image: Unsplash