The first marketplaces date back to the mid-1500s. Brokers, moneylenders, and citizens would go to a specific physical location — often a city square or centrally known area — to buy or sell goods and deal with business, government, and individual debt issues.
Over time, exchanges evolved into a concept similar to what we know today. One of the first futures and options exchanges began in Chicago in 1884. The traders stood on the octogon-shaped floor and made trades in the pits by negotiating buys and sells. The bids were placed in local currency (U.S. Dollars), and while the trading was peer-to-peer, the clearing of the trade was handled by the exchange.
Eventually, advances in computing made it possible for orders to be stored in a single source of “truth,” famously named an “order book.” An order book is a list of the bids and offers in a given asset, organized and matched according to a specific algorithm. Currently, order books are both physically and logically centralized. They are physically centralized because they run on a single server, and they are logically centralized because all messages are processed synchronously.
Today, assets trade through centralized exchanges with trusted centralized parties conducting the transactions. The exchange must be in a physical location and jurisdiction, and both parties in the transaction must be in the local jurisdiction — foreign parties are not allowed to buy or sell. Orders are handled first-in-first-out, and every participant in the market is subject to the same algorithm treatment with respect to order execution.
Lawyers, bankers, brokers, clearinghouses, and governments are all part of the trading equation. But do they need to be?Removing Middlemen
A new paradigm of transaction execution called blockchain could eliminate the need for all of these middlemen.