Ethereum has become the center of attention in the blockchain world over the past year. Individuals and institutions can use Ethereum to create smart contracts and tokenize real world assets. Digital securities – which are tokens backed by securities or real estate – largely reside on the Ethereum blockchain (over 80%), and provide issuers and investors with numerous advantages over traditional share certificates and manual cap-tables.
In order to operate, the Ethereum blockchain relies on gas fees, which effectively power the transactions on the blockchain and allow users to create new immutable records. The fee goes directly to Ethereum miners who provide the computer power that’s necessary to verify transactions and keep the network running.
As Ethereum’s price goes up and the network gets increasingly busy, gas fees are becoming very expensive and making the technology obsolete in certain cases. For instance, ERC-20 token transfers now cost around USD 90 to complete, and liquidity pool transactions on Uniswap are costing upwards of USD 270, which is essentially making these systems unusable unless in the case of large amounts. For example, if an investor wants to transfer $5,000 worth of ERC-20 digital securities to their secondary wallet, they will effectively pay 1.8% in gas to the network.
For digital securities trading, this can be a challenge. Users are paying high fees to send their tokens to the secondary venues’ wallets, and when it comes to decentralized solutions, liquidity is becoming scarce due to the high cost of adding tokens to the DEX. RealT is an example of a digital security that is traded on Uniswap, and its trading has seen a substantial decrease as gas fees increased rapidly. In order to tackle this problem, RealT shifted to Levinswap, which uses the xDai blockchain in order to provide lower transaction costs. But the overall volume on these real estate-backed tokens is still low, and most investors just hold the assets in order to receive dividends and redeem them at a later date.
Several solutions are emerging to tackle the high gas fee and network congestion problem, from other smart chains appearing in the blockchain ecosystem (such as Avalanche) to multi-chain solutions such as Polygon (which connects Ethereum-compatible blockchains and reduces gas fees to less than a dollar). Polygon is currently the best-fitting solution, as it allows users to bridge their tokens (using third party bridging solutions) to the Polygon network, and then operate in a low transaction fee environment. The one challenge is the user interfaces and processes to bridge tokens can still be intimidating to new investors.
Digital securities face a big challenge at the moment: lack of liquidity. Trading volumes are so scarce due to lack of interconnected trading venues. In other words, the secondary market is so fragmented that users need to operate on several different exchanges in order to trade. This in turn results in low liquidity for each individual market.
The best way to increase trading is to create a decentralized solution that connects all market participants – i.e. broker-dealers – and offers seamless trading infrastructure with friendly user interfaces that incentivizes users to provide liquidity. Some are already creating this type of infrastructure, and finding creative ways to address the high gas fee hurdle.
IXSwap is building a decentralized trading platform for digital securities in order to connect broker-dealers and investors, further expanding the ecosystem and offering higher liquidity.
IXSwap has added the capability to use the Polygon network for its users in order to substantially reduce the costs of staking their native token IXS. The future for decentralized digital securities trading is likely to operate on Ethereum-compatible blockchains that reduce gas fees – at least until Ethereum 2.0 is able to reduce the high fees.