Blockchain Unshackles New Markets from Regulatory and Geographical Constraints
According to a16z Crypto investment partner Robbie Petersen, blockchain technology is breaking down traditional financial bottlenecks. Historically, the bottleneck in finance has been supply-side constraints, not demand. Blockchain has eliminated this constraint, allowing for a massive influx of new markets.
The market is a mechanism for transferring risk from one party to another. Every trade is simply an agreement between two parties to transfer a certain exposure at a specified price. Risk can be expressed along two independent axes: the underlying asset (e.g., a company's cash flow, a barrel of oil, election results, a borrower's creditworthiness) and the mechanism for transferring that risk (e.g., spot markets, futures contracts with expiration dates, perpetual swaps, options, event contracts).
Almost the entire history of finance has been a slow innovation story on one axis at a time. Spot commodity markets have existed for thousands of years, but it wasn't until 1865 that the Chicago Board of Trade (CBOT) listed futures contracts. Currencies began floating in 1971 and futures trading followed in 1972. Stock options have their roots in custom-made trading agreements dating back centuries, but it wasn't until 1973, with the introduction of the CBOE and Black-Scholes, that they became a mainstream market. Exchange-traded funds (ETFs) didn't appear until 1993.
New risk units are rare. Interest rates weren't widely tradable until 1981. Credit default swaps (CDS) introduced in 1994 provided a tool for transferring credit risk. Volatility wasn't a tradable market unit until the introduction of VIX derivatives in 2004. Event results didn't become a true market until recently, with the rise of prediction markets.
The demand side has never been an issue. Farmers have wanted to hedge their crops long before CBOT existed, and borrowers have always wanted to transfer credit risk before CDS became available. Instead, it's been supply-side constraints that have held back growth. Historically, there have been two main factors limiting supply: regulatory approval and geographical fragmentation.
Blockchain has eliminated both of these bottlenecks. It allows for decentralized issuance without requiring permission, making global distribution possible. In Petersen's view, this is the most elegant manifestation of blockchain's killer use case, it enables the creation of new markets that can keep pace with global demand.