What is PoET?
PoET is an exciting new protocol led by Yale ReiSoleil at IOB. The protocol aims to radically change the way financial transactions work today, resulting in true fair trading practice as well as improved trader control.
What does PoET offer?
PoET (derived from “Proof of Enquiries & Trades”) is a proposed financial protocol on blockchain, which provides tools for building a decentralized trading platform and portfolio management applications based on the Proof of Enquiries & Trades principles. The transparency promoted by PoET will benefit the majority of the financial participants.
At a glance, here is what PoET offers:
Promoting An Industry-wide Fair Trading Practice
Through the IOB PoET smart contracts, every order that occurred on the network is recorded automatically on the distributed public ledger, regardless whether it is filled or not. The order details and trades executed are permanently kept on blockchain.
Proof of All Enquiries
PoET addresses the price spoofing problem by recording all orders sent, not only the small fraction of executed orders. Every time an order is sent, it records its wallet address, time (accurate to a nanosecond), quantity, price, instrument, account/wallet ID, exchange(s) it was sent to.
Most significantly, all canceled orders are recorded on blockchain. The current financial markets (stocks, bonds, forex, commodity futures etc) do not report canceled orders and that leads to price manipulation abuse.
Proof of All Trades
To prevent front-running, PoET records all transactions occurred on the network on an immutable public ledger.
For investors and traders, what are the main benefits of PoET?
Despite the increased regulation in the licensed financial markets worldwide, market manipulation is still a common problem. The un-regulated cryptocurrency trading is even more susceptible to market abuses and manipulation. Rules and law alone cannot stop bad actors from taking advantages of others in an unfair way. With total trading transaction record, PoET will help prevent many existing forms of market manipulation.
Major benefits offered to the traders:
Instant Fund Transfers and Trade Settlements
Not Profiting From The Delayed Settlement and Clearing – Currently, when funds are transferred, many financial institutes remove a client’s funds from their account balance immediately while holding the funds in its own pool during the settlement and clearing process that can take several days via an Electronic Settlement. The interest payment to this balance of funds is not credited to the client but kept by the institution. If there are fees incurred or financial penalties associated with the delayed settlement, the client’s financial losses are further compounded.
The PoET protocol enables an automated instantaneous trading settlement mechanism. The smart contract directly swaps cash and assets from buyers to sellers, resulting in instant settlement.
Giving Back to Traders The Complete Control of Funds and Assets
Hundreds of millions of dollars worth of cryptocurrencies were hacked through centralized exchanges. The PoET protocol enables cryptocurrency trading without the need to trust or rely on a third-party. It uses hash time-locked contracts (HTLCs) to allow both parties to trade their cryptocurrency directly with each other without having to trust one another or a third party. It is an effective way of removing trust from the equation and thus makes trading cryptocurrency safer as the funds and assets are controlled by the traders themselves.
What is Price Spoofing?
Spoofing is a disruptive algorithmic trading entity employed by traders to outpace other market participants and to manipulate financial markets. Spoofers create artificial interest in trading futures, stocks, cryptocurrencies, and other products in financial markets creating an illusion of exchange pessimism in the market when many offers are being canceled or withdrawn, or false optimism or demand when many offers are being placed in bad faith. Spoofers bid or offer with intent to cancel before the orders are filled. The flurry of activity around the buy or sell orders is intended to attract other traders to induce a particular market reaction such as manipulating the market price of a security. In all financial markets today a majority of orders were spoofing orders and are canceled before they are executed. However, those orders do not officially exist as they are not reported or disclosed to other traders.
Spoofing can be a factor in the rise and fall of the price of shares and can be very profitable to the spoofer who can time buying and selling based on this manipulation. Under the current US laws, spoofing is “the illegal practice of bidding or offering with the intent to cancel before execution.” Spoofing is often associated with high-frequency trading which can be very profitable for the exchanges and broker-dealers as they make huge profits from the HFT and algorithmic trading.
What is Front Running?
Front-running is the prohibited practice of entering into an order to capitalize on an advance, nonpublic knowledge of a large pending transaction that will influence the price of the underlying security. This is considered a form of market manipulation in many markets. Cases typically involve individual brokers or brokerage firms trading stock in and out of undisclosed, unmonitored accounts of relatives or confederates. Institutional and individual investors may also commit a front-running violation when they are privy to inside information. A front-running firm either buys for its own account before filling customer buy orders that drive up the price or sells for its own account before filling customer sell orders that drive down the price. Front-running is prohibited since the front-runner profits from nonpublic information, at the expense of its own customers, the block trade, or the public market.
Would PoET Deter Clients from Using IOB Smart Trading™ and SmX™?
Market manipulation by high-frequency traders and bad employees at exchanges and brokerage firms is illegal in most countries, and unethical in all. While HFT has gained some glamour in the recent years, only a very small group of companies and individuals are actually capable of abusing that technological advantage in the malicious market manipulation. We know that because we are a few people who have that nanosecond technology.
Overall, the overwhelming majority of market participants are investors and traders who do not want to be taken advantage of by the manipulators. This majority is our targeted users.
IOB LLC, as well as many other institutional investors, would want our trades and positions to be protected by PoET.