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ERC-6123 is an open-source standard for creating and managing derivative contracts on blockchain networks. By leveraging ERC-6123, market participants can benefit from a more streamlined, secure, and efficient approach to derivatives management, addressing many of the challenges present in traditional OTC markets.

ERC-6123 Deep Dive

The over-the-counter (OTC) derivative markets experienced significant growth in 2023, with outstanding derivatives increasing by 8% to reach $667 trillion!

The over-the-counter (OTC) derivative markets experienced significant growth in 2023, with outstanding derivatives increasing by 8% to reach $667 trillion. This expansion was primarily driven by interest rate derivatives, which grew by 8% year-over-year, and foreign exchange derivatives, which saw a 10% increase.
 

ERC-6123: Rethinking Financial Derivatives is a deep dive into the ERC-6123 standard for managing and settling derivatives contracts compliant and regulated manner on Ethereum and EVM-compatible networks.  This comprehensive report features use cases, technical breakdown and inishgts from industry experts, clarifying the mechanics, challenges, and opportunities of the ERC-6123 standard. 

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Source: OTC Derivatives Trends – Source: BIS

ERC-6123: Rethinking Financial Derivatives

Managing and settling derivatives contracts in the traditional OTC derivatives market is complex, manual, and inefficient, leading to high operational costs for market participants. Counterparty credit risk is a major concern for both parties in a derivatives contract. This risk is typically managed through several mechanisms: a) Credit Valuation Adjustment (CVA), a pricing adjustment that reflects the market value of counterparty credit risk. This adjustment results in higher costs for the parties having higher credit risk, b) Regulatory capital charges imposed on financial institutions to cover potential losses from counterparty defaults. These requirements tie up significant capital, reducing overall market efficiency and increasing costs, c) Netting agreements, which allow for the offsetting of positive and negative exposures between counterparties, reducing overall credit risk exposure, d) Collateral requirements, where parties post liquid assets against their positions to mitigate potential losses in case of default.

These operational requirements and risk management practices contribute to the complexity and cost of OTC derivatives trading.

 

ERC-6123 offers an open-source standard for creating and managing derivative contracts on blockchain platforms.

 

ERC-6123 Overview:
 

  • Smart Derivative Contracts: ERC-6123 is an Ethereum Virtual Machine (EVM)-based standard for creating Smart Derivative Contracts (SDCs).

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  • Immutable: ERC-6123 enables the creation of self-executing, transparent, and immutable derivative contracts on EVM-compatible networks.

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  • Full Contract Lifecycle: ERC-6123 provides a standardized interface and functions for initiating, confirming, and settling derivative trades.

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  • Automation and Efficiency in Derivatives Lifecycle: Utilizes smart contract technology to automate key aspects of the derivatives lifecycle, reducing counterparty risk and increasing efficiency.

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  • Eliminating Counterparty Credit Risk:  ERC-6123 is designed to remove counterparty credit risk, a significant concern in traditional over-the-counter (OTC) derivatives trading, and aims to bring the benefits of decentralization to the traditional derivatives market.

     

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ACCESS THE ERC-6123 DEEP DIVE REPORT

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Learn how ERC-6123 contributes to improving infrastructure Supporting OTC Derivatives Markets.

 

This report demystifies the technical facets and showcases its potential strategic advantages to the financial services industry.  Participants that have contributed their expertise and insights include contributors from DZ Bank, Tokenovate, the Enterprise Ethereum ALliance, Hacken, Kaleido.
 

Discover the Framework: Learn the structure and functionality of ERC-6123.


Strategic Adoption: Explore how to implement ERC-6123 within your DLT-based FMIs.


Future-Proof Your Operations: Understand the implications of adopting the ERC-6123 and how it can help with compliance and market competitiveness.
 

See our latest webinars on the future of FMIs

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