A Conversation With LGO Markets Founder Hugo Renaudin

Decentralization may have become the guiding trope for crypto enthusiasts but Hugo Renaudin, founder of LGO Markets – a startup with a digital asset management platform, is less than impressed with the concept. “You cannot work in a fully decentralized way,” he says. As an example, he points to the settlement process for a trade. “You are trusting the market (and not the counterparty) in the process.”   

Among the multiple problems hampering adoption of cryptocurrencies among traders, the absence of a reliable trading infrastructure is the most important. Cryptocurrency exchanges, which have been subject to hacks and routine price surges, are still to come into their own as OTC markets garner a bulk of trading in the asset. LGO Markets claims to solve that problem by creating secure and transparent trading venues.   

An Annoying Introduction to Cryptocurrency Trading 

Renaudin was introduced to cryptocurrencies in 2015 while still in college. He’d already invested ihis own money in them. Through friends, he was introduced to the founder of Bitspread and, subsequently, worked as a trader with them. His job was to arbitrage bitcoin price between different crypto exchanges. The experience soured him on crypto trading.  

In mainstream markets, a plethora of indicators – news, analyst reports, or quarterly earnings – are triggers for price movement. But crypto exchanges have baffled traders. Bitcoin scaled new heights last year even as economists criticized the coin and governments clamped down on its use. This year is a different story and the cryptocurrency has not reversed its prolonged slump even after a slew of positive news about the entry of institutional investors into the space. “The market is completely opaque,” says Renaudin. “You don’t know why it’s up or down and it’s completely annoying.” 

Over time, he distilled the cause of his annoyance to two reasons. The first one was a lack of transparency about transactions occurring at exchanges. “If you are using data as a signal, then exchanges post fake volumes,” says Renaudin. Some reports also surmise that bitcoin whales, or holders of large stashes of cryptocurrencies, move markets with their trades. Still others accuse prominent exchanges, such as BitMex, of betting against their own customers. The SEC has recently started investigations into price manipulations of Tether, a stablecoin that trades at parity with USD. 

The second reason for Renaudin’s annoyance was the lack of trust between various stakeholders involved in the trading process. This absence of trust is best exemplified by the jumble of connections in a trade involving cryptocurrencies. Exchanges often act as custodians of their holdings by storing coins. They also clear trades by functioning as clearinghouses. In effect, traders are forced to include the risk of their holdings going bust, if the exchange goes down. The numerous hacks and breaches over the years have only added to their worries. When he was trading, Renaudin says they distributed funds between multiple exchanges, sometimes as many as 10 to 20, to avoid a complete loss. “But that is not a good strategy,” he says. 

A Clean Process  

As with most entrepreneurs, Renaudin says he built LGO Markets to solve his problems with current crypto trading infrastructure. The potential of cryptocurrencies to act as a medium for exchange of value representing security ownership also excited him. “Once you see that current incumbents like traditional exchanges are not made to handle digital asset-based transactions, the potential becomes clear,” he says. 

The starting point for Renaudin was a breakup of the monolith that is a cryptocurrency exchange. “In cryptocurrencies, there is one big bank account or a big wallet (to trade and store your cryptocurrencies). One entity does the entire trade execution,” he says. “There are no checks and balances.” Renaudin drew inspiration from the current structure of capital markets and the three distinct entities – exchanges, clearinghouses, and custodians – that facilitate investor trade execution. 

“We bring a clean process and we apply it to crypto,” he says. The startup’s whitepaper describes the exchange’s architecture as “fair by design” because it is verifiable and multilateral. Verifiability refers to the fact that all transactions occurring within the exchange are logged and can be traced back to their provenance. Multilateralism refers to the distribution of information between the three entities to ensure impartial execution and minimizing of conflicts of interest.  

While he hasn’t launched the exchange yet, Renaudin is putting pieces of the puzzle together. LGO markets has already tied up with a qualified custodian for safekeeping of its funds and has tied up with a liquidity provider. It has also signed up four institutional clients for its launch. The exchange is designed to be transparent and secure. Transactions available on a blockchain will ensure that exchanges cannot front run their traders and encrypted multisig wallets will be used to implement security. The multisig wallets for exchanges will have three private keys distributed between clients, custody providers, and the exchange itself. Two of the three private keys will be required to conduct transactions and move funds. The decision to focus on institutional investors also means that the exchange will have fewer connections to verify and validate as opposed to, say, an exchange like Coinbase, which has more users than Charles Schwab.    

LGO Markets is part of LGO Group, which also has a marketing & advertising company for blockchain. Called LGO Launch services, the division will provide an array of services – international marketing, content creation and dissemination, social media and community management – to clients in the space.   

Renaudin’s emphasis on avoidance of conflict of interest may fall short here. According to him, the customers for this company are crypto companies and clients from different industries interested in cryptocurrencies. It is not hard to imagine a situation where a firm avails itself of launch services from LGO Launch Services and, subsequently, lists its token on LGO Markets – the exchange. But Renaudin dismisses the concerns because “these are two different companies with different governances and targets.” (But the website for LGO launch reverts back to a white paper for LGO Markets and the team listed is the same as for LGO Markets).  

Decentralization Vs. Centralization  

In mainstream finance, bitcoin and cryptocurrencies have positioned themselves against the monolithic “too big to fail” structures of the industry. Centralized exchanges belong to Wall Street, crypto proponents say. Decentralized exchanges, in which two parties trade directly with each other without the exchange recording details of their transaction, have emerged as an alternative in cryptocurrencies. 

Renaudin’s attempt to imitate the Wall Street structure at LGO Markets could open it to charges of centralization. But he is unfazed. “There’s always some kind of centralization.” he asserts. As example, he says even traders at decentralized exchanges rely on trade contracts drawn up by the exchange. The reliance on US dollar (or other fiats) for conversion or trades at crypto exchanges is also a form of centralization, he says. “In the digital asset space, you still need some kind of central authority to ensure that you get paid for the trade.”