5 Ways Open Finance is Changing Money Forever
What if your money was intelligent and could lend itself out to the highest interest rate or how about a no-loss lottery where you always get your initial money back, or perhaps you'd like to receive your paycheck on a daily basis rather than monthly. Well, this is all possible today.
What's Actually Happening Under the Hood?
The Ethereum blockchain, thanks to its smart contract capabilities, has seen an explosion of experimentation and innovation by developers in the areas of finance and banking, now that we have borderless, permission-less digital units of value.
Think of it as a parallel financial system, created from the ground up, and purpose built for the digital era (similar to the way entire countries skipped the step of installing landline telephone infrastructure and went straight to mobile). Being open-source, it benefits from rapid prototyping and development as a result of the compounding number of tools and miles of 'plumbing' accessible to everyone. In simpler terms, we're talking about money pipes
and 'money legos
' that can be snapped together in multiple combinations to create a seemingly infinite number of products and services.
Let's take a look at just five of theses examples.
1. Dharma: Border-less Savings Account
SCAM! That's not possible. The FED Funds Rate is ~2%, how do you explain that?
Because Dharma isn't a bank, it's an interface built on top of a protocol ('Compound') that uses the plumbing of the open financial system to automatically source the best available global rate on DAI
(a 'stablecoin' that mirrors the value of USD). That rate is reflective of a real-time free-floating market for loans, determined by people like you & I in aggregate (not by 12 central bankers every six weeks), with strict collateralisation requirements. The best part is your earned interest is also paid out in real-time (every ~15 seconds).
Are there risks? Of course (read up on them here
), but they're comprehensible and will decrease over time with adoption. Kind of like the very first time you used your credit card to buy something on the internet. But the genie is well and truly out of the bottle on this one.
"You are using experimental software built by two companies, Dharma and Compound. While this software has been extensively tested, it is still relatively new and could have bugs or security vulnerabilities." - Dharma (FAQ's)
2. Pool Together: No-loss Lotteries
"Ok, now this has to be a scam!" Hear me out. What is the marginal cost of one additional person listening to a digital song? Zero. What is the marginal cost of one extra person using a piece of open source software? Zero.
Traditional state-run lotteries have administrative and manual processing costs associated with them. Meaning there is a minimum scale at which lotteries are viable. But what if all those processes could be replaced with self-executing software effectively bringing the operational costs down to zero. You could automate a lottery to operate at much greater frequencies, with far smaller capital pools, accessible to a wider (global) audience. You could also eliminate the downside. Imagine pooling funds and simply designating the earned interest as the prize, with everyone then having their initial outlay returned after the draw. What you get is Pool Together
3. Sablier: Streaming Money
You stream music, you stream movies, soon you'll stream money.
Digital money, like a John Mayer song (I can feel your judgement), is just data that can be delivered in a variety of forms, through a variety of mediums and at a variety of intervals. Think of it as highly programmable. Set the payment amount, frequency and duration to whatever you need and execute. Just think of what this could do to subscription-based businesses, not to mention the unlocking of entirely new business models. I'll admit it's a conceptual shift in thinking that many people will struggle with, but it's ideal and intuitive for machine-to-machine transactions. And if, in the future, you have a bot or 'smart' assistant that manages your finances and calculates that paying per minute of music consumption, versus a monthly subscription, is a better deal for you then you'll do just that.
I gave the example of paying full-time employees a daily
salary earlier. When you get paid on a fortnightly basis you're essentially loaning your time to your company at zero interest. They then settle their debt with you via your paycheck. Given that a significant proportion of payday loans are taken out by people experiencing temporary shortfalls between paychecks, only to be trapped in debt quicksand, this could really benefit a lot of folks. The two week pay-cycle is really just a hangover from the paper-based manual processing days of past decades [listen- The Journal: Why Every Day Isn't PayDay
4. UMA: Build-Your-Own Financial Derivatives
I'm not even going to try to explain this one when the folks at Universal Market Access Protocol can do a far better job.
This means that, theoretically, anyone in the world with an internet connection can gain exposure to any asset (e.g. foreign currency, stock, bond, index fund) in any market through this model of self-enforcing contract design, provided there is a willing counter-party.
The model is contingent on having independent oracles from which to draw accurate pricing information. We're in the early stages, but this problem is attracting a community-wide effort given the massive system-wide benefits [read- Blockchain Oracles
5. Token Sets: Automated Trading Strategies
Exchange traded funds (ETF's) allow you to hold a basket of investments, actively or passively managed, in a single unit of account, for a management fee. But what if you want greater control and transparency over the active/passive piece?
The same way that, in the 90's, pop music was primarily made in a recording studio supported by a record label. Like our lottery example, this was required due to the overhead costs. Once those tools (music production and distribution) were democratised through software and the internet, the floodgates opened to bedroom EDM artists. The same story is now playing out in finance with the democratisation of the tools to create and automate investment strategies.
Let's say you want to exposure to crypto-assets at a weighting of 75% bitcoin and 25% ether. You want to maintain this weighting over the long-term by rebalancing if things get too far out of whack. So far, nothing particularly revolutionary about this. But let's say you don't want to pay someone else to manage this for you, but rather encode
these parameters into the asset itself. The smart contract knows to buy or sell either bitcoin or ether on the open market in order to abide by the rules you've set (like software executing a command). You could also trade this weighted asset as is, with the automated rebalancing built in. Imagine if you could take $5 of Uber stock, fuse it $15 of Lyft stock thus minting a new single asset, destined to maintain that 25/75 split as prices of each stock move independently. It's a little more complex than this in reality, so read up on it if you're interested here
Because it's open-source software, there's no fee. Admittedly, Token Sets is a product built on top of the Set Protocol and they may charge a fee in the future, but they'll be competing with anyone who wants to build a competing product using the same protocol. Translation- you'll have to provide a superior product and experience in order to command a fee.
What You're Probably Thinking
These all look like toys and seem wildly experimental. There could be bugs in the software or some kind of black swan event. There could be regulatory compliance issues associated with the use of these products and services. Yes, yes and yes! But ask yourself, where have you heard these arguments before? Remember when Netflix's DVD mail order service never innovated and the company folded? Remember when Heartbleed bug was detected and we just stopped using OpenSSL? Remember when Universal Studios
said that recording content from your TV to your VCR was not 'fair use' and that was the end of that? Me neither.
New things get invented,then they get launched, then they get questioned, then they falter, then they get improved, then some people use them, then they become accepted, then they become the norm. And the cycle repeats.
Why You Should Care
There's always been one area that we could not openly innovate, remix or tinker. That era ended in 2008 with the publishing of the Bitcoin White Paper, where, for the first time, digitally scarce assets were imaginable. If they could be imagined they could be created, if they could be created they could be assigned a value. And what value exactly is that? We now get to choose.
In the same way that email (SMTP), domain names (DNS), file transfers (FTP) and VoIP formed some of the foundational building blocks of innovation on the internet, the same thing is now happening with money. The future of how we interact with money is being re-imagined and redesigned at lightning-speed by a community of volunteer developers globally. Each day, the arsenal of building blocks gets bigger and, each day, the community grows exponentially.
The same way that TED and its independent satellite TEDx events brought thinkers together to share ideas. ETHGlobal
(the org behind Ethereum-specific hackathons) and it's independently run ETHx events are bringing 000's of builders together across major cities to compete for thousands of dollars in prizes.
If you were to bet on where the future innovation around money and financial tools & services will come from, it's likely to come from the bottom-up, not from the top-down [read- Why Dumb Networks Are Better
]. The pipes that will form the plumbing of the future financial system are being joined. They're being purpose built to handle internet-native money (1's and 0's) and they've never heard of business hours or a cheque.
In 2000, 16 year olds were burning CDs in basements while receiving strongly-worded letters from record labels. The 16 year olds of today are no longer burning CDs. They're building banks.
*Disclaimer: I do not have any vested interests in the mentioned projects. This is not an endorsement of the products, teams or assets mentioned in the article. Using or engaging with these products and protocols may carry technical risks and have legal & taxation implications. None of this should be construed as financial advice, as it is for educational and illustrative purposes only.
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