The realm of financial services as we’ve known it for many years is drastically changing driven by the new opportunities offered by DLT.
Newly created decentralized digital money call for corresponding new mechanisms to operate on. The trigger for the build-up of the next layer of more complex protocols: powered by Ethereum blockchain these smart contracts are set to enable parties to exercise financial services in a decentralized trustless manner. Decentralization is no stranger to the money matters that has once proved to be viable historically. Unlike the modern fiat money that has turned into void backed by nothing but governmental promise. With Bitcoin basically becoming the first crypto-financial primitive with the value attached and acknowledged by the community, new decentralized digital money call for corresponding mechanisms to operate on. Ultimately, as the world’s value is becoming tokenized, we are now in the middle of a very exciting process of creation of a new infrastructure layers built on foundation of Ethereum token standard. Those layers are set to become the foundation of the emerging financial stack driven by DLT. Dharma, 0x, ETHLend, asdx/dy are the most vivid examples of this ongoing shift.
Before diving into the peculiarities and definitions, let’s probably look into the pre-conditions of this global shift of the finance into the realm of DLT. Essentially, as with any other industry, blockchain is transferring the existing business-model to the community-run protocols that are solving pretty much the same problems as their industrial counterparts, but on an entirely new level. This new approach and new efficiency standard allows not only to successfully compete with existing analogues, but also to outperform them on a number of markets.
More so, the ongoing post-industrial transition affects not only the business landscape, but also institutions and operational models that once were considered to be the greatest achievements of the vanishing industrial era. Social security and insurance, lending and collateral, asset management and pensions system are those mechanisms and processes that has already been widely disrupted by fintech are now facing the new era of transformation — this time by the blockchain. Once built by the governments as an effective tool to provide for sustainable future of the citizens, they are now failing to perform their basic function. Public agencies grew weaker, with state debt gradually accumulating to the point where it’s impossible to retrieve. Asset portfolios of the majority of pension funds consist of state and corporate debt, which is regular practice allowed by the legislature and profitability of pensions funds barely covering real inflation rates.
And more recently, with the implementation of smart contracts and code that is shared across the entire network to execute upon the consensus is reached between the parties with immutable results, we have the possibility to tokenize pretty much any asset and financial construct on the blockchains.There is a number of economically and socially progressive implications of the digital asset movement with most innovative being these:
Supreming the primacy of capital and those who control it by ideas and innovation is the essence of ongoing technological disruption, and DLT is basically taking it one step closer by virtue of a token that has the power to align the incentives of all the major stakeholders — business owners, developers and users. We might call it the democratization of finance: to get certain power and voice in the business one needs to contribute his brain and effort to the decentralized protocol rather than the money or equity. In the most successful protocols, the earlier adopters will continue to contribute and design the incentive structure and user experience that appeals to the late-comers, even though their own may differ.
Cryptocurrencies are essentially becoming the new money coined specifically for the digital age with Bitcoin becoming the first precedent of crypto-financial primitive, i.e. a generic basic building block designed to do one very specific task in a family of emerging protocols that are set to create a new digital universe of conventional financial models and mechanisms — from lending to asset management. They are now built from the scratch with a view to basically serve as foundation for the development of upcoming protocols and applications. A CFP is a category primitive — the subclass of a broader group of crypto-primitives (or basic notions used in the space) that among others include a token, a protocol, an incentive scheme, a TCR, a stable coin, etc. Hence, CFPs serve as foundation for protocols & applications, for instance Ocean protocol uses TCRs for the list of participants in a decentralized data exchange.
Finance run on smart contracts and consensus is taking shape right in front of our eyes as new protocols are popping up to fill the void. Dharma is developing generic tokenized debt agreements, 0x protocol is set to be used for developing decentralized exchanges, dy/dx is working on open-source protocols for decentralized financial derivatives and margin trading, while Akropolis is building a trustless asset management ecosystem for fair pensions distribution — are all those early runners that are setting the trends building the basics of operational modes and strategies.
A fascinating point to consider from the adoption perspective is how these new primitives will play out when mixed and matched with one another in the longer run. These emergent systems will have greater value and the scope of application than any of the individual primitives on their own.
The emergence of CFPs is an early sign of maturing knowledge and infrastructure of the crypto industry. The continued advancements and definitions of these primitives makes it increasingly easy for people to design consumer applications that are uniquely enabled by blockchain. On a broader scale, the crypto-financial primitives will eventually contribute to the rewiring of how society functions at large. Distributed ledger brings about new levels of user / customer sovereignty to control their own value, identity and other personal assets — both tangible and intangible.