Prism and the Cost of Money
This is the official definition: “a Prism is a custom-built portfolio of digital assets (aka cryptocurrencies).” It doesn’t give you “access to the actual digital assets,” but to their price movements. It’s decentralized because your invested funds (only expressed in Ethers for now), matched by an equivalent collateral value (in Ethers as well), are held by an escrow contract over which you and the Prism code, written mostly by Prism’s brilliant Lead Architect, Raine Revere, have total control. An oracle tells you how your portfolio is faring, and after a 24-hour waiting period from its creation, you can either sell or (for a fee) rebalance it.
A Prism is a virtual portfolio at the square power, both in the sense that it is indexed on virtual currencies and in the sense that it does not truly hold them: it is an as-if portfolio, a bet that your chosen aggregate of cryptocurrencies will do well (or bad, if you go short on it) on the market. As such, investing in a Prism is tantamount to betting on a horse.
In fact, the Prism app (see picture, showing the Leaderboard, which ranks current portfolios by performance) is a sort of personalized wagering window. When you bet on a horse, you don’t own a small piece of the horse, you just make the fate of your wagered money depend on the horse’s performance; the same principle applies to your Prism, it makes your invested money depend on a virtual portfolio’s performance. The major difference between betting at the races and investing in a Prism is that time is irrelevant to the race; your money doesn’t gain or lose value between the moment you place your bet and the end of the race, while it does change value when you invest it in a portfolio bound to exist for longer than a day.
Let me cut to the chase, then.
I will model my investment in a Prism on the analogy of the horse race. In order to simplify and shorten this exposition, our race will last exactly one year. (This model’s execution may be complicated at whim, of course, stopping-time-wise, diversification-wise, etc., based on your acquaintance with security options.) This one will be a special race, in the sense that our horse (we need just one) is genetically modified to run no-stop for the duration. Let’s call it BTC Horse.
I bet $10,000 on BTC horse’s win, one year from now. The rival of BTC will be a mechanical horse, let’s call it Numeraire Horse. If at the end of the race, BTC Horse has one meter advantage over its rival, I gain $100; two meters earn me $200; 10,000 meters earn me a 100% profit. However, if my horse outruns its rival of, say, 13,000 meters, I still get only a $10,000 gain. Why?
The answer is in the nature of the Betting House where I make my bet. It is a decentralized House, it doesn’t claim any control over my wagered money. The moment I place my bet at the Betting House, my money goes into an escrow contract and is matched by the collateral money of whoever is betting against my horse. If no one is, or if their bet is smaller than mine, the difference in the collateral is put down by the House itself. So, this is a horse race where my odds are always 1 to 1. Or almost — there is a small devil in this detail, as we’ll see presently.
This race is equivalent to my $10,000 Prism contract being worth $10,100 if BTC gains 1% over the course of one year, etc. In the picture of the Prism leaderboard, the “MyInvestmentPrism” portfolio, whose performance is the second highest ranking in the Prism’s Beta version as I write, has gained 24.34% over its original value — the equivalent of 24.34 meters in my model.
Someone else bets $5,000 on Numeraire Horse; in other words, they go short on BTC Horse. Their money goes into my escrow contract. The House (let’s call it with its name here: Shapeshift) puts down the missing $5,000 to balance the win and lose (long and short) bets. As an incentive to put down this money, I promise to pay 1% monthly interest on this sum to the House. (Remember, this is a race where time affects the value of the wagered money.)
It falls upon me to pay this interest, and not on the person who went short on BTC Horse, because it is I who created the $5,000 gap by investing more than they; à propos, see Raine Revere. It also makes horse-race sense: in gambling and betting, your odds mirror the inverse ratio between payoff and stake, or in other words, betting with the majority pays more likely yet smaller dividends. In line with Revere’s just-mentioned contribution, I promise a 1% monthly incentive to the House because, at present, this percent “is roughly commensurate with the ETH borrowing rates at exchanges.”
Let’s take stock of our commitments and run the race. I invest $10,000, which at a 1% compounded interest rate is equivalent to roughly $12,600 in one year, at the end of the race. I pay half of that increase as an incentive to the House (read: Shapeshift) to put down the missing money. (My example models such a situation. Depending on the presence and activity of BTC Horse shorters, it could be a smaller or greater percentage. Raine Revere’s writings are not totally clear about it, but I’m inclined to think I’m not being asked to pay interest also to the shorters of my position.) I pay about $2 to the House (Shapeshift) as a fee for the usage of their betting app. And I pay about $14 in gas to Ethereum to enable the placing of my bet (read: the creation of my Prism). My total investment amounts to $ 13,916 (all my numbers are approximated by defect). To get even, I need for BTC Horse to outrun Numeraire Horse of at least 39.16 meters. In terms of cryptocurrency, I need BTC to increase in value at a solid 39.16% yearly rate. Not an impossible goal, but still…
This is the end of the chase. Based on this simplified horse race model, you can try out all conceivable alternative scenarios, all sorts of diversifications and stopping-time sequences. I won’t impinge on your financial imagination.
An alternative investment opportunity might look like this. You go to your Poloniex account (or Kraken, or Bitfinex etc.), invest your $10,000 in the real assets (BTC in my simple example, but it could be such a hugely diversified portfolio that you can’t hold it in a hardware wallet), and, after paying much more modest fees, reap the benefits (or suffer the losses) accordingly. In this case, your $10,000 investment is equivalent to $12,600 one year from now: this is the present value, the cost of your money. The overhead is around $1,300 lighter than the Prism overhead. A further advantage is that the structure of my Poloniex portfolio is known only to me, while, at present, anyone with access to the Prism app can “borrow” from my strategy if it is high ranking on the Leaderboard. To create this sort of real portfolio takes a bit more tech-savviness than operating the Prism app, true — but not that much.
However, in going this way you run into “regulatory risk,” to use Revere’s words. Indeed, who knows if all currencies in your wallet will survive future Federal regulations? Who knows, moreover, the extent to which Poloniex will be solvent in the future — I mention it as it’s a recurring nightmare of Poloniex’s customers, or so I hear, although this financial institution has always been solvent and quite decent to me.
One last word on the socio-moral issue. After all, we blockchainers are in it for the social mission first of all, and for desirable personal gain second of all. It is maintained by many people, me included, that one of the benefits of thousands and thousands of traders trading daily on the exchange markets is the achievement of (relative) fair prices and the containment of arbitrage. It is one of the pillars of competitive markets. No such contribution derives to any market, not even the racing horse market, from betting at the races. (No less than betting odds, the price of a thoroughbred depends on wins and reputation, and not the other way around.) Horse betting and Prism portfolio-building are purely speculative and recreational, with no positive social attributes.
You may ask: isn’t a Prism the equivalent of an option, a derivative on a set of currencies? (Let’s leave aside the currency-versus-security thorny issue.) Is option trading on Wall Street equally sterile from a socio-moral viewpoint? I would put it this way — and here is what I deem, on the long run, the potentially redemptive attribute of Prism. There is a high degree of permeability between derivative trading and stock trading on Wall Street: the information flow goes both ways, both markets affect each other, and both affect the prices. The day a robust ecosystem of digital financial transactions will be in place, the owner of a Prism will be the player in a socially beneficial network. I can easily picture Prim’s future contributions to a prediction-market network orbiting the likes of my friend Martin Koppelmann’s Gnosis.
I won’t make predictions on the timing of such future state of affairs, because in these euphoric days any prediction is tinged with excessive optimism, and one knows too well, doesn’t one? what comes after a trader’s euphoria.
That’s all. This is Prism as I understand it.
I’m ready and more than willing to stand corrected, of course.
Thanks for reading. This is me in public keys (to pay for my student fees at the University of York):
ETH: 0x61515EA460fa100a901d0Bb435A9d84698BDE74A
BCH:12ukKi64AwXDeFkhCN1LmWEQRLCs1ddMP1
BTC: 131t1fX5g2K6qYkg97yLwJJ2HLVqrY3ztP
