How IOTA’s Qubic Might Be on the Verge of Revolutionizing Finance
EDIT from 2018/09/11: I wrote this post some time ago when I had basically no understanding of finance. Consume with caution.
Lately it has become apparent that cryptocurrency is going to be a game changer for finance. Those who have done their research, will have realized that there is a Tangle-based protocol called IOTA unlike all others — and it is changing the game for cryptocurrency.
Just this Thursday (May/03/2018) the IOTA Foundation has given us insights into the mysterious Q that has driven the IOTA community crazy ever since it was mentioned. Until just now, nobody was certain what it was about, yet it was hyped up infinitely while the Foundation kept reassuring the community that the hype hasn’t even come close to what Q really is. Now we know that Q is indeed Qubic (qubic.iota.org). But so far nobody has fully grasped the consequences of this. One thing for sure, Qubic is changing the game for IOTA.
If you watch the trailer video, take a very close look at the visualization for “Oracles” and “Smart Contracts”. You will notice that the focus is clearly laid on the fiat currencies euro and U.S. dollar. There is an oracle feeding the EUR/USD conversion rate from bloomberg.com into the tangle. On the next screen you see two financial institutions being connected through a smart contract interacting with said currencies. First off, take a moment to make up your mind about what is going on here. It seems that they are trading fiat currencies via a smart contract. But, how the hell can they trade fiat currencies on the Tangle? And here is where my theory comes into play…
Just Imagine …
Let’s say there is an institution in the US with a capital of $1,000,000. Now their research suggests that the USD is going on a down trend for the next week, hence they want to change their funds to EUR. At the same time, over in Europe, there is a German insitution that wants to do the exact opposite and switch from EUR to USD for the same value.
Both instutions buy iota worth 5% = $50,000 of that value (this is their margin balance) and agree to sign a smart contract which locks up both iota funds, so they cannot be moved on the tangle. After three days USD has shown 1% growth compared to EUR and the German institution decides to end the contract (if none of the institutions ends the contract, it will be settled automatically as soon as the losses of one party would have reached the 5% margin balance).
In order to do that, the smart contract issues another settlement transaction which transfers the losses of the US institution in iotas to the German one. The smart contract is well aware of how much both institutions owe eachother at any moment, because it receives the exact EUR/USD rate through an oracle.
What’s the Big Deal?
This is basically decentralized margin trading without trust and fees. So what makes this a big deal? It would mean that all kinds of assets could be margin traded on the tangle and traders who use IOTA as a trading platform, will have to hold their margin balances in iotas. This is real world adoption of the iota token. Traders would have to buy iotas, not because they speculate on the iota price, but because they NEED it as the underlying value carrier to speculate on entirely different assets.
And now let’s take all that a step further. If you can margin trade on the IOTA protocol, you can also make contracts on IOTA/USD and other IOTA/FIAT rates. And that is the groundwork for allowing you to hold a fiat coupled cryptocurrency: your funds will be stored safely on the Tangle with all the advantages it offers (feeless, instant and scalable transactions) while you can hold your value tied to fiat money. Basically you open an option with another party through a smart contract guaranteeing you that you can convert your “virtual fiat” back to iotas of the exact same fiat value at any point in time, ultimately outsourcing the volatility.
If your car has a wallet and you put in $100 today, you want it to be worth $100 tomorrow. You want to use iota, but you don’t want to speculate on the price.
The other party can be a margin trader going long on IOTA doing the trade with you for free. Or it can be an institution that actually market trades the majority of iota funds to fiat on an exchange to hedge against the volatility and only keeps a margin in iotas as reserve for the smart contracts to settle. The smart contract will guarantee that you can withdraw your balance at any time from their iota reserves without asking for their permission. But you want it to be a regulated institution to make sure they will indeed keep refilling those reserves before they are empty. Because they have to pay for market trades, a service like this will likely require a negligible fee (which is more than fair considering all the advantages of holding a stable cryptocurrency).
Negligible because: If this option provider has a lot of customers opening/closing options each day, the majority of these trades will cancel out each other. And only rarely if there actually happens to be a bigger difference at the end of the day (too much or not enough funds in the reserve), the provider has to do a single market trade (iota → fiat or fiat → iota) to get it back in order. Bundling those options is far cheaper and more efficient than if each of the customers was doing individual market trades by themselves multiple times a day whenever they want to convert between iota and fiat.
Volatility is probably the main reason stopping real world adoption of cryptocurrencies as of now and Qubic seems to deliver a very smoothly and efficiently working solution. That’s what the IOTA Foundation might have had in mind when they were talking about an iota2fiat gateway.
But Wait, There Is More …
This is all huge already and I really don’t want to blow your mind, but have you thought about what that means for banking? Let this go through your mind until you realize the full implications: since the volatility is no longer a concern, you will be able to move your bank account to the Tangle. You will hold a smart contract with your bank, allowing you to make trustless (your bank cannot lock up your account), instant bank transactions online and for much lower fees, possibly even feeless. In order to allow that, your bank will have to hold their (2% or whatever) reserves as iota tokens so that the smart contract can access them at any point in time. Here is why qubic banking is beneficial from their point of view:
- Customer Satisfaction: Because of massively increased convenience and new possibilities for the account owners.
- Competition: Why should anyone use your archaic banking system where you have to wait days for transactions to complete while the other bank down the street offers feeless bank transfers where you can send money around the globe in seconds without having to trust them that they don’t lock up your account?
- Network Effect: In a world where the globally growing qubic banking system turns into a standard, your bank will have to integrate the new technology itself in order to exchange funds with other banks.
- Efficiency: The bank will save a lot of resources because all those individual (micro)transactions will be automatically handled on the tangle by smart contracts. They will only have to look for their reserves.
And even if you happen to not care about banks, think about this: With the growing adoption of the protocol in this sector, billions of dollars margin trading balances and bank reserves could be injected into iota, increasing the market cap by a multiple of that (for every $1 put into the market, the market cap will increase by something like $25). And if you are not jumping around in excitement right now, you probably haven’t bought enough iotas yet.
All of this is speculation, we will have to wait until the IOTA Foundation releases more information about Qubic. However, so far my idea goes pretty well together with statements by the IOTA founders like CFB saying that Q will dominate over the financial world.
DISCLAIMER: Of course, I do hold IOTA — how could I possibly miss out on that?!
Credits to olifa for helping me out regarding option trading.
If you want to donate, please don’t donate to me personally, but to the IOTA Spam Fund instead. All donations will be paid out to people supporting the Tangle by spamming transactions. ❤