Risk Nodes

At Citizen Hex we’re attempting to create an at scale liquidity provider to the Ethereum ecosystem, an organization that can narrow bid/ask spreads in the long tail of tokens. Citizen Hex is just one instance of what we internally believe will become a significant, perhaps even dominant business model in the mature Ethereum ecosystem — the ‘risk node’.

A risk node resembles a hybrid of a software startup, an insurance company, and an HFT. It’s a centralized organization (prioritizing decision making speed) with a high bandwidth connection to the Ethereum blockchain and a pool of on-chain risk capital that it allocates and grows.

Risk nodes receive new blocks as inputs (or react to centralized APIs that receive new blocks as inputs), use software to analyze the data, and execute transactions that take risks. If a risk node does its job correctly, the ecosystem will gain liquidity and functionality and the risk node will grow its pool of capital and become a more influential liquidity provider. If a risk node fails to properly manage risk, it will lose its risk capital and influence, and other smarter nodes will step in to fill the void.

Because decentralized applications like Augur make little distinction between adding liquidity to an existing market, and creating a new market entirely, risk nodes will create new markets and add new functionality to existing platforms via their risk taking activities.

Risk nodes are a further generalization of generalized mining, where the opportunity set is expanded to include lending, insurance, arbitrage, market-making, directional speculation and all other forms of crypto-native risk seeking.

Risk nodes resemble hedge funds, but there are important reasons to distinguish them from hedge funds:

• Programmable money will lead to unique entities that don’t resemble traditional GP/LP structures
• Risk nodes will be as ubiquitous in the Ethereum ecosystem as SaaS startups on the centralized internet

At Citizen Hex we’re excited to build a large scale user of Ethereum and look forward to the emergence of other risk nodes — organizations that are focused not just on building protocols, but on utilizing them at scale.