ACTUS — standardising smart contracts
Davos hosted the World Economic Forum last week and the Blockchain Hub invited extremely influential people discuss the matter alongside it.
No shiny DeFi projects with high APY or new NFT collections. We’re talking about the most economically literate people on the planet thinking about how to optimise our societies on a deep procedural level.
Imagine a Chinese scholar brainstorming with his team to come up with the idea and the implementation of the first banknote ever during the seventh century. Same same but different.
Standards
In an ever increasingly globalised world standards are a must.
Having different power outlets can already be a pain in the ass, so we can’t consider a world where finance doesn’t use standards, like SWIFT — the “Society for Worldwide Interbank Financial Telecommunication”.
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Some of the standards we use today are so broadly adopted that we forget they are standards and not the only natural way of doing something.
SIM cards for example allowed our world to share and use the same technology for mobile phone worldwide. Which of course not only accelerated adoption but innovation as well.
Containers are a great example of it as well: a globalised civilisation needs globally standardised shipping methods. For this purpose, a group of engineers imagined and optimised a box with a particularly functional shape.
ISO
The International Organization for Standardization is a prime example of what a peak civilisation activity looks like. Their purpose is to bring together experts from every part of the globe to define the best standards for everything they can think of.
By doing so, humanity as a whole can build on stronger foundation and help bring safer and more effective products to everyone.
Created in 1946, their first headquarters is installed in a small house in Geneva, Switzerland.
In 1960, for example, they published the ISO 31 standard concerning the International System of Units. They marked the meter as a unit of distance, the second as a unit of time etc.
These standards allow humans to be even better at what they do best: large scale collaboration.
Back to us
If you believe that blockchain and smart contracts have a central role to play in the future of our financial institutions what follows might be of interest to you.
As you know, hack and exploits are common issues when it comes to web3. The reason being that the whole ecosystem is digital and thus based on code. Human written code, sometimes faulty and thus vulnerable.
The reason of all these issues is the abysmal information asymmetry between the few who deeply understand the code and the rest. This, in turn, results in some very knowledgeable people abusing the rest of us, illiterate on the matter.
Naturally resulting in the use of standards for obviously practical reasons. Some of them are already broadly adopted like the token standards ERC20 and ERC721a, as well as their equivalents in different blockchains.
The idea being an easier and democratised access to technology through the safe use of tested and approved standards.
ACTUS
During his presentation in Davos, Allan Mendelowitz president of the ACTUS Financial Research Foundation presented his views on today’s financial ecosystem, its inability to forecast huge crisis and the subsequent need for a standardised base layer.
The situation as he puts it in his presentations is the following
- There will always be another financial crisis
- The reasons for the next crisis will be different from the ones that caused the last crisis
- The “transmission mechanism” through which the crisis evolves will always be the expected cash flow
Which means that chasing the root cause of the last crisis will not help us with the next one — it still needs fixing though.
Control the cash flow → control the crisis
He proceeded to explain how during the 2008 crisis the people who were the closest to the data were oblivious to what was going on. We’re talking Jamie Dimon CEO of JPMorgan, Ben Benanke chairman of the FED at the time, and all the other CEOs and regulators.
Everything was falling apart and the pilotes of the system were “flying blindly”.
The problem — at least one of them — is that regulators have backward looking data
- The data is months old when they access it because of the way it’s collected
- The descriptive data is static
- The data is highly aggregated and lost too much granularity
The solution might be lie in understanding what data can optimise a forward looking analysis
- Financial analysis starts with the examination of expected cash flows derived from individual contracts
- Quantifying the effects of a crisis requires the assessment of the risk of these individual contracts remaining unpaid
- Effective regulation starts with the collection of granular data
- Consequently resulting in better risk assessment models
Simultaneously, the emergence of Blockchain has changed everything and most people in the matter have accepted the idea that this technology is naturally perfect to support the financial ecosystem. Yet, paying through the blockchain is not finance. Blockchain will become a tool for global finance when it is used to manage and host “long term, multi payment contracts between contracting parties.”
No surprise in the fact that we’re not there yet, but preparing the future is the best way of ensuring a smooth and optimal implementation of the new world order — I mean, new and better ways of doing things.
Needless to say that the global financial ecosystem can not be based on vulnerable and heterogenous smart contracts. Hence the need for standards, again.
“The computational core for a viable, smart financial contract has to be a validated, tested and widely accepted algorithmic financial contract standard, namely, the ACTUS standard.” Allan Mendelowitz, 2022
The goal being the transformation of the data collection abilities of financial regulators.
Win Win win
The system is built with the idea that it is beneficial for all parties and won’t cost more than it saves to ensure a frictionless adoption.
- End-customers gain more transparency from their counter-parties and increase their financial knowledge through more complete data
- Banks reduce drastically their operation and auditing costs, allowing for a more efficient inter bank apparatus
- Regulators get access to overall better data, quantity, quality and timing-wise
Concluding thoughts
Such a system would enable the ability to assess the financial health of an organisation through lots of different metrics like its solvency, liquidity coverage, stress resistance etc.
For the first time, we could imagine assessing the systemic risk and the expected chain reaction of failure. Which could help us protect and manage vital financial nodes before a crisis, instead of throwing money at 2B2F faulty banks that put themselves in a bad position in the first place.
This goes without saying that regulators and governments alike should never have access to this much data if not anonymised on the personal level. Data is essential for the effective control of a system but people’s identity should never be a dimension of it.
We’re still very far from implementing such standards on a global scale, blockchain wise the world still has to find what foundational protocol to use to build the future of finance on top of, be it public or private.
As always, time will tell.
