🇬🇧🎯What FINWEB 3.0 Is About
FIN WEB 3.0 is a blog and a newsletter …
…on the novelties concerning three paradigms that are the basis of financial technological innovation (fintech): Stablecoins, Central Bank Digital Currencies (CBDCs), and DeFi financial applications of WEB 3.0.
They, individually but especially through their interaction due to the Digital Transformation process that is investing money (as a means of exchange and deposit of value), will affect in the coming years the micro-scenarios that affect everyone, with reference to the payment system and financial instruments available and usable.
From a macro point of view, the co-action of the three innovative processes is likely to evolve the monetary policy transmission scenarios to a level not experienced before, considering the direct link (and its automatic regulation methodologies) that would be created between monetary authorities and citizens.
Below an introduction to the concepts discussed, with the intention of making the issue as comprehensible as possible.
What are Stablecoins
The stablecoins are in monetary cryptoeconomy the cryptocurrencies that have a fixed value against a fiat currency: the counter value is 1:1, so it is stable depending on the fiat currency of reference.
To date those with greater market-cap, market value, and greater volume of daily exchanges have as reference currency the U.S. Dollar.
Of stablecoin for now there are four types, those:
- that are issued against a collateral of fiat currency (fiat-backed, but also a basket of fiat currencies, basket-baked);
- for which the collateral is the deposit of a commodity (commodity-backed, for example gold);
- for which the deposit is another cryptocurrency (cryptocurrency-backed);
- for which it is not foreseen collateral (seignorage style) but, in alternative, an algorithm that regulates the price in function of the increase or decrease of the demand.
The common characteristic to all the typologies is the intent to assure the parity against the currency fiat of reference and to avoid the fluctuations of the cryptocurrency no-stablecoin (bitcoin leading). The logic is when a stablecoin is issued (from the issuer) the collateral increases of equal amount, when it’s cashed (destroyed from the issuer) the collateral is released.
It is clear that the fiat-backed type is the most stable because its conversion does not depend on third-party quotations or factors extrinsic to the quotation itself, as in the case of the ‘seignorage’ type.
The stablecoins with collateral are an aberration of the concept of cryptocurrency expressed by Satoshi Nakamoto because they do not present an equi-decentralized distribution of trust between the nodes. The first three types are to be compared to high volatility cryptocurrency only for the operating engine, i.e. the adoption of the DLT (Distributed Ledger Technology, i.e. blockchain) protocol.
While for Bitcoin (Etherum, etc. …) the reference blockchain is public and open, so indifferently any node of the network is able to equi-act and be part of it, for stablecoins no: the transaction validation algorithm allows only a few nodes (issuers) of the network to act with certain privileges, first of all the creation and destruction of collateral to maintain parity against the fiat referent.
Then they act on public blockchain (all may be part of the network) but closed (partial operational restriction for nodes), i.e. permissioned, i.e. with the distribution of information not perfect because not fair.
Therefore the stablecoins with collateral can conceptually represent the translation in cryptoeconomy of the functioning of complementary currencies, present for more than a century, with different articulations, in the monetary landscape.
In the stablecoin, unlike the complementary ones, the community of reference of use and adoption is defined by the cyber-space (or by its partitions) and not by territorial or sectorial perimeters (i.e. that refer to the geo).
The translation takes place by adopting the blockchain protocol for the regulation of exchanges between holders, transferring to the complementaries all the advantages of security, speed and disentermediation that the protocol notoriously induces.
Compared to a complementary digital currency centrally managed DLT ensures greater efficiency to the currency for two reasons: the first, all nodes are given way, transparent and non-modifiable a posteriori, to control that the effect of centralization is limited to the creation / destruction of the reference stablecoin; then you can give up to part of the trust equi-distributed (in a perfect way) to the algorithm (case of the bitcoin) in exchange only for the stability of value and control this. A centralized solution, not DLT, allows that but does not ensure equal efficiency.
The second reason to be stablecoin allows, as much as all cryptocurrency, to be an execution term for smart-contract, which is currently not allowed either by complementary currencies or electronic money: they always require the authorization of the central body that issues or manages them (financial intermediaries). Finally, and consequently, the DLT is one of the founding technological concepts of WEB 3.0 and the stablecoins are born, like the other cryptocurrency, with it in their DNA.
The fourth type of stablecoin, the ‘seignorage style’ without collateral, instead respects the concept of equi-distribution of trust advocated by Nakamoto for the Bitcoin protocol. In this case there is no centralization, because all nodes share the conditions imposed by the algorithm of creation/destruction of currency (money supply) to vary the value as a function of parity with respect to the fiat currency of reference.
The first authoritative stablecoin appeared in the markets was Tether, back in 2012. Collateral of the first type against USD, despite the fact that over the years Teher has undergone various reputational phases on the management side, Teher still remains the most relevant sector expression for market-cap and daily traded volumes.
In the last two years, the sector has shown great fervor both for initiatives and for resources made available for investment. The issue is a business fintech, because it disintermediaries with a single shot all the traditional payments chain, especially if cross-border and without the exchange risk that characterizes the traditional cryptocurrency. Authoritative actors that present assets to highlight are the twins Winklevoss, with Gemini Dollar, the crypto giant Circle, with USDC, and Paxos, with PAX.
What are CBDCs
The ‘Central Bank Digital Currencies’, as the Bank of England defines them, are simply ‘digital banknotes’, instead of the physical banknotes.
Therefore, a CBDC is not a digital representation of a fiat currency, i.e. the electronics money for everyday use, but it is M0: if the banknotes are printed by central banks, or who for them, the CBDCs, likewise, are issued digitally by the same issuing entities.
Despite being a subject of study for more than 10 years, since mid 2019 they have received impulses differently articulated, operational and in-depth, as a response to the Facebook risk: in July of the same year in fact the company presented the Libra project, namely the issuance of its own basket-baked stablecoin.
Clearly, given the number of direct and indirect users headed to the social network and the breezy interpretation that it has given over the years to the concept of privacy about data of users, the premises were such as to hypothesize what happened: on the one hand, the ostracism of monetary authorities to Libra and, on the other, the race of the same to emulation.
If up to now Facebook has had to change its target, at least nominally abandoning the basket-baked target and aiming for Libra to a PayPal replica, in which several baked-fiat act (therefore without any more threat to any monetary system), the interest towards CBDC has instead grown.
In the realization there are extremely advanced countries, in pre-online operational beta-test, others in feasibility beta-test and countries in more or less advanced phase. Two factors common to all the projects and analyses are the complete non-disintermediation of the traditional banking system and the complete non-replaceability with the traditional fiat currency.
The U.S. sees CBDCs as a pain in the neck, cause to the contribution that their large-scale adoption would make to the ongoing de-dolarization process, mainly by China. Europe is in-depth analysis process but not operationally advanced: the cause, in this case, is the debate that is taking place among the bearers of qualms about the possible disintermediation of banks against, instead, the clear advantages that an instrument that brings money directly into the pockets of citizens would have in terms of monetary policy efficiency.
Also for the CBDC the typologies can be different according to the operation, the position with respect to the privacy of transactions, economic factors and the technology used. With regard to the latter, if they, as in China, adopt the DLT protocol they can be defined fiat-baked stablecoin, with all the characteristics seen before.
In the context of adoptability three considerations. The first, the pandemic crisis has given all latitudes a further impetus to the implementation of CBDCs: they are becoming an essential concept in the process of digitization, forced by events, of the relationships of exchange and deposit of monetary value.
Secondly, Europe is likely to be one of the last countries to adopt the instrument (if ever it will adopt it) at the Eurozone level: this is due to the dilemma of decision making, which are daily visible to all, and the disparity in the level of social digitization of different countries.
Thirdly, a Eurozone country does not need the hypothetical ‘ECBDC’ (European Central Bank Digital Currency) to create its own digital banknotes: for the issuance it is sufficient to remove from circulation (guarantee, create collateral) a quantity of M0: France, Austria, the Netherlands, the Baltic States and the United Kingdom, are in an advanced stage of development with different operational nuances.
What is WEB 3.0
Among the components, the standards, in which the development of WEB 3.0 is articulated, the distributed applications play a key and transversal role: through them the user (business or consumer) is transformed from an ‘account’, registered to a service, to a node belonging to a set (multi-level) of connected networks.
In each of the networks the trust, inherent to the use of data and their purpose of use, is placed in respect of the execution of a computer program (lines of code) shared between all the nodes of a specific network.
The current trust (WEB 2.0) is placed, centralized, in the managers of the application platforms that guarantee, for each account, the management of data and the provision of different services. Through the WEB 3.0 applications it is possible to transfer the trust to the automatic execution of a code, whose outcome is shared in terms of content, purpose and results by all the nodes belonging to the network, eliminating the role of trusted intermediary held by the manager.
It will therefore be a node that, also with certain reserved privileges, like the others will have to follow the execution, from all shared, of the computerized automatism foreseen to regulate the service offered by it. In the case in which, instead, the service originates from the spontaneous interaction between the nodes of a net, for example a marketplace, the mutual trust between the actors of the application will be based on the respect of the execution of a specific computerized automatism, for the nodes of the community and peculiar for the service object of interaction.
The lines of code are the ‘smart-contract’. It is logical, natural and historical that the transition to WEB 3.0 will be a slow process, progressive, spurious and never involve the whole (inter)net, as much as the transition from WEB 1.0 to 2.0. Currently the smart-contracts act on interactions between the parts of elementary nature, both for complexity and for amount of data and components involved.
The progress of WEB 3.0 on the distributed applications side currently suffers, in addition to the scarcity of data transferred into blockchain, two other fundamental problems that slow down its development: the lack of standardization of an inter-operability protocol between the different networks and a ‘user-friendly’ front-end for the users.
However, on the one hand fiat-baked stablecoins CBDCs are already born, as seen, designed on DLT basis and, on the other hand, the exchange of currency for currency or currency for product/service is a low complication element.
Although a contract, which regulates the relationships between parties, can be complicated in its drafting, depending on the interaction of the different variables that the same parties provide necessary for the regulation of their relationship, and therefore difficult for now to trace back to an algorithm (smart-contract) that automates it in its entirety, the occurrence of the resulting currency exchange is projecturally simple.
In fact, the question is almost always related to the value ratio between only two variables (currency vs currency and/or currency vs counter-value of the good/service): therefore, on the one hand elementary planning and, on the other hand, the need to share among the nodes of the network the only variable that indicates the counter-value of the good/service, being the cryptocurrency, of which the CBDC stablecoin are part, already based on DLT protocol.
Consequently the forecast that the development of WEB 3.0 applications will have in the payment systems one of the ram’s heads for the diffusion and market penetration, as in fact is happening by FINTECH.
The three paradigms described above have labels only for descriptive convenience. Never existed, even less talking about innovation, a label that can factually enclose a concept.
The three paradigms taken as leitmotif are significant but not exhaustive of the ‘new’ in finance but it is expected to represent what, perhaps, in the coming years will have the greatest emotional impact compared to current habits: being innovation, it is not possible to know if this will also correspond to the social and/or economic impacts in their different articulations.
So for each of the three paradigms the mutual contamination, from external variables and towards external variables is the norm, not the exception, and is called complexity. It is a state with which it is impossible to do without confronting because no matter how much you delimit the areas of observation they will always be part of ‘something else’ and composed of ‘something else’.
The ‘something else’ contributes to increase chaos and for this it is necessary to know it and treat it as much as possible: ignoring it, or treating it with sufficiency, it produces confusion.
The complex reference system, for descriptive purposes, is given the name of ‘Virtual Economy’: conceptually and mediatically, the term is useful to recall the set of ideas that make it up, and semantically it is correct, but, in fact, it is limited.
Until now, the ‘Virtual’ has been understood as a set of separate metaverses aimed at imitating factual realities, translating it into the digital world: the novelty now is the interaction of the metaverses with the ‘real’,
Periodicity and Contents
Fin WEB 3.0 does not want to be a publication of news, there are already many (of excellent workmanship) with regard to the topics covered: the imprinting is intelligence analysis (innovation intelligence) one. So a couple of monthly issues: one in which the news, useful for understanding and interpreting the scenario trends, will be reported and one for in-depth analysis.
This is an English adaptation of a neuronal Italian/English AI translation by DeepL