The Era of Distributed Financial Products: Here It Comes
The crypto-finance world has developed enough to produce financial products far better designed for the people’s needs. By people.
Sad Finance
Our financial system is not feeling well. It’s slow, expensive, unsafe and its transparency is more than questionable. Behind the digital façade of online transfers and mobile apps, banks and insurance companies are drowning in paperwork. Layers of intermediaries and ever growing fees make it cost-ineffective. It’s extremely prone to economic crimes: as PWC reports, 45% of financial services suffer from it every year. Compliance and regulatory costs are soaring putting more pressure on the end user — us, humans. Centralized nature of industrial finance makes makes it unresponsive to innovation, exclusionary and clumsy.
Happy Finance
With the creation of Bitcoin in 2009, a new, parallel financial world appeared. The world “of advanced functionality, seamless exchange, and 24/7 global availability”. Blockchain-based finance exceeds the abilities of the old system in many regards. It’s safer, cheaper, and 100% transparent. All transactions within the network are performed, confirmed, verified by and open to the participants of the network. There’s no government to control it — it regulates itself. There are no intermediaries to feed off of it — all transactions are peer-to-peer. Unlike Wall Street, this system is inclusive: everybody is a player in this game. Even the words like “client” or “customer” are not applicable: sounds too subject-object for this environment.
Humans of the network, a little over 10 million of them, can now store, trade and create money on blockchain. The time has come for more complex financial products: credits, loans and insurances — conceptually different from those we use now.
How? Financial products of the crypto-currency world are distributed. Meaning — not centralized.
The invention of Ethereum-based smart contracts made it possible to create distributed financial products. A smart contract is a program that makes sure that a payment or an exchange of cryptocurrency happens no matter what. Traditionally, that is what banks, insurance companies and governments do — promise you that you will get paid. Except, they can change their mind or use funds otherwise — smart contract can not. It does not have a mind — it’s a program that controls accounts and performs transactions.
Crowdsurance Instead of Insurance
Insurance is the saddest area of traditional finance. Nobody likes insurance companies for they are slow, expensive and incomprehensible. Processing claims takes weeks, sometimes years, and they never want to pay you what they promised they will. An alternative to this mess in crypto finance would be crowdsurance — a distributed platform for sharing risks. REGA Risk Sharing are the ones who coined the term and built the first crowdsurance product for pet owners — Lexi Club. Here’s how it works.
Let’s say, you have a dog and you want to protect it against accidents or illness. There are other people who also have dogs and want to do the same thing; and none of you wants to go to insurance companies. Instead you unite in a community of dog owners and accumulate your personal funds in a crypto jar — a pool. 80% of the contributions are used to secure the pool, and 20% — to improve the platform. If anything happens to your dog, you send a photo of the vet bill to AI bot, it checks in with the vet, makes sure none of you lies to responsible dog owners in the pool and commands the smart contract to give you back your 80% that you see back on your account within 90 hours. No claims, no intermediaries, no arbitrage. If the scoring algorithm sees something odd — like someone sending the dog to a complicated surgery next day after signing the contract — it sends an alert both to the system and the community: REGA’s token holders that took on the role of “experts” to mediate suspicious cases.
Inclusive Credit Instead of Just Credit
Credits. What do we know about them? They are hard to get and even harder to pay out: the rates are high, the pressure — too, you risk loosing property and sleep while the banks are doing everything to make you feel unworthy of their money on every step of the way. Unless your financial situation is already stable and your debt repayment history is spotless, you’ll be put through hell to raise money from any financial institution. Scoring and risk assessment mechanisms are exclusively managed by lenders, so you’ll never know why you are considered a risky client, especially if you are new to this and don’t have credit history at all.
Bloom created an end-to-end protocol for identity attestation, risk assessment and credit scoring to help those who currently cannot obtain a bank account or credit score. Since it operates entirely on blockchain, Bloom offers a high security against identity theft, global credit score for borrower and decentralized credit data for lender — something banks could never do.
Community Loans For Small Businesses Instead of Commercial Loans
Say, your favorite corner coffee shop wants to buy a new coffee machine and make your morning coffee even better with La Marzocco FB/80 4 Volumetric Espresso Machine — the best of the best, costs $23, 800 — a little less than four-months profit of your coffee place. You and your neighbors want to lend the money to the owner in a secure way.
Wish Finance offers cash advances and business loans with interest rates based on the company’s cash flow, not assets. Loans are issued within 24 hours and are re-paid with 2–5% of the merchant customer’s’ payments. Peer-to-peer nature of the distributed loans give small businesses access to international capital while lowering risks of the lenders. Each loan can be insured from the bankruptcy of the borrower.
Crypto finance is an open, inclusive world. No one can force you to use blockchain or products built on it, just like no one forced you to use Uber. This is truly global opt-in system that you can choose to be part of and why wouldn’t you? In the era of distributed financial products, every aspect of how they work: risk assessment, fraud detection, claim processing, underwriting, payments are performed and regulated by algorithms and community itself. It’s the era of empathy and reason in finance, the digital native ecosystem where everyone is welcome.
