Proof of Performance — Blockchain applied to trading, Part 1
Blockchains as trusted third parties
The Blockchain is a wonderful tool to act as a trusted third party in a wide range of use cases. The key feature is the possibility to time-stamp any piece of data (or its “finger-print” (hash)) in an immutable an crypto-proved manner.
Of course, besides the security of the protocol itself, the strength of this proof is directly correlated to the size of the networks of miners, to its computational power and to its level of distribution/decentralization.
As of today, both the Bitcoin (supported by the
) and the Ethereum (created by ) blockchains are considered to be adequate to provide strong enough crypto-proofs of time-stamped data. The doubtful reader can comment this article and we will provide her/him with references supporting this statement.Proof of Perf (a.k.a. Proof of Performance)
One of the most challenging job to do as a trader (real or bot), is to convince investors to make you manage their money. So has been invented what is called “paper-trading”, which consists, as you may easily understand, in giving to potential investors the trading signals in a real-time (or almost real-time) way. Usually an email or an excel worksheet works fine.
But the major draw-backs are that 1) potential investors may earn money without paying any fees for that and 2) a dedicated communication channel has to be set-up every time.
The blockchain provides a nice and elegant solution for these issues. Indeed, the trader may send its trading signals to the blockchain 1) on their trading dates, but in a hashed and obfuscated way, and then 2) after a given latency period, but in a clear way with the obfuscation key. As a consequence of doing so, the trader is able 1) to prove that she/he knew the trading signals when they should have been executed on the financial markets and 2) to compute the gross performance she/he would have achieved in a trusted manner. Those two elements constitute a Proof of Performance.
Application to the Ethereum blockchain
From its programming nature wanted by its creator
the blockhain is the natural choice to implement the Proof of Performance.Indeed, given a latency period L, a set of underlying assets, a set of closing price on these assets for at least the last L open days, then, it is easy for a smart contract to compute the index value of any strategy giving trading signals for the close of any subset of the assets.
We have developed a tool that implements that and that shall be release on oct. 2017, before NaPoleonX’s ICO that shall begin from Dec 4th to Jan 4th (pre-sale from Nov 12th. For those interested, there may remain some bonus on our green list at bonus.napoleonx.ai.
Back-testing trading bots
Proof of Performance may also be a performing tool to address the power of quantitative trading strategies. Quantitative trading strategies, also called trading bots, are trading strategies that are automated. Trading bots have two main advantages in comparison to human traders: 1) they are not negatively affected by human emotions (which usually lead to under-performance) and 2) they can benefit from a wider range of data and incorporate weak signals in their decision making.
From the automatic nature of a trading bot or quantitative strategy, the Proof of Performance may be extended to the back-test of quantitative strategies. It can also be a good way to address any overfitting issues, but we will see that in a soon to come new article… Stay tuned!
