Future of Finance Ⅳ
〜The World of Web 3.0 as Seen by a Former Hedge Fund Portfolio Manager and Goldman Sachs Currency Trader
This story is a continuation of Future of Finance Ⅲ, Chapter 3 Decentralized Finance — The Future of Finance Shaped by Web 3.0 (1)
Chapter 3 Decentralized Finance — The Future of Finance Shaped by Web 3.0 (2)
As we have seen in the previous chapters, the concentration of data and centralized power in finance has brought a variety of adverse effects to light. In this chapter, I would like to explain the solutions our team at Secured Finance will provide under the Web3 banner.
There are three main objectives we are aiming to achieve. The first is the introduction of a new concept to the crypto world. Specifically, to build a ‘yield curve’ and a platform for trading them. The second is the creation of new value. By establishing a reliable system, we want to bridge the existing financial world and the Web3 world. And the last objective is the democratization of finance. We want to create a decentralized, autonomous economic sphere in which there is no centralized organization, and where all participants can directly share in the profits.
Let’s look at them one at a time.
Yield Curves and Trading Platforms
One thing that exists in traditional finance and currently does not exist in the crypto industry is the ‘yield curve’. It is a curve that connects yields over a period of time and serves as the basis for various financial instruments.
How can you earn interest rates from cryptocurrencies when there is no central bank and no bonds to be issued? One of the greatest inventions in the crypto-asset industry is the liquidity pooling system, and there are several projects that grant interest rates based on their pool system. Behind the scenes, they are distributing commissions rather than interest rates, but they are using these funds to grant short-term interest rates.
What we are trying to establish is an interest rate trading platform not only for the short-term but also for the medium- and long-term in the traditional way. If we could generate a yield curve, we will be able to structure financial products with cryptocurrency as the underlying asset and offer a variety of investment opportunities.
Whether there is demand and what will be the methodology will be covered next time in my topic.
In the cryptocurrency world, various projects rise and fall every day. Some companies are creating wonderful projects with excellent people with noble visions, meanwhile, others are succeeding in raising huge amounts of money without any visibility into their contents or management. On the other hand, there are also numerous projects that have gone down the tubes and disappeared, and in fact, there are many fraudulent projects as well. We also still hear stories of funds being stolen from exchanges or specific wallets.
The problem may be that the regulations are not set in stone and thus the lack of perspective of transparency and legal compliance. As we have seen in the previous section, the direction of traditional finance is moving toward greater transparency and regulation.
So how can this be solved? In fact, blockchain technology and transparency go hand in hand. This is because blockchain is designed in such a way that it is impossible to lie to anyone. It is open to anyone who wants to go and get information. You can even trace the flow of hacked money!
Since the regulations in each country have not yet been established, we intend to build a system based on ISDA (International Swaps and Derivatives Association), which is a standard that existing financial institutions follow when conducting financial transactions such as derivatives. KYC (Know Your Customer) and AML (Anti-Money Laundering) will also be performed. We will also undergo various audits to build a robust system. If necessary, using insurance against hacking would be an option to consider to secure our product as well as the users’ fund.
At the same time, we want to achieve efficiency. We want to minimize human intervention by replacing every possible action to smart-contract. Of course, since it is written on the blockchain, it is available to everyone and cannot be tampered with. The entire operation, such as transaction history, confirmation transmission, collateral management, etc., can all be replaced.
Existing financial institutions have developed their own proprietary systems, which are not compatible with each other, and the cost of operations is still not small. According to a report by a consulting firm, the ISDA working group estimates that the industry as a whole can expect 50% or more cost-efficiency.
As mentioned above, we would like to contribute to the development of not only the crypto industry but also existing financial institutions by creating a reliable and efficient system. At the same time, we wish to remove barriers to enter into the crypto industry from traditional financial institutions acting as a bridge between the two.
Democratization of Finance
I saw Mr. Sota Watanabe, the Founder of Astar, explain the recent Web3 movement by comparing it to the “French Revolution”. This is nothing less than overthrowing the absolute monarchy and restoring sovereignty to the people, which means that each individual will regain his or her rights, including data, from giant platformers such as GAFAM.
What we are aiming for is the revolution in the Financial Sector or Democratization of Finance. As mentioned in Chapter 2, the downside of centralized finance is the heterogeneity and opaqueness of information. Banks have been rampant in disrespecting their customers through collusion that takes advantage of opacity, as seen in Libor’s rigging, for example. It has also contributed to the widening wealth disparities through this exploitation. Our mission is to free the financial system from such centralized control and create a transparent platform that returns profits directly to the individual.
One way to achieve this is through a decentralized, autonomous organization called a DAO. There is no centralized organization and it would be governed by people with the right to vote who belong to its community. Anyone can participate. In order to achieve this, we would like to create an economic bloc where people can easily access and participate so that we can grow together.
We hope you will join us in developing the future of finance.
You can read through the whole story from the link below.
Chapter 1: A Modern History of Financial Institutions — Changes Induced by the Once-in-a-Century Crisis
Chapter 2: Information Asymmetry: The Merits and Drawbacks of Centralized Finance
Chapter 3: De-centralised Finance — The Future of Finance Shaped by Web 3.0 (1)
Chapter 4: De-centralised Finance — The Future of Finance Shaped by Web 3.0 (2)