Asset management on Web 3.0. rails — one step closer to global financial inclusion?
By Vasily Sumanov & Olga Grinina
Decentralization hype train has been operating at full steam for some time now bringing along a drastic change of the economic reality with commerce and finance being the blockchain darlings. This, of course, didn’t happen overnight. Over the last couple of decades, the concept of profitability and socio-economic impact of entire industries has drastically shifted. Information technology is pushing forward the entire set of newly invented values based on social interactions. More so, many of businesses and public agencies operating by conventional industrial principles are struggling to compete with their digital rivals staying afloat mostly by virtue of enormous debt load, excessive monetary emittance, and some creative financial schemes.
Meanwhile, compared to the 7 billion world population, the decentralization is now tackling the concerns of very limited categories of people — mostly geeks and financial institutions. Around two billion people worldwide still do not have access to the financial services that meet their needs. Whether individuals or small to medium enterprises, many struggle to get sufficient financing to lift them off poverty, establish a sustained source of income or gain the opportunity to obtain shares and invest in assets. Distributed ledger technology could alleviate some of these challenges by virtue of newly invented mechanisms and principles for more efficient asset management, intermediary-free remittances, credit-history for micro-loans and accessible tokenized-assets investments.
To grasp some major implications of this shift for the global economy as we know it, let’s try to figure out the origin and major building blocks of driving forces behind the bespoke decentralization.
Web 3.0: the Economic Trigger
In fact, this whole process is entirely organic. Since the 70s, the change of economic paradigm has stemmed from massive boosts in labor productivity tied to fast technological development ultimately changing the industrial operational mode. The mass adoption of the Internet as a global tool for fast information exchange and new social interaction modes has accelerated this phenomenon of post-industrial transition, which can now be defined as
‘The transition from the economy of scale to the sample-based economy’.
This definition is short, yet embracing the essence of post-industrial transition. Once essential stages of product development — tech execution, branding and marketing — have now become much more expensive than scaling of production that implies effective implementation of all the aforementioned stages. In the world of open-source code, there is zero-like cost for copying, while production of a sample can be quite hard, lengthy and expensive. Pure industrial age goods are becoming less critical to the end consumer, in contrast to typical post-industrial products — like brands or valuable information. This new status quo is strengthened by the phenomenon of network effects that are often stronger and more compelling than their offline counterparts. What it basically means is that each open-source product is first of all a brand powered mainly by the community around it, while the tangible product is taking up the secondary role.
That said, we’re now observing extensive development of services and products seeking to transfer business processes from a conventional operational model by creating a decentralized community-based projects on the basis of existing industrial patterns. These projects are solving pretty much the same problems as their industrial counterparts, but on an entirely new level, by introducing new business and tech efficiency standards that appear to be outperforming the existing analogue products on a number of markets.
Speaking of tech, you might have already heard a thing or two about Web 3.0. that is essentially a technology stack for deploying decentralized applications and socio-economic concepts for postindustrial community-based services of the future. Back in 2014, Dr. Gavin Wood in ‘dApps: What Web 3.0 Looks Like’ elaborated on how post-industrial models of interaction between society and technology would start to push for adoption of new decentralized protocols. Now think even bigger. Post-industrial transition affects not only the business landscape, but whole institutions and operational mechanisms that once were considered to be the greatest achievements of vanishing industrial era. Asset management, social security, pension systems are probably most vivid examples here. Once built by the governments as an effective tool for sustainable future, they are now failing to perform this basic function. Banks and public agencies are growing weaker, budgets are continuously decreasing with government debt gradually accumulating to the point where it’s practically impossible to retrieve. Asset portfolios of the majority of pension funds consist of state and corporate debt. The prospects of this deceased framework with capital assets in the form of governmental debt looks extremely alarming. Even more alarming is the fact that the future of each and every individual ultimately depends on decisions of a governmental or corporate entity that manages those funds and savings. Now that we realize that gradual weakening of governmental functions is typical for post-industrial economy, that’s why it’s extremely important to find a replacement solution.
Could the decentralized Web 3.0. principles of re-invented socio-economic interaction be a viable alternative to this corrupt system that affects the majority of regular people?
Re-imagining asset management
This brings up another fascinating question: what would asset management look like, once decentralized interaction patterns become adopted globally? Naturally, decentralization is not the silver bullet to each and every industry. Apart from decentralization, one of the core features of Web 3.0 is merging the roles of the owner, consumer and producer into one: we now get this opportunity to produce and dispose of our own data, while consuming the service at the same time. But it’s not solely the data that the consumer fully controls. More importantly, decentralized asset management systems are able to transfer the control over more universal ownership and possession rights from financial institutions to the hands of users. Integration between trusted protocols for decentralized financial services, such as dx/dy, Dharma Protocol, ETHLend and others, could eventually become a good opportunity to manage assets, debts and risks in a new, trustless and convenient way. Independence of large scope of the traditional financial institutions is a great advantage and allows to re-engineer traditional finance and create the new types and paradigms of financial products and operating mechanisms.
Essentially, asset management on Web 3.0. rails is re-imagining traditional asset management stemming from newly built underlying tech stack in terms of mechanics, parties involved, incentives and the nature of assets. There are three key components to consider when creating this system: assets, storage and exchange, social interactions (or trustless responsibility).
First, assets under management need to be fully digitalized and exist in digital form. In case of traditional assets and money the term ‘tokenization’ is applied, which means the possibility to operate with tokenized assets in a completely decentralized environment without the appeal to traditional entities, such as depositories, brokers, and banks. Cash flow, revenue or debt, generated by those assets also needs to be redeemed in digital form.
Storage and exchange
To manage these new assets, a new technological infrastructure able to execute simple operations, such as storage and exchange of assets in trustless and secure mode, is required. Decentralized crypto exchanges and custody services are a good example of this sort of systems. All manipulations with assets are exchange-like operations that are processed within an ecosystem of new type based on set of crypto-economic primitives. The notion of crypto-economic primitive implies a self-sustaining system driven by tokens and based on the protocol that incentivizes its participants.
Here interactions between the fund manager (or the management team) and the customer come into play: for the win-win result it is essential to introduce the protocol of trustless interaction with built-in incentive mechanism. The blockchain-powered token allows for creation of new sorts of incentives that were not possible before. Most importantly, the decentralized asset management is not only about managing investable assets, but also about operating by new incentives for professional asset managers and funds, along with introducing a whole new business model for a user/manager interaction. Hence, professional players are incentivized to operate transparently and efficiently, while beneficiaries are keeping constant track of their funds and free to choose how they wish to dispose of their assets.
More so, there are some other essential prerequisites that need to be taken into consideration when building this new stack of programmed finance:
Decision-making strategy on extremely chaotic market
Smart assets integrated into entirely new business models can generate new sort of revenues or cash flow, mainly in case of active use in the relevant networks or services. Digital assets are not limited to conventional shares that are often indirectly connected to network or application cash flow. So, in some cases, it can cause a dilemma for the fund manager — to buy and hold, or to invest and participate.
The transition of private cash flows from business entities to public environment with smart assets attached to the cash flows (mostly indirectly) raises another fundamental question: will asset management of the new time partially consist of working with systems/business/projects that imply holding of their assets by individuals? The typical role of an asset-manager is blurring the lines as well: what would be their actual structure, scope and strategy? The crypto space has introduced us to the new economic reality: it’s not exclusively business entities that operate assets, but a variety of private players entering the scene — networks, open-source projects, DAOs. In the crypto-economy of new formation, the typical asset management strategies span from buying and holding the asset waiting for the stock going up to active participation in community-based platforms, which was never the case in the traditional asset management of.
Privacy and security
Transparency of blockchain based networks is usually preached as its key advantage. Nevertheless, privacy is the same desired attribute of Web 3.0 for the customer as security and censorship-resistance, which brings up another challenge: privacy vs. transparency. Applying privacy layers to public blockchain networks that has been extensively researched over the last years might be a viable solution here.
How about conventional social security trust funds?
Building a system for asset management in line with Web 3.0 is not easy. Designing a long-term operating trustless fund management system for ‘saving-for-retirement’ is even more challenging. The very definition of ‘pension’ needs to be reinvented to fit the new technological and social reality. If past pension was defined as accumulation of funds for payments that are due upon reaching a certain age, now it can be referred to as strategic preservation of personal capital assets in a secure and reliable mode. It is the primary goal that is now being addressed by emerging trustless asset management platforms that leverage an essential set of features to eliminate cases of misuse or corruption of funds seeking to give pension beneficiaries full control of possession and disposal of their savings. When implemented, these protocols have the potential to bring a significant shift to the industry by introducing the concept of real financial independence where individual ownership and possession rights are granted to every user. In Akropolis -like systems, a user is entitled to possession and control their assets and savings being able to monitor the process transparently and having access to their funds tracking them at any time. It is basically an open borderless competitive marketplace for asset management services made of the set of crypto financial primitives that open up access to effective asset managing strategies to virtually everyone. Naturally, to build those basic blocks, a number of crypto-financial and crypto-economic primitives should be introduced and tested to prove their reliability and efficiency.
Okay, so where do we go from here?
Now, it’s pretty clear that with appearance of digital assets a significant part of centralized industrial age financial services will be re-imagined in the community-based decentralized mode. The asset management of tomorrow is set not only to establish a decentralized and trustless system to manage assets, but also to create a framework for active usage of digital assets with a view to receive fixed stable income. By creating a set of crypto-financial primitives, i.e. the mechanisms and operational modes to fit the new economic patterns, decentralized asset management platforms strive to bridge this gap starting with the concept of personal financial independence as one of the fundamentals that stands for trustless operation, safety and reliability.
Ten years ago there was no Bitcoin, and zero possibility to store one’s funds in trustless mode. Now, there is an entirely new industry with enormous market capitalization. If we consider the last decade — forget that, the last year — and the transformation in financial products, we begin to imagine how much more change is in store. And as we’re moving data and assets on to the blockchains, some bigger questions still exist. One thing is perfectly clear though: the reality where a common teacher on the outskirts of India is depositing her bitcoins into a global trustless pension system being sure that none of it is stolen or misspent is officially upon us.