Monday, October 05, 2015

Blockchain Financial Networks: Rethinking Risk and Finance with Automated Value Transfer

Internet transfers Information, and now Value
Blockchains are important because they constitute the next phase of the Internet, not just transferring information, but now transferring value: money, assets, and contracts. Blockchains are secure distributed ledgers, which can be implemented as globally-distributed financial networks. Ultimately, blockchain financial networks could automatically and independently confirm and monitor transactions, without central parties like banks or governments.

Fast-moving Crypto-economy

The crypto-economy is evolving quickly and it is crucial to watch and actively participate because
the uptake of blockchains could be extremely rapid, particularly by institutions. The crypto-economy is important to watch because:

  1. whereas a year ago crypto-technology was heresy, it is now becoming commonplace
  2. blockchains as a modernizing technology have a pervasive reach – including all cash, financial instruments, and contracts in economics and finance; and all legal, legislative, political, and governance operations 
  3. the decentralized structure of crypto-technology implies a reorganization of the existing financial system; and eventually, political system

The key benefit of blockchains as a modernizing technology is that they allow assets to be transferred immediately, not taking 3 days to settle (t=0, not t+3). This has a number of efficiency improvements including decreasing counterparty risk, reducing cost, improving liquidity, and instilling trust in the system.

Rethinking Risk
Blockchains, crypto-economics, and decentralization invite an explicit reconsideration of risk. Four risk regimes can be identified ranging from 1) traditional mutuality risk models (Lloyd’s of London) to 2) classical portfolio theory (CAPM, efficient frontiers, trinomial tress, value-at-risk) to 3) black swan risk models (more frequent unpredictable outsized events) to now 4) decentralized risk models. As we rethink the world of science through complexity, now too complexity is a model for rethinking risk. Part of the more robust consideration of risk is moving to a conceptualization of causality that is not exclusively straightforward and linear. Complexity math allows a rethinking of risk in decentralized network models of consensus trust.

Rethinking Finance
An institutional crypto-economy also calls into question the definition of finance. Finance can be seen as a spot and future contingency management system for assets and liabilities. In this definition, blockchains are improved form of contingency management, with greater precision, automation, and lower-risk. The Internet becomes a contingency management system with programmable money, smart contracts DACs, and distributed ledger transactions, all contributing to automated value transfer.

Realizing the Automation Economy
Distributed ledgers allow a more serious move into the Automation Economy, via secure value transfer previously unavailable with the Internet. Internet 1.0, the ‘non-secure’ Internet allowed the automation of several sectors such as news, information, entertainment, manufacturing, and to some extent health. Now Internet 2.0 seen as secure value transfer networks could facilitate the automation of the entire economic, money, finance sectors, as well as government, politics, and legal services. What is at stake is a fair and orderly transition from the Labor Economy to the Automation and Actualization Economy.
Automated value transfer is the bigger project of decentralization, algorithmic trust, and the automation economy.

blog comments powered by Disqus