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36. 01/01/2019 21:17
Fidelity’s Man: Can Tom Jessop Bridge Crypto and Wall Street for Good?

Everyone in cryptocurrency has a story about the time they went down the proverbial rabbit hole. Tom Jessop’s takes place in his kitchen.

It was around 2013 or 2014 when Jessop, then a managing director at Goldman Sachs with two decades of Wall Street experience, became enthralled with bitcoin – at the time an obscure topic in finance circles.

“This idea of this scarce asset, this fully digital money, cryptographic trust replacing institutional trust – all these things, I thought, were interesting,” Jessop recalls.

As part of his self-education, he tried to explain the phenomenon to his wife and three sons. “We ended up watching a Khan Academy video there in the kitchen,” Jessop told CoinDesk. “My youngest son at the time was 10 or 11. No one understood it. My little guy said ‘I understand it.’ For an 11- year-old, he did a reasonably passable job explaining it to me.”

Looking back on it all, he understands why people struggle with the concept, explaining:

“In hindsight the reason my family didn’t understand it is: it sort of challenges how you think about money. A lot of people think money, fiat money in particular, has intrinsic value. It doesn’t. If you can’t understand that, there’s this mental thing, and you can’t get to the next level.”

Jessop, however, did get to that next level of understanding. And now, nearly five years later, he and his team at Fidelity Digital Assets (FDAS) are poised to help take the cryptocurrency market to a new level of maturity – and, perhaps eventually, liquidity.

Fidelity Investments will officially launch the new business, a trading platform built for institutional investors, in the first quarter of 2019. The product of years of behind-the-scenes research, experimentation and planning at the Boston-based asset management giant, FDAS represents one of the boldest moves to date in the space by an incumbent financial institution.

The platform promises to address market structure problems that have kept crypto-curious big-money investors on the sidelines, specifically around issues like custody of assets and price discovery. By offering to safekeep bitcoin and ether on behalf of hedge funds, family offices and the like, and to match their buy and sell offers with a range of liquidity providers and exchanges, FDAS aims to make these institutions feel at home in a nascent market infamous for hacks, thefts and a lack of transparency.

That doesn’t necessarily mean the launch of FDAS, or other soon-to-open institutional markets like New York Stock Exchange parent ICE Group’s futures platform Bakkt, will immediately resuscitate crypto prices from their year-long funk. But they are laying important groundwork for the industry’s long-term growth.

“What will really make an impact is the next bull run, when these institutional tools are available,” said Daniel Cawrey, chief executive officer of Pactum Capital, an over-the-counter (OTC) trading firm.

Jessop is perhaps unusually suited to lead such an effort, given his pedigree. He’s worked in traditional capital markets, but also invested in blockchain startups and helped run one for a time. He sees the long-term promise in open financial networks but has also pitched blockchain tech to enterprises and knows what they require to be comfortable, and compliant, dealing with crypto assets.

“He has this unique combination of skill sets bridging all these areas and real experience in bringing emerging technologies to market,” said Jill Carlson, a blockchain consultant and fellow Wall Street veteran who worked with Jessop at the startup Chain in 2017.

The road to Fidelity

Soft-spoken and genial, Jessop is a far cry from the stereotype of Wall Street executives as “human piranhas” or “masters of the universe.”

“He just doesn’t have a bad bone in his body, and he’s no pushover, a unique combination,” said Brad Levy, who worked with Jessop in Goldman’s principal strategic investments (PSI) group. “He somehow finds a way to be ambitious and forward without hurting people in the process.”

Levy credits Jessop for helping Goldman to reshape the U.S. equity markets in the early 2000s, for example, through the firm’s investment in Archipelago, an early electronic stock trading platform (which eventually merged with the New York Stock Exchange).

“Tom played a big role in all that coming together from a Goldman perspective, benefiting the market and us at that time,” said Levy, now the CEO of MarkitSERV and global head of loans at IHS Markit.

By the mid-2010s, Jessop was helping to put together Goldman’s investments in fintech startups, including a small but symbolically important stake in one of the longest-running exchange services, Circle Internet Financial. “In 2015, there had not been a lot of large players in banking who had made investments in companies in the space, so it was noteworthy back then,” said Circle co-founder Jeremy Allaire.

Carlson, who was working at Goldman as a bond trader around that time, agreed that taking a stake in a bitcoin startup was a bold move for that era.

“It’s easy to forget now, but just a few years ago, to use the word ‘bitcoin’ or ‘blockchain’ within a bank would get you raised eyebrows or people looking at you with a puzzled look, like, ‘What is this thing you’re talking about?'” she said. “Now there’s this stereotype of the Wall Street person who bought into bitcoin, but when Tom got into the space, making the investment in Circle, that was definitely not the case.”

Jessop himself sounds more humble than anything else when he talks about this period, when he met with early evangelists of the space like Digital Currency Group founder Barry Silbert, and spoke on panels with the likes of Balaji Srinivasan of venture capital firm Andreessen Horowitz (now the CTO at Coinbase).

“It was crazy, trying to learn at the same time as these people, who were further ahead, were doing interesting stuff,” Jessop told CoinDesk.

In April 2017, no longer content with just investing and learning from startups, he joined one, becoming the president of Chain. That company, founded by Adam Ludwin, had started in 2014 as a provider of APIs for bitcoin developers but repositioned itself the following year as a vendor of blockchain technology to enterprises. “Visa was a big client. That was exciting because Visa had something in production,” Jessop said.

Stepping back, the conventional wisdom during the 2014-2016 bear market was that digital currencies running on public networks weren’t going anywhere anytime soon, but that businesses could leverage the tech to create their own private versions.

But the year he came on board at Chain, the crypto market came roaring back, and the zeitgeist once again shifted away from gated corporate blockchains in favor of the public ones powering digital coins and tokens. So did his new employer.

“The founders decided to do something more in the public space,” Jessop said. “In the span of nine months to a year they completely pivoted the business model.” (The transformation became apparent to outsiders in September 2018, when Chain was acquired by Lightyear, a for-profit company building on top of the public Stellar protocol.)

It wasn’t what Jessop had signed up for – though that’s not to say he was averse to public blockchains. “By no stretch of the imagination am I a private-versus-public guy,” he said. “Everything we’re doing here [at Fidelity] is public, and I love it. And I’ve always had a keen interest in both.” But at Chain, “I didn’t feel I could be particularly helpful to them in where their business was headed.”

As Chain moved in a new direction, Jessop started talking to Fidelity, and he joined the company in January 2018 as head of corporate business development. It was a similar job to one he’d held at Goldman, scouting for M&A, venture and partnership opportunities.

But very soon, Fidelity would hand him a bigger challenge.

Not your grandfather’s money manager

To understand the significance of that challenge, it helps to recall how Fidelity, the world’s fourth-largestasset manager, had positioned itself as an unusually crypto-friendly corporation.

For years, Fidelity had been studying bitcoin. Not just “the blockchain,” which had been the politically correct area of interest for regulated, reputation-conscious financial institutions, but bitcoin itself. This curiosity had stemmed from a wargaming exercise that took place in 2014.

“We were trying to envision what potential futures might look like that we weren’t putting any probability against but just trying to prepare for and imagine the possibilities of,” recalled Katie Chase, a senior vice president at Fidelity who was involved in these scenario-planning discussions. “One of them was ‘frictionless capital markets.'”

Tom Jessop in Fidelity’s offices.

“Frictionless” described bitcoin, or at least certain aspects of it. Transactions in the cryptocurrency typically settled in minutes, rather than the days it took for bank transfers or securities trades (and weeks or even months for instruments like syndicated loans).

While buying or selling bitcoin through exchanges like the now-defunct Mt. Gox was a cumbersome process for early adopters, once on-boarded, you could zap value across the globe instantaneously. (Well, nearly instantaneously; more on that shortly.) Picture the Autobahn… except with really crummy on- and off-ramps.

Was this the “straight-through processing” that financial professionals had long dreamed of? The strategic planners at Fidelity thought it was worth at least investigating.

The company started experimenting with crypto in the Fidelity Center for Applied Technology (FCAT), an R&D lab. Some of its early trials had inauspicious results, such as allowing employees to buy food with bitcoin at the company cafeteria. Chase recalls an awkward time when a senior executive held up the line trying to pay for a snack with the cryptocurrency.

“The cashier was trying to wait for the transaction to clear. That can take a while, as opposed to giving him his banana and assuming the transaction would come through,” she said. Unlike a credit card transaction, in crypto there’s no intermediary to guarantee eventual payment. So even though a merchant won’t have to wait days to see the money, as they would with Visa or Mastercard, it might take 20 minutes to get a confirmation that the transaction was recorded in the blockchain rather than an immediate authorization.

Friction at the point of sale aside, the employee pilot taught FCAT another lesson. “People don’t want to spend their bitcoin,” Chase said, because it tends to appreciate over time. “You hear all these stories about how someone transferred $1 to their friend, ‘Yay, good job.’ They come to realize that that $1 in today’s terms is many many more dollars.”

While that didn’t bode well for bitcoin as an everyday currency, it underscored the case for the asset as “digital gold,” a long-term store of value for those willing to stomach the volatility.

Fidelity’s explorations continued. In 2015, a blockchain incubator was spun up within FCAT. The researchers started mining bitcoin, an activity that continues to this day, according to Chase, who now runs the incubator. Fidelity’s charitable arm began accepting crypto donations.

And then there was the coming-out party: In May 2017, Abigail Johnson, the chairman and CEO of Fidelity, spoke at CoinDesk’s Consensus 2017. “I love this stuff,” she declared, sporting a “Vote Nakamoto” pin, a humorous reference to bitcoin’s pseudonymous creator.

The fact that Fidelity is a privately held company (49 percent owned by Johnson’s family) helps explain why it can push the envelope this way. Spared from the pressure of having to show short-term profit growth quarter after quarter, it can invest in cutting-edge projects that might not pay off fast enough to satisfy Wall Street analysts’ expectations.

Crypto is not the only example of Fidelity’s adventurousness. Jessop notes that Fidelity was one of the first firms to offer online trading back in 1993, via the internet but not on the World Wide Web, which was still in its infancy. “There’s this reinvestment in innovation here which I think is unique,” he said.

Notably, Fidelity has not participated in any of the private enterprise blockchain consortiums, like R3 or Hyperledger, that other banks and financial companies joined.

“To date, the technology isn’t mature enough for it to be particularly impactful in the securities space,” explained Chase, citing scalability and privacy issues. She said:

“Ultimately, we believe the future is in open permissionless ledgers. Right now the technology’s just not ready for us to be doing financial securities transactions on open permissionless ledgers.”

All things considered, then, it wasn’t a huge surprise that the first business to graduate from the FCAT blockchain incubator was not some esoteric back-office play, like using a shared ledger to track proxy votes or audits. Instead, Fidelity decided to build a business around what is arguably the most successful application of blockchain so far: trading crypto.

The corporate type

Not long after Jessop arrived at Fidelity in January 2018, he was asked to lead the new business, which would fill a gap the team had identified.

“We didn’t see an institutional quality offering in the market,” he said. “People are trying to be institutional, but not the way institutions want to consume that service.”

Further, Fidelity saw institutions are the more appropriate investor category to make its initial focus. “Digital assets is an emerging asset class, [with] a lot of volatility,” Jessop said. “A lot of things still need to be proven out. Institutions are more sophisticated in terms of how they think about this stuff.”

The business plan was kept under wraps for most of 2018, as Jessop recruited employees (his team is now 100 strong) and got the wallet and other technology that the incubator had already developed ready for production.

Fidelity CEO Abby Johnson speaking at Consensus 2017.

“When you’re using things internally, you don’t really need fancy, intuitive front ends. But when you have a customer who’s going to be interfacing with the system, you have to do UI/UX design,” he explained, by way of example. “So it’s really just productizing these technical components and objects that we’d already been using internally.”

After FDAS was unveiled in mid-October, some on Wall Street scratched their heads that Fidelity, best known as a consumer financial brand, was courting institutions. “People see us as an asset manager and a personal wealth manager. But we have an institutional business,” Jessop said. “We have a capital markets business. We service about 13,000 banks, broker-dealers, funds. So we have that DNA.”

And with that DNA, FDAS aims to bring a level of sophistication to the market previously unseen from service providers in crypto. Take, for example, its custody offering.

For context, the blockchain industry has already developed innovative ways to safeguard assets, such as cold storage (keeping the cryptographic private key to a wallet offline, either on a device disconnected from the internet or a piece of paper locked away in a safe) and multi-signature wallets (which can be programmed to require more than one private key to release funds).

To some extent, these innovations were born out of necessity, since crypto is a bearer asset, more like cash or jewelry than stocks or bonds. Knowledge of the private key means control of the asset, and if a key is compromised and the thief transfers money out of a wallet, it is gone for good.

According to Jessop, FDAS will marry crypto security methods with processes and procedures that enterprise clients expect, things Fidelity does as a matter of course in its traditional custody business. “You think about another custodian keeping your own personal coins at Xapo or Coinbase, there’s a single login. Institutions don’t want that,” he said. “Institutions want something called ‘maker-checker‘ – the segregation of duties in which two individuals within an organization must sign off on a transaction.”

Think of it as the corporate, pre-crypto forerunner of multi-sig. “You might be able to say, ‘I want to transfer bitcoin out of a wallet’ but guess what, there’s someone else in your organization who needs to approve that electronically before it can happen,” Jessop said.

Another potential differentiator: Leveraging Fidelity’s insurance relationships, FDAS has obtained an insurance policy against theft or loss of the digital asset it will custody for clients. Such coverage is notoriously scarce right now, in part because the insurance industry doesn’t have much of a track record to go on in underwriting the risk. As Cawrey of Pactum put it: “Any insurance policy in crypto is bespoke.”

Jessop would not name the carriers or say how much coverage FDAS secured, but he said it is significant. “Based on what our knowledge was of industry capacity at the time we asked for the insurance, we were pleasantly surprised by how much we got,” he said.

However, Jessop was clear that Fidelity’s own balance sheet won’t be an additional backstop for losses, since FDAS is separately capitalized from the parent company, “a standalone business unit.” This is also one reason FDAS is pursuing state licenses rather than piggybacking on Fidelity’s federal broker-dealer license, Jessop said.

Yes, there are real digital assets you can own.

A slow burn

On the trading side, Jessop emphasizes that FDAS will not be an exchange. Rather, it will act as a brokerage, helping clients find the best price available across a highly fragmented global market.

“If you’re an institution now and you want to trade digital assets you need to open accounts at various exchanges and fund those accounts,” he explained. “There’s no concept of a consolidated tape. I have to interrogate those exchanges separately to see who’s got the best price and then execute.”

To address this problem, at the outset FDAS will allow clients to submit buy or sell orders and have liquidity providers compete for their business.

“Our goal is that those liquidity providers will quote tight markets around some benchmark or index,” Jessop said. “So clients have a sense that they are getting a best-price experience through Fidelity.”

And over time, it may “cross” orders, i.e. match one investor client’s order with another’s, he added, though “that won’t happen until there’s a critical mass of trading activity on the system.”

Implicit in that statement is the assumption that critical mass won’t be there on Day 1. So it bears repeating: anyone expecting bitcoin or ether prices to go “to the moon” in the first quarter simply as a result of FDAS (or Bakkt) coming online is likely to be disappointed.

To put things in perspective: Allaire says Circle signed up 1,000 institutional clients in 2018, and while the majority have started trading crypto, many are “waiting and getting ready.”

“The nature of the institutions involved today, it’s not the BlackRocks or pension funds or large asset managers,” Allaire went on. Rather, the players to date have been smaller pools of capital, like hedge funds and family offices.

Hence, while Fidelity’s platform “is going to be useful” in bringing in the larger investors, “they’re a little bit ahead of the market,” Allaire said. “It’s not like asset managers are banging down the door to get some bitcoin.”

Such caveats aside, it’s still fair to say FDAS’ conception is a milestone for cryptocurrency.

“Fidelity was one of the more real and most exciting announcements of 2018,” Carlson said, adding:

“The fact that a mainstream, retail but big financial markets platform is moving into crypto in such a serious way – not just a proof of concept, not just dipping a toe in the water, but diving into the deep end – is a huge leap, and hopefully a testament to the fact that this space has now grown up and become an industry and is here to stay.”

Even Caitlin Long, a former Morgan Stanley executive turned bitcoin and blockchain advocate who has expressed worries that Wall Street will ruin crypto by “financializing” it through practices like rehypothecation (essentially, creating multiple claims on the same asset), said this is less of a concern with Fidelity.

“Fidelity is a lot more likely to be careful about these issues than the sell-side firms … because Fidelity (and other mutual fund companies) are on the losing end of these practices in securities markets,” Long said. “So I’m more optimistic that Fidelity will do this right.”

2019 and beyond

By December, FDAS had signed its first investor client. Jessop said the platform will launch in the first quarter of 2019 and will spend the first half of the year “executing on the richer pipeline opportunities, things we’ve been cultivating for a couple of months,” while making sure “everything is working and we’ve shaken off the kinks, so to speak.”

As for the revenue model, Jessop said FDAS will charge a commission on trades (no spread, since it won’t be taking a principal position) and a fee based on assets under custody.

To start, it will facilitate the trading of bitcoin and ether, and then look selectively at adding the rest of the top five to seven coins by market cap. Notably, the other reason FDAS won’t seek a broker-dealer license, according to Jessop, is that it doesn’t need one, since it won’t be dealing in securities – suggesting that tokens from initial coin offerings (ICOs) that are at risk of being designated securities by regulators won’t be supported on the platform for the foreseeable future.

Jessop looks out over Boston.

But that doesn’t mean Fidelity doesn’t see a bright future for the representation of securities with tokens on a blockchain.

“We envision a day when people will trade stocks, bonds, real estate, private securities in tokenized format,” Jessop said. “It’s not just getting this parallel universe with these new assets, but the application of the underlying technology to the existing financial system. Which is incredibly powerful.”

He noted recent transactions in which a Colorado hotel and a World Bank bond issue were tokenized. “We’re watching that trend carefully,” he said. “That’s the fullest expression of what we’ve built and quite frankly it has much more applicability than to just bitcoin, ether and other things.”

Five years out, he predicted:

“You’ll have an interesting mix of assets that only exist because the technology allowed them to exist [and also] other assets that want to take advantage of the technology. We’ll be custodying all of those things and we’ll be developing other types of services that make us look more like a full-service institutional brokerage for this asset class. So we think this is actually a new type of brokerage business.”

In the meantime, Jessop advises observers of the blockchain industry not to put too much stock in the price doldrums of 2018.

“It’s very easy to over-index on what’s going on in the market right now from a price standpoint,” he said. “If you look at the uptake of [bitcoin scaling project] Lightning, if you look at institutional investor attitudes in this space … things are probably more robust than the casual observer would see.”

For example, he noted that venture funding for the industry in 2018 approached $3 billion, a nearly threefold experience from the year before.

“There’s a lot more smart money coming into the field, a lot more smart people from academia,” he said.

And showing that his passion for crypto goes way beyond lucre, Jessop expressed wonderment at the accomplishments of the community’s open-source software developers.

37. 31/12/2018 10:08
The End of the First Crypto Decade

The end of 2018 is not the end of a year. It is the end of a decade, a decade that changed the world of money and finance.

I do not mean the decade since the release of the Satoshi paper that CoinDesk properly celebrated a couple of months ago. With the typical egotism of young, brilliant innovators, the crypto community loves to think that this is the end of the first decade of the crypto-era. But the rest of the world has been celebrating quite a gloomy anniversary this autumn: the 10th anniversary from the beginning of the Great Financial Crisis.

With Lehman’s default, the world woke up and found out that banks were not the safest industry in the world. They could not borrow enormous amounts of money from the public and invest them in very uncertain financial markets without running any material risk of default.

2008 taught us that banks could run out of the cash and capital necessary to manage their risks, and that they could default or require taxpayer money to be saved and avoid a default on their deposit liabilities.

What happened in the next 10 years? Did banks disappear? Was commercial bank money replaced by a new global cryptocurrency? Did financial markets, that were the spark that lit the crisis flame, get replaced by a network of trustless smart contracts? No, banks survived, and so did financial markets.

And now that banks and financial institutions seem to have discovered that blockchain is not a magic software giving easily safety and efficiency to existing processes (neither is it the weapon of a overwhelming digital gold crushing all existing world money), they tend to disregard that this was also the decade that saw concepts like distributed systems, financial cryptography and consensus algorithms become part of a public debate.

Yet, 2019 could be the year when banks really understand what these concepts mean for finance. Remember, finance had to pay a price for surviving, as a review of financial markets over these 10 years clearly reveals.

It became clear that the role of banks in money creation through deposits made them systemically too important and fragile for allowing them to play freely their other roles of moving liquidity and value in space (through helping efficient trading), in time (through safe intermediation between investment and credit) and across different states of the future (through advanced derivative contracts).

They became over-regulated entities, their operational costs grew, their funding costs became much higher due to a new perception of their risk. Additionally, their dependence on centralized entities increased. Not only central banks, but also other institutions like CCPs or CSDs (where the first ‘C’ always stands for “central”) now crucially manage financial markets such as bond, equity or derivative markets. Centralization was seen by regulators as the only way to increase standardization, transparency and to mutualize the resources of the individual banks toward market risk management.

The concurrent single-point-of failure effect was considered an acceptable collateral damage. In the same years, the financial industry stopped being the darling of investors, and was replaced by internet companies, which now total a much higher capitalization than banks.

Crypto in Context

What has the crypto and blockchain decade to say about such “old finance” topics?

We have to go back to the roots of blockchain and forget both the temptation of considering it “just a software” and the opposite temptation to consider it “heaven on earth.” The Satoshi paper was probably not the beginning. In the days when we celebrate Timothy May, we have to recognize that some ideas being realized today started to grow 30 years ago.

In this way, bitcoin is not a magic creation of perfection. Satoshi spotted that the internet lacks some of the fundamental features needed to store and transfer value. It lacks an enforceable form of native identity, an unanimous way to order messages in the absence of an official time-stamp and some alternative to the client-server architecture to avoid value to be stored by a single entity for all users of a service.

No matter how early or limited, Satoshi made a feasible proposal to overcome the above issues. It was a mutation of the web in the value management environment, and it is thanks to mutations that systems evolve.

In the past, while banks were expanding their balance sheets by creating more money and taking up more risks, some thinkers introduced the concept of Narrow Banking. This alternative idea of the role of banks could have spared us some of the big financial issues of the last decade. Narrow banking means banks with a narrower role, more similar to the role they had in some moments in the past. Banks without enormous balance sheets of deposit liabilities, used by everyone as money, matched by corresponding risky investments.

Narrow banking would require a way to free banks, at least in part, from the role of creating electronic money in the form of deposits.

The crypto decade shows that forms of electronic money that do not take the form of a commercial bank deposit are possible, and can be managed outside commercial banks balance-sheets.

The application of this principle could free banks from part of their money creation role and allow them to go back to a role of real intermediaries, helping those with money to take up well managed risks, and providing services to real and digital economy, without enormous books of assets and liabilities.

A Convergence Ahead

Yes, you read it correctly. I said that blockchain technology could help banks to resume their role as intermediaries. You read so much about blockchain tech disintermediating banks that this may sound strange.

Yet, today the systemic risk posed by banks does not come out of their strict intermediation activity, but from their “technical” role in money creation. Technology alone cannot avoid crises, but when used to make narrow banking possible it can stop a crisis from spreading systemically. No need to bail banks out if we have reduced the link between financial markets and our deposits of money.

If a form of digital money based on cryptography and managed on a distributed network was available for financial players, it could be the layer upon which further reduction of systemic risk in financial markets becomes possible.

Today, systemic risk in markets like derivatives or securities is often associated to the technological centralization that built up over the past decades. As we recalled above, recourse to centralized infrastructures increased after the crisis, in order to manage collectively the guarantees provided by individual banks, in order to provide more transparency to financial markets, and to help standardization and coordinated risk management.

At the end of 2008 regulators thought that such goals could only be obtained via centralization, even if this could make financial markets less resilient to systemic risk.

After the crypto decade, regulators know there are alternatives. Decentralized networks also allow for transparency, standardization and collective management of resources provided by the network nodes, through appropriate use of smart contracts. They can allow for forms of risk management and risk reduction that are unthinkable in the traditional world.

They may not have yet the required features in terms of scalability or privacy, but their technological evolution has come a long way since the original mutation.

So, the coming years may be the years of awareness.

No, early cryptos and tokens are not a fast and easy solution for the future of finance. No, a light splash of blockchain tech over old business models is not a solution either.

Some hard work is ahead if we want to use the lessons learnt over the past decade, and see these two world, the world of finance and the crypto world, to eventually converge into a new, safer financial system.

38. 30/12/2018 08:43
Where the Future of Crypto Payments Is Being Built

“The stars have aligned,” he said, the room hanging on his every word.

“In the same way that the industrial revolution created the economic prosperity that’s made the U.S. what it is today; in the same way that Africa leapfrogged wired telecommunications and went straight to wireless; the Philippines has the potential to be the biggest beneficiary of this technology now. Manila could be the next New York. The next London. The next Hong Kong. The next Tokyo.”

The audience at Manila Private House was silent, wholly captivated by Brock Pierce’s speech as he told the story of a nation primed for a technological revolution. The Philippines is a collection of over 7,000 islands, where only 31 percent of its 100 million people are banked, and just 4 percent of transactions happen online, but nearly 60 percent of people own a smartphone.

Add to this the identity issue, with thousands undocumented and disenfranchised due to poor access to government services, and you can start to see how the Philippines is attracting the attention of some of the world’s most forward-thinking blockchain entrepreneurs and investors.

The government and central bank have jumped onboard, too, recognizing the potential for this technology to introduce unprecedented efficiencies and interconnectivity to the local economy, supporting the movement with special economic zones to promote development and attract investment – particularly in fintech, of which 16 percent of the current industry is in blockchain or crypto.

“There has been great movement from the government side, to learn and do more with blockchain technology,” says John ‘Jem’ Milburn, an EOS enthusiast who is based in Seoul while building business in the Cagayan Special Economic Zone (CEZA), continuing:

“Banks and business are getting interested, too, to make real, sincere pushes to learn and provide services. The move to encourage and allow exchanges in CEZA is huge, and will lead, I think, to big growth in Philippines involvement in international blockchain projects.”

One of the Philippines’ incumbent financial institutions, UnionBank, is leading the way in blockchain experimentation, applying the technology to everything from internal distribution of operating manuals to digitizing the badly fragmented rural banking system, effectively bringing costly processes that previously took a few days into real-time.

For the rural banks, of which there are only 400 left in the Philippines today, compared to 1,400 just 30 years ago, UnionBank plans to partner with at least 100 of them to help build blockchain-based connections to the main national and international banking networks.

Buoyed by early successes, and with 30 ConsenSys-certified blockchain developers already in-house, UnionBank says they will add 20,000 more programmers to the team over the next few years.

Active startups

But it isn’t just incumbents that are hard at work in the Philippines.

With financial inclusion heralded as the next big wave of cryptocurrency adoption, startup Coins.ph is capitalizing on the opportunity to deliver secure, reliable and convenient payments services to the unbanked and unidentified.

Founded by Silicon Valley entrepreneurs Ron Hose and Runar Petursson, Coins.ph is a blockchain-enabled digital wallet that can be used to pay bills, buy credit for your mobile phone and process peer-to-peer transactions – all with minimal KYC and without needing a bank account.

With super-easy onboarding and a multitude of methods to top up your account, from sending bitcoin or ethereum to depositing Filipino Pesos at a 7-Eleven store, this offers some insight to how Coins.ph have managed to build a user base of more than 5 percent of the local population when the company is little more than four years old.

Coins.ph are also using blockchain to lower the typical cost of cross-border remittances, a critical service for Overseas Filipino Workers (known as OFW) and their families.

Money sent home by OFW is the Philippines’ second largest export, accounting for 10 percent GDP. In February this year, the Bangko Sentral ng Pilipinas reported that remittances had grown 5.3 percent in 2017 to bring in a total $33 billion.

This was an all-time high for the Philippines, smashing government targets and positioning the Philippines as the third-highest global remittance recipient, only topped by the whopping diaspora of India and China.

But on average, migrant workers lose more than 10 percent in international transaction fees when sending cash home. This is significantly higher than the average cost reported by the World Bank at 7.1 percent and has a devastating effect for the families that rely on those funds, not to mention the people that work so hard to earn it in the first place. Global Overseas Worker, or GOW, is a crypto exchange licensed by the Philippines Central Bank and Philippines SEC that is delivering up to 98 percent savings on the usual remittance fees copped by Filipinos.

“Every little bit helps, and that saving is potentially the difference that puts a smile on someone’s face this Christmas,” says William Sung, COO of GOW. “However, it’s more than that. It’s about being included in the new digital economy and blockchain services are gateways into that inclusion.”

Like Coins.ph and GOW, other local ventures such as Satoshi Citadel Industries (SCI) and Bloom Solutions are tackling the remittance problem too.

Brian Calma Sales, a Filipino who works in Dubai as an office coordinator at a construction company, and has a side hustle offering hair and makeup services, says the extra money would go a long way.

“Most OFW work abroad for their family – part of Filipino culture is helping our family, it’s our responsibility,” he says. “If we didn’t have to pay the fee, it could be used to pay off some bills, or save for a vacation. Also, Filipinos mostly work two jobs. So, instead of working extra hours to get the money needed to send home, maybe we could have taken the day off.”

Aspiring entrepreneurs

There’s reason to think this is only the beginning of a major movement.

19-year-old Kyle Acquino found inspiration in those strong Filipino family values to come up with the idea that won the Accenture Choice Award at DISH 2018, the Philippines’ first-ever community-led blockchain hackathon.

“I tapped into that mindset and came up with the idea to provide a platform where communities can grow together like a family,” says Acquino, who is studying Computer Science at the Technological University of the Philippines. His team’s idea, Psycellium, is to build a decentralized cooperatives network that would take the Philippines one step closer to globalization.

A derivative of a DAO, Psycellium would allow cooperatives to merge, invest and join other co-ops without the typical cross-border concerns or restrictions.

DISH 2018 (which stands for Decentralized Innovations Startups Hackathon) was a blockchain-agnostic event held in Makati in November, bringing together EthereumEOS and NEM communities and encouraging participants to make objective decisions about which platform would be best-suited to their project.

“Blockchains are not all encompassing in terms of features,” commented Chris Verceles, CTO of decentralized disaster-response startup LifeMesh, developer at ConsenSys Philippines and one of the main organisers of the hackathon. “Each one is best at a certain use case and I believe we should be able to mix and match tools depending on what we need. Additionally,” he said, “a community only grows if it is inclusive.”

Themes of inclusion appear to be top-of-mind for Filipinos, with many leading female-oriented tech communities hosting a local chapter in the capital of Manila, including Women Who Code, Women in Blockchain and Coding Girls. After launching in November 2017, the latter grew from five members to more than 100 in just six months. Their leader, 20-year-old Electrical Engineering student Alenna Dawn Magpantay, says the Philippines’ young population (the average age is 24) makes it “a haven for tech-savvy professionals who are creative and resourceful.”

Michie Ang, a Director of Women Who Code Manila, said she’s looking forward to answering the demand for encouraging further training in blockchain languages in 2019. Her organization represents a network of more than 1700 female devs across the national capital alone.

Bright young minds are plentiful in the Philippines. In fact, that’s what prompted intimate.io to relocate half its executive team here in August, to work more intensively with our existing Pinoy team of four.

Since then, we’ve added another two devs with the help of our business process outsourcing (BPO) partner, Cloudstaff. Established in 2005 by Australian internet pioneer, Mr. Lloyd Ernst, Cloudstaff is an outsourcing company in the Philippines providing skilled workforces to a range of industry verticals.

Today, the company employs more than 2000 staff and contractors across four regions, with plans to double in size over the next year.

Growth data reveals that enterprises are outsourcing talent to companies like Cloudstaff more and more, with 1.3mil people now employed by BPOs in the Philippines. Ernst says the growth is being driven by small and mid-size companies who have moved to the cloud in order to utilize a global workforce. With a background working in China, Vietnam and Thailand, Ernst says that the high level of English language proficiency in the Philippines makes a big difference. Verceles agrees, adding that the Filipinos common exposure to online and western cultures makes local developers very trainable.

“There is a large pool of untapped talent here, since a lot more hiring attention is paid to surrounding areas like Singapore or Hong Kong,” he says. “You can see this in the current scramble for blockchain talent, where companies are increasingly looking into the Philippines for more abundant developer resources.”

Community drive

To say it’s “refreshing” to be immersed within a community that is genuinely focussed on designing and building practical solutions to some of the world’s gnarliest problems… is an understatement.

Milburn agrees, musing that “the Philippines community seems to be focused on the utility of the blockchain, more than the typical speculation and gambling we see in so many markets.”

Another example of this is ODX, or Open Data Exchange, a data marketplace founded by serial entrepreneur, Nix Nolledo, which aims to deliver sponsored internet services to consumers for free via the blockchain. Partnered with industry giants such as Booking.com, ODX will be vital for emerging markets where the right to connect is fast-becoming as critical as the right to transact, and consumers are still offline up to 80% of the time because mobile data is so expensive.

This is particularly vital for emerging markets where consumers are estimated to be offline 80 percent of the time, because data is so prohibitively expensive. Projects like Nolledo’s – and all others mentioned in this article – have no need to tout “blockchain social good” slogan because economic empowerment is simply an inherent byproduct of their operations.

In the short time we’ve been stationed here in the Philippines, the blockchain community has welcomed us with open arms. We’ve found synergies, supported each other’s initiatives and kick-started some fabulous friendships.

In the intimate.io office, our sense of team cohesion has never been stronger and productivity is through the roof! As a result, my co-founders and I have decided to stay for at least 12-months, and come January 2019, we’ll be moving into our new abode in Angeles City.

After a rollercoaster 2018, traversing almost every continent on the planet, we’re all incredibly grateful to be plonking ourselves somewhere that feels way more stable than anything else in crypto right now.

It’s true that something phenomenal happening here – and – I get the sense that the only hot air we’ll have to deal with in the Philippines…is the humidity.

39. 29/12/2018 11:08
2019: The Year Digital Securities Offerings Become the New ICOs

2018 was a tumultuous year for cryptocurrencies, but for those of us who work in digital securities, also known as security tokens, our enthusiasm for the blockchain and distributed ledger technology (DLT) has never been stronger.

Digital securities are not theoretical concepts anymore, but rather a foundation for real applications on the blockchain. A nascent industry poised to fundamentally evolve global capital markets, it’s just now getting started.

The digital evolution of legacy securities

It is amazing to think that just a few decades ago, the New York Stock Exchange would shut down every Wednesday just to process trades and settlements via couriers on bikes physically carrying stock certificates between buildings on Wall Street every time a stock changed hands.

This lead to the “Paperwork crisis of the 1960s” in 1968 when the volume of stocks traded rose threefold to 15 million shares per day. Following the crisis was the creation of the Depository Trust Company in 1973 and the National Securities Clearing Corporation (NSCC) in 1976, which later merged in 1999 to create the Depository Trust and Clearing Company (DTCC).

This signified that the digital era had come to Wall Street.

Today, DTCC holds trillions of dollars in shares and settles more than $1 quadrillion in trade value. However, the sector failed to truly digitize the end-to-end process. Pre-trade order routing and electronic trading of securities had become extremely low cost and frictionless, but the same improvements have not arrived similarly to clearing, settlement and custody.

Blockchain-based digital securities have emerged to solve these problems and enable low risk management, proxy votes, liquidity and seamless dividend distributions among other features. First, they allow for individual ownership of the digital shares through tokens. Second, they enable instant settlements so there is no counterparty risk, eliminating billions of dollars in intermediary fees. You trade you own, not like today.

They also help to enhance transparency measures by providing visibility for an almost real-time cap table for the issuer. And finally, digital securities can simplify governance processes through voting or payout distribution, which could also be done using smart contracts and stablecoins to improve efficiencies and reduce the processing fees.

Paving the way for digital securities

Blockchain technology has pulled the rug out from under legacy financial systems.

For all the trouble ICOs may have inflicted and still might on investors, issuers and regulators, one fact remains – they proved that blockchains, coins and tokens were a phenomenal system for successful fundraising.

Anyone with patience and a computer could list their idea for investment and any inclined investor could buy an interest in a company or community and then trade that interest with an instant settlement for fiat currency or another coin on the blockchain. Suddenly there was a way for investors to invest in private companies and startups and to have instant liquidity in global markets. And the market responded with resounding attention.

Blockchain technology is so good at raising money that the crypto markets lost their minds. One study – which examined over 4000 ICOs – found that within four months of issuing a token, more than half of the projects launched had already failed.

ICOs may have tainted the narrative around cryptocurrencies, but digital securities are helping to shift the conversation to show the wider public that blockchain technology can help to power compliance, too.

BUIDL-ing the foundations

In mid-2017, we saw the blockchain technology’s potential to digitize securities. The technology could be used to automate and provide transparency to the process of purchasing, owning and transferring a security between investors.

By end of 2017, three funds, had successfully raised funds and issue tokens representing digital securities on the Ethereum blockchain, first Blockchain Capital, then Science Blockchain, then Protos. They represented early attempts at creating digital securities that followed rules and regulations associated with securities.

Following in their footsteps, I had begun to work on SPiCE VC, a blockchain technology venture capital firm, in March 2017, which would eventually become the fourth digital security ever issued. At that time, the market was still heavily focused on ICOs and there was no platform that could provide the level of compliance to security tokens that we wanted for the issuance and lifecycle management of SPiCE VC, so we built one and launched it in September 2017.

By that time, the SEC had issued the DAO report saying that the infamous leaderless ICO, which raised $50 million in crowdfunding, was actually a security offering.

Secondly, many prominent people in the industry started discussing how tokenizing securities on the blockchain was a way to improve private securities and was a big deal beyond just making ICOs legal since it is a much larger market. For context, there were $1.7 trillion private placements in capital raising in the U.S. alone in 2017 as opposed to a few billion dollars in ICOs worldwide according to a 2018 SEC report.

We saw the opportunity to provide a compliant security issuance platform for others and spun it off as a new company called Securitize, which we launched in January 2018.

Along with other key players in the space like Polymath and Templum, we knew that eventually regulators would catch up with ICOs. The digital security offering (DSO) is already taking over as the preferred, complaint way to raise capital and issue debt on the blockchain and not only for blockchain companies but for other type of operating business or even real estate or art.

Transforming the securities landscape

2019 needs to be the year of increased liquidity of digital securities. This can be done via the emergence of regulated trading platforms for tokenized securities like Open Finance, which just launched this year.

Right now, there are several companies looking to tokenize assets but few individuals wanting to invest in the tokens themselves. As other regulators begin outlining the rules and guidelines around how transactions should take place, investor confidence will grow.

Public perception on digital securities is evolving too as the ecosystem is maturing. The drop in the cryptocurrency market has helped to consolidate the industry and cut out the unnecessary projects in the space. Mainstream financial media publications are covering the digital securities industry more frequently too, which is a great indication that the masses are beginning to recognize the benefits of cryptocurrency.

Digital security industry community building efforts are emerging with more to come in 2019. The first dedicated conferences and associations, like the Security Token Academy, are starting to gain momentum helping to stimulate meaningful dialogue in the industry.

The key action point for 2019, for the industry, is to start communicating the advantages of digital securities to traditional financial markets and investors to encourage them to enter the market. Once this starts to happen, we are optimistic that we will see a wave of DSO adoption.

40. 28/12/2018 09:45
12 Markets Crypto Decentralization Can Actually Improve

Over the last 20 years, a lot of companies have built large online marketplaces to connect buyers and sellers. Amazon, eBay, Uber and AirBnb typically come to mind as the most obvious examples. But there are many more.

Starting a few years ago, VCs began to publish variations of the mock up below. It shows how almost every sub-vertical on Craigslist has become a large enough market with enough idiosyncrasies to justify a bespoke marketplace with dedicated features and optimized search and discovery.

 

Although each of these markets is a P2P (person-to-person) marketplace, each of these marketplaces is run by a centralized company. This tells us a few things:

  1. There is no structural reason why most P2P markets need to be decentralized.
  2. Because the centralized entity imposes a tax on all transactions that take place on its platform, it can justify spending capital on attracting both supply and demand to join the marketplace. Supply and demand acquisition makes the product service more valuable for existing participants through network effects, and creates a defensible moat so that other marketplaces cannot as effectively compete.

Given these two observations, we should naturally ask: what markets are actually better as P2P markets without a centralized intermediary?

It turns out there are actually quite a few markets that we can already identify that are better truly decentralized. And I suspect there will be many more that are unlocked as the crypto ecosystem matures.

To answer this question, let’s consider the unique strengths of blockchains. In no particular order:

  • Near-0 transaction fees. This should allow for micro payments. For real-time payments between untrusted parties, this can be compelling (e.g. pay per byte of data). This can also reduce administrative costs in the legacy financial system (e.g., T+3 settlement for securities).
  • The ability to collect revenue without setting up a legal entity. This is particularly beneficial for networks like Filecoin, in which it would be counterproductive if consumers needed to set up an LLC to participate.
  • (Pseudo)anonymity. The ability to participate in a network without KYC (know-your-customer) of any form.
  • Regulatory arbitrage. Governments create all kinds of friction around many forms of commerce. For example, prediction markets are illegal in most jurisdictions, despite the fact that there is virtually no evidence that they produce meaningful negative externalities for society.
  • Permissionless. Several billion people around the planet don’t have a bank account. Generating a key pair – and thus the ability to store digital scarcity securely – for a blockchain is free for everyone. That key pair is global and isn’t subject to international transaction fees.
  • Trust minimized. Blockchains allow distrusting parties to transact without trusting any person or institution, rather the parties can transact while only trusting math and game theoretic incentives (e.g., using 0x to trade assets).
  • Censorship resistant. This applies to both money and non-money assets.
  • Allow competing front ends that read/write from the same back end. This reduces barriers to entry, creating near-perfect competition for products that in the web2 environment are subject to extremely strong network effects.
  • Eliminating all fraud around asset ownership.
  • Embedding logic in assets themselves, rather than embedding logic in the applications that control assets (e.g. embedding transfer restrictions on concert tickets rather than trying to prevent people from moving their tickets around).

Below I’ll walk through some of the markets that we’ve identified that benefit from one or more of these traits.

1. Open Finance

Open fiance tools like Augur0xMakerCompoundDharma and UMA are truly global and permissionless. Using these tools, people are creating derivatives such as Primotif that anyone can access anywhere in the world.

Consider this: a substantial majority of the world’s population does not have access to U.S. capital markets. For example, if you live in Brazil in the middle class, you probably cannot buy Apple stock. Given the KYC, broker/dealer and banking frictions involved, U.S. capital markets are simply unavailable to billions of people around the planet.

Using Primotif, anyone anywhere in the world can buy S&P 500 exposure using ether, the token that powers the ethereum network. This is a profound breakthrough in capital market efficiency.

Using the open finance stack, capital markets will become truly global and accessible to anyone anywhere, permissionlessly. That this is not already true is a travesty.

2. Grey Markets

Markets that are hampered by unnecessary regulation. Ridesharing is the best recent example.

Uber was illegal in most cities when it entered them. But taxi laws were outdated, and most city governments quickly realized that and adjusted.

The most obvious grey markets that can be meaningfully impacted are:

  1. Prediction markets, e.g. Augur and Gnosis. The most obvious sub-verticals are politics and sports betting. However, I expect we’ll see new markets emerge, e.g. meme markets around celebrities like PdotIndex.
  2. Marketplaces for people to sell individual predictions, e.g. Erasure

3. Online Gambling

Today, market participants trust online casinos that they’re actually using a random number generator (RNG). Using blockchains, consumers can validate the integrity of the RNG in real time.

Although it’s not clear that online gamblers actually care about this, all things equal, ensuring fairness is preferable. This is precisely what FunFair is building.

4. Virtual Real Estate

Virtual worlds with fixed amounts of real estate (e.g., Decentraland) are another great example.

It’s not clear that consumers care about owning cryptographically unique digital assets (e.g., a one-of-a-kind sword). However, if an online game has a fixed amount of real estate, that real estate could become valuable if players want to spend time in that virtual world.

5. Smart Assets with Embedded Logic

Although this is similar to the point above, it’s actually distinct. Whereas the idea above is about self-sovereign digital asset ownership, the next layer of intelligence is to embed logic in the assets directly.

An example: Embedding transfer restrictions on tickets to concerts. This could eradicate the ticket scalping market, which is nearly universally hated by everyone in the music and event businesses.

This is precisely what Tari is building.

6. Labor Marketplaces

Labor markets that cannot match supply and demand due to lack of regulatory frameworks are ripe for decentralization.

Aragon is building the technical frameworks to allow permissionless creation of smart-contract defined organizations that support any conceivable rule sets (e.g., preferred equity, revenue share or co-ops, etc). It’s still unclear what these organizations will look like or what can emerge that’s not currently possible, but the opportunities are certainly interesting.

7. Distributed Computing

Finally, this use case is reasonably well known because of high-profile projects like Filecoin, but it’s not as clear-cut as most people think. Distributed computing only makes sense when either a) physical proximity of supply and demand matters, or b) the network’s primary purpose is obfuscation (more nodes is better).

There are fundamentally three kinds of computing resources: compute, storage, and bandwidth. Let’s examine each of these to understand them:

  • Distributed computation networks (such as Golem and iExec). You can think of distributed computation networks as AirBnB for your CPU/GPU. These networks are designed for asynchronous computation jobs (e.g. video rendering). As such, they are neither bound by physical geography, nor do they create any obfuscation. These networks claim that they’ll be cheaper and faster than centralized alternatives, but this has not been proven at any meaningful level of scale.Given how nascent these networks are, it will take some time before decentralized computation networks achieve enough scale to actually verify this hypothesis. Although theoretically the supply side of the Golem and iExec networks have no marginal cost (because of sunk cost of hardware for other intended uses), in practice this is questionable because of the cost of electricity, and because of chip specialization.The more demand there is for a particular type of computation, the more justification there is to build ASICs. ASICs are typically one to three orders of magnitude more efficient per watt than general purpose chips for a specific type of computation. Given the massive efficiency gains that ASICs have, it’s simply not possible for non-specialized chips to compete with ASICs. ASICs have blossom in the cryptocurrency mining, machine learning, video encoding/decoding, and background processing (e.g. always-on microphone) fields, and quite a few others.It’s generally expected that we’ll see more ASICs as Moore’s law ends, and hardware innovation moves further into chip specialization.Lastly, computation is already geographically distributed. There are tens of thousands of data centers around the world. It seems hard to argue that tens of thousands is insufficient for some use cases, but that millions of computers is. Overall, it’s still unclear if networks like Golem and iExec can provide valuable service, except in instances where the demand is from a truly decentralized, P2P application (it’s unclear if this demand will ever exist in meaningful volumes).
  • Distributed file storage (like Filecoin). You can think of Filecoin as AirBnB for your hard drive. Here again, the idea is compelling on the surface. Most desktop computers have a lot of unused storage space. And unlike renting out CPU cycles, storing files doesn’t consume substantial electricity.However, distributed networks like Filecoin are in some ways less efficient than centralized ones. Most importantly, the Filecoin protocol runs on an adversarial network, and as such, requires additional redundancy relative to a centralized, trusted alternative (e.g AWS S3). Given how cheap S3 storage is already (S3 is the lock-in so that AWS can generate profits elsewhere), it’s not clear that Filecoin can offer meaningfully cheaper storage given the need for additional redundancy.It’s still unclear that Filecoin can compete with AWS at any meaningful level of scale. And like computation, file storage is already geographically distributed across many data centers, and obfuscation can be handled through software (e.g. sharding data and erasure coding) on existing centralized file storage networks).
  • Distributed bandwidth routing. Bandwidth is inherently local, and subject to latency. Moreover, many countries censor internet traffic, so obfuscation through decentralization can circumvent these restrictions. There are three fundamentally unique use cases for bandwidth routing

8. Distributed VPN / Tor

There are a handful of teams already working on this, including SentinelMysterium and Orchid. Although they use different technical methods, they deliver the same end goal: obfuscation of internet traffic. These services clearly benefit from geographic distribution, and from quantity: the more nodes there are, and the more distributed they are, the harder it is for governments to censor them.

However, it’s still unclear what the price and performance of these systems will be at scale.

9. Distributed CDN

CDNs are by definition already geographically distributed. But it seems possible that they could become substantially more efficient with some additional P2P magic. As a simple thought experiment, let’s take a high-rise building that 300 people live in.

If there are two people streaming the same NFL game, it makes sense that one of those people should relay the video to the other, which would decrease the bandwidth requirements of a CDN. If this works as proposed, it should reduce costs, and perhaps allows consumers to make money for doing something they’re already going to do anyways.

At least one stealth startup I know is working on this. Filecoin is also working on this, although it’s not their exclusive focus.

10. Distributed Wi-Fi sharing and mesh networking

This one is self-explanatory given the above.

Wi-Fi is inherently local. There are quite a few teams working on this, including RightmeshAlthea, and Open Garden. While the idea is certainly compelling in theory, it’s an extraordinarily difficult technical problem.

12. Distributed video transcoding (for example Livepeer)

Although this benefits from decentralization in the same way that bandwidth relaying does, it’s technically distinct. The best way to understand video transcoding is to understand how Netflix works. For every video on Netflix, Netflix stores hundreds of versions of each video file, each of which is optimized for a unique permutation of screen size, resolution, available hardware, OS, bitrate, etc.

From an original master file, Netflix transcodes the video into each permutation. When a user is streaming, the client-side application constantly reports its status to Netflix’s servers. Based on the real-time status, Netflix’s servers adjust which video it serves to deliver the best experience. This works because the content on Netflix is not live-streamed. They can transcode everything in advance.

With that understanding, it’s easy to see why transcoding live video is much more difficult. The amount of computation required increases with each additional stream as the system needs to support more permutations of the video. Livepeer decentralizes the transcoding process, allowing anyone to transcode.

Because video requires so much data, because latency matters, and because the amount of computation necessary to transcode is so large, it’s better if nodes are geographically distributed, and thus as close as possible to the source of the video.

Untapped markets

Many investors rightly say “But displacing Uber/Facebook/eBay” is nearly impossible. And they’re right. Displacing any of these entities by competing head-on is a losing proposition. But that doesn’t mean that there aren’t great uses for P2P networks today.

As blockchain technologies mature, I expect this list to grow exponentially. In 2014, no one had even conceived of the idea of open finance. As we solve the two biggest technical challenges in crypto – scaling and privacy – and as general usability and adoption improve, I expect that many new use cases will emerge that were not previously possible. Moreover, many of the examples listed above will compound in ways that we cannot possibly forecast.

We are just starting to see the early signs of how we can put together the pieces of the open finance stack in interesting ways. Today, most people cannot get a mortgage collateralized against their equity portfolio. As units of value are tokenized and made interoperable with the broader financial system, people will be able to manage their balance sheets far more effectively. For example, employees who own a lot of equity in private companies should be able to use that equity as collateral in other financial transactions. Yes, their loan-to-value ratios should be very conservative, but this can unlock a massive amount of new wealth for millions of people.

As these kinds of changes unfold, we can expect to see repercussions in adjacent industries (legal, mortgage, etc.), and so we should expect the evolution of P2P markets to be highly path dependent, making it particularly difficult to forecast second and third order effects today.

 

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