7 Examples of Blockchain-led Financial Innovation

Jeremy Epstein Business 1 Comment

When crytpocurrency hits the Op-ed page of the Wall Street Journal and has a cover story in Forbes on the same day, it is probably fair to say that cryptocurrencies have hit the consciousness of the mainstream. What may be even more interesting is what is how the back-end infrastructure of the blockchain world is getting ready for mainstream adoption and enablement.

The protocols are becoming more even sophisticated and showing the signs of becoming serious threats to the existing world order. Given the blockchain’s inherent strengths when it comes to finances, it is no surprise that there is a huge amount of innovation in that sector.

Improving the Market Data Infrastructure

Though they don’t call themselves this, Santiment which recently completed its $45 million Initial Coin Offering (ICO) might be termed a “decentralized Bloomberg terminal.”

Unlike many others who offer only a whitepaper, Santiment has both an iTunes and an Android app. You can use them today to offer your own perspective on various crypto-tokens and ICOs. It may be a simple implementation now, but you can definitely see how this is the first-step towards their vision of driving crowd-based clarity for sentiment.

The “real-time” user feedback is only one part of the equation. Their whitepaper (which is solid) explains how they will offer crypto-content streams and newswires, curated by experts, a curated database of blockchain projects and analyses, and a crypto-market data feeds and signals. The larger point is this…the crypto-market, which stands just north of $84 billion at the time of this writing, is maturing faster than almost anyone expected. Professional traders are now well ensconced and the need for professional grade tools has come with them.  This is probably the first of many.

Improving Market Transparency Through Decentralization

One of the challenges for people trading decentralized cryptocurrencies is kind of a “meta” joke. That is, to trade a currency, you need to go to a centralized exchange like Bittrex, Poloniex, or Kraken. Then, you have exchanges that are native to countries like China, Japan, or Korea and many others. As a result, according to CoinMarketCap, there are 4421 different markets where you can trade. The result is an arbitrageur’s dream, but an individual investor’s nightmare. Prices can vary dramatically between each of the exchanges.

Into this void steps 0x (pronounced Zero-Ex) which is doing their ICO on August 17.  What they are building is a protocol for conducting asset exchange in a completely decentralized manner. It is not a user-facing application. Instead, it allows for the removal of centralized parties that can be hacked (this is what happened to Mt. Gox, ShapeShift, and Bitfinex).  Like other protocols, it will require a token for access which, as they describe it “are used by Makers and Takers (market participants that generate and consume orders, respectively) to pay transaction fees to Relayers (entities that host and maintain public order books).”

ZRX tokens are used for decentralized governance, essentially giving shareholders the ability to “vote” with their token holdings about the direction of the protocol itself.

While costs will not go to zero, they should be much lower and there should be greater transparency in the marketplace.

Improving Asset Liquidity Through Tokenization

For many people, their largest investment is the home they own. Which explains why a home equity line of credit (HELOC) can be very appealing for many owners as a source of cash.

In 2015 (the most recent data I could find), US lenders extended just over $156 billion in home-equity lines of credit, the largest dollar amount since 2007, the beginning of the housing bust. That marks a 24% increase from 2014 and a 138% spike from 2010 when new approvals hit a low point.

The challenge with HELOCs is that they come with a cost. Yes, the mortgage interest (to a point) is tax-deductible, but it’s still extra money that is being spent.

The Liquidity Asset Token (LATO) seeks to change this. Their ICO is coming up in August as well and what they offer homeowners (and eventually anyone with illiquid assets) the ability to do is…get cash without having to pay interest.

Let’s say you want to get cash out of your house. In the LATO model, you go on their site (the technology is somewhat proven as it is based upon an existing home equity marketplace, Zalago, that has facilitated 12,000 mortgage offers and more than 1000 deals from 7 banks and 25 investors in the past six months).  Once there, you can select one of two options (borrower or investor) and go through the same detail you would to get a HELOC.

However, now, you are selling fractional ownership in your house (say 10%) in the form of a digital token. Those tokens, since they are digital, can be sliced up into micro portions, traded, and held on to by investors all over the world until you either buy back the tokens or your house is sold. Now, you have the cash, but you don’t owe any interest.

Since it all blockchain-based, ownership of the token is never in doubt and liquidity is much more available to investors.

Investors benefit as well. Say you want to gain some exposure to the Los Angeles real estate market, but you don’t want to invest $100k or $50k with a firm. Now, with LATO, you can buy a few hundred or thousand dollars of fractional ownership of homes or buildings all over the city. If you think the market is going to go up, you get the benefit of the appreciation and you avoid the fees associated with the management firm as middlemen.

Unlocking the value of illiquid assets by making them tokenized and tradeable where ownership is never in doubt is one of the great game-changing aspects of blockchain technology.

Improving Risk Protection Through Smart Contracts

Two start-ups Aigang and Etherisc are moving down the path of providing you with greater financial security through blockchain technology.

Aigang seeks to connect real-time insurance pricing to your IOT devices.  According to their website, digital battery insurance for your smartphone is available today.  You know how when you buy a phone, you are hit up for the expensive “protection plans?”  Well, that’s not really when you need it, particularly if the issue is a dying battery. It’s brand new!

So, what if you could get a policy after a year that guaranteed a fresh battery (with a replacement package) based on battery life remaining? And if it was updated in real-time?  You could then make an informed decision about whether to upgrade or not. Bottom line, the phone tells the Smart Contract that Aigang runs about what is happening and-without a company behind it to manipulate prices-the protocol calculates the premium.

Ok, so maybe a phone is not the best example, but with the proliferation of IOT devices, particularly in industrial settings, you could see how something like this could be extremely valuable…and a threat to many existing businesses.

On the personal side of insurance sits Etherisc. They have a wonderful demo on their site of a Flight Delay Dapp (Distributed application) that shows how you can maintain your level of protection from flight delays that you currently have, but also have more transparency about fees and, best of all, get payouts faster.

Let’s make it real with an example. A few weeks ago, I was on a flight from Frankfurt to Washington, DC.  It was delayed 3 hours at the gate and then we sat for 2 hours on the tarmac.  Now, I watched Rogue One while I was waiting, but how great would it have been if my Flight Delay insurance had been paid to me WHILE I was sitting there as well? The movie would have been that much better, no paperwork or hassle, and no time

How does this work? The insurance is paid out based on a smart contract that relies on an “oracle.” This ‘oracle’ is a trusted entity that tells the smart contract, in real-time, whether the flight you are on is delayed or not.  Remember, no human intervention needed at all.

The “oracle” could be the flight board at Frankfurt airport or the on-board computer from the plane. Or, say you don’t trust those centralized systems….what if all (or a percentage of the passengers) on the plane had opted into the same system?  Then, since all of their phones were on and geo-located to Frankfurt airport, we could trust that the plane had not taken off!

In the Etherisc world, you disintermediate the function of determining if an incident should be covered from the assessors and the companies to the data in the field. Speaking of field, they also have a crop insurance demo. Real-time payouts to farmers following weather tragedies. Powerful.

Financial Management of Crypto Portfolios

Given all of this innovation and the nearly 1,000 crypto-tokens (not to mention the tax management nightmare for those who care), professionals and individuals need help. They need the ability to manage their portfolio where they can track performance and returns. You could have all of this information feed into your Etrade, Schwab, or Fidelity account, but then again, you run into the downsides of centralization.

That is where Melonport comes in. The Melon protocol is designed for decentralized asset management. Because it is based on blockchain technology, records are transparent and auditable at any time. This makes it easier to comply with regulations and cost-accounting while simultaneously providing a marketing platform. Think about it, a money manager or an individual investor can make a claim about her performance and everyone can ascertain the veracity of the numbers. That is the best kind of prospectus available.

When you throw in the decentralized nature of the Melon protocol, you see tremendous opportunity for cost-reduction and risk-mitigation that should provide a competitive advantage over existing firms.

Improving Blockchain Interoperability

Once upon a time, the so-called “Bitcoin maximalists” would argue that “one chain would rule them all.”

That ‘one chain,’ of course would be Bitcoin.

While I’m personally still very bullish of Bitcoin as the ultimate store of value, I think many people (including some former self-proclaimed “maximalists”) would agree that the “one chain to rule them all days” are pretty much over.

That means we are pretty much destined for a multi-chain world. Multiple open, permissionless chains, multiple industry consortia-based permissioned chains, and then some private chains limited to one enterprise.

In the early days of the the railroads, one of the critical moments in history was the adoption of the “standard gauge,” measuring 1435 mm or 4 feet 8 ½ inches. While the entire world isn’t quite on that gauge even today, over 55% of the world is and it enabled inter-connectivity and inter-operability of different systems on a previously unimaginable scale.

The history of blockchains is at a similar point.  Back in 2016 (which feels like ancient history given how quickly things are moving now), Vitalik Buterin, the creator of Ethereum, wrote a whitepaper on behalf of the R3CEV consortium entitled, “Chain Interoperability.”

One protocol to watch in this regard is OmiseGo. What is particularly exciting about them is how they intend to use the Ethereum blockchain to facilitate payments through existing wallet providers. So, for example, you will be able to use your PayPal balance to pay a friend who uses Venmo.  Extend this to international remittances for platforms across geographies and you can see the potential.

One strength they have in their favor is that Omise is an existing company that is working in Asia already, so this is not a pure start-up play. OmiseGo is slated to roll out the protocol in Q4, 2017 and it will be a strong proof-of-concept for how the crypto world and “real” world work together.

Mainstream Adoption Is Closer Than We All Might Think

One of the most challenging parts of the blockchain transformation for me has been to assess the timing of it all. I have been asking the question for a while now. It was the title of the free PDF I published last December featuring 33 of the biggest industry names entitled “Blockchains in the Mainstream: When Will Everyone Else Know?”

There will be a moment when all of us realize it is here and was inevitable all along. What we don’t know is the arrival date.

The speed of innovation, particularly around increasingly sophisticated financial instruments, is staggering and happening at a pace that far exceeds what most people would have surmised even 6 months ago.

The financial services sector of innovation has been the bellwether all along. From the looks of the start-ups we just looked at, the future is probably a lot closer than we realized.

  • Thanks for a great overview.

    The company’s that make money in the gold rush are the one’s that sell the shovels. These companies are the ones selling shovels!