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Finance Investment Market

Cryptocurrency as an investment opportunity

Introduction

In the first years of the cryptocurrencies life, they were suspiciously considered as a financial tool for illegal activities and a space prone to frauds.
More recently the scenario has changed: cryptocurrencies and bitcoin in particular are part of investment products offered by banks and other financial organizations, and even a significant percentage of the investment portfolios hold by personal investors on popular online trading websites includes cryptocurrencies.
This might be enough to consider Bitcoin and cryptocurrencies as an interesting investment instrument.
However, we might want to look at this issue from a more technical standpoint in order to come to more solid conclusions and understand whether the current valuations still make it a potential good investment or not.
There are a few methods that were developed in the last decade in order to properly value the cryptocurrency.

Total addressable market

A common approach consists in comparing the current capitalization with the total addressable market. As of 30 January 2021, the value of one bitcoin is 27’704,80 euros and the current supply is about 18.6 million units. That makes a capitalization of about 515 billion euros.
Bitcoin is more and more considered a store of value and, due to its nature, competes with gold as a non-sovereign store of value. At the current gold price, 1’512 euros per ounce, the total stock of gold amounts to 9.6 trillion euros.
Should bitcoin capture 10% of the gold market, each bitcoin would be worth about 46’000 euros, given the fact that the maximum number of bitcoin that will ever be available is 21 million.
Currently bitcoin captures about 5% of the value stored in gold.
However, should we consider that bitcoin attracts investments from the whole store of value market this would expand the total addressable market to tens of trillions of euros.

The equation of exchange

An additional method for the valuation of cryptocurrencies is proposed by Burniske and Tatar and it is based on the equation
MV = PQ
Where:
M = Crypto-asset market capitalization
V = Velocity: Average frequency with which a unit of the cryptoasset is spent
P = The average price of transactions executed in the period studied
Q = Number of transactions executed in the period studied
This method assumes that the value of a currency is based on the size of the market and on the velocity as it moves through the market.
While the other values can be relatively easily estimated, Velocity is hard to estimate as, even for the US dollar, it changed a lot over time. Therefore, small changes in velocity estimate can lead to very large changes in proposed valuations.

The value of crypto-assets as a network

This approach values cryptocurrencies using the “Metcalfe’s law”, a popular theory in technology and in platform economy that states that the value of a network is proportional to the square of the number of participants.
Ken Alabi showed in 2017 that this method allows to estimate the value of a cryptocurrency rather precisely. The assumption is that daily active users are an indicator for interest in the adoption of a cryptocurrency.
However, while in social networks the Metcalfe’s law applies as it is, in a financial network some important aspects are not considered, for example, not all users have the same value. Nevertheless, it makes sense to consider the number of users as an indicator of the interest in the cryptocurrency and its future trend.

Cost of production

This method defines the cryptocurrency valuation based on the cost of production. This approach was proposed in 2015 and refined in further research in the following years.
This thesis considers crypto as a commodity, which has a cost of production that influences its value.
The costs to be considered for the production of cryptocurrencies are hardware and energy cost to run the infrastructure, including cooling costs. Hence the value of bitcoin can be estimated by comparing the mining costs with the value of what is produced by the computation.
However, this approach cannot explain the high volatility that was observed along the bitcoin history and is also rather fragile as the difficulty in mining changes over time due to the fact that the mining algorithm is adapted on a 2 weeks basis.
Additionally, each cryptocurrency has different consensus mechanisms which imply different computational costs, for example in proof of stake systems there are no or very low computational costs and therefore the cost of production is much lower than in proof of work systems.

Stock-to-Flow model

The Stock-to-Flow model was first published in 2019 in the paper “Modeling Bitcoin Value with Scarcity”. The idea behind the model is that the bitcoin value is related to its scarcity and the scarcity can be measured using the Stock-to-Flow i.e. the relationship between the existing value of bitcoin and the amount of new bitcoin being produced each year.
Actually, the price of bitcoin has historically been tightly correlated with increasing scarcity shown by the stock-to-flow model.
Being the bitcoin’s stock-to-flow ratio programmatically increasing over time, this model “predicts” a perpetually rising price for the cryptocurrency.

Conclusions

Out of the 5 valuation approaches outlined above, none seems to properly model a cryptocurrency, additional research will have to be carried out in order to find a better model.
Cryptoassets are more similar to commodities or currencies but valuation frameworks for commodities and currencies are challenging. Additionally, Cryptoassets are still extremely early in their development, and we are still uncovering the utility that these assets can provide.
But if we look at bitcoin value since it was traded for the first time, we see that it has shown two characteristics: high returns and high volatility.
As the data show, bitcoin value has risen in 9 of the 11 calendar years since it was traded for the first time and has posted triple-digit or greater returns in 6 of those years. These high returns make bitcoin the best-performing investment of the past decade and probably the best-performing investment opportunity of all time.

Disclaimer

The information in this article does not constitute a solicitation to public savings and is not intended to promote any form of investment or trade, or to promote or place financial instruments or investment services. The data and information contained on this website are provided for illustrative purposes only.

Categories
Legal Framework Market

Switzerland and Germany favour securities on blockchain

Introduction

The emergence of Bitcoin and other cryptocurrencies has had a much wider impact on the financial world than it might at first seem.

Indeed, the underlying technological infrastructure, Distributed Ledger Technology (DLT) and the Blockchain, have since served as the basis on which many other financial services were built in a decentralised mode, giving rise to Decentralised Finance (DeFi).

The paradigm shift that these innovations underlie has on the one hand caused resistance in the existing financial system, but has also confronted the authorities with the need to regulate a sector with new characteristics. On this front, not all countries have moved in the same way and at the same speed, resulting in a situation with heterogeneous and sometimes deficient regulations. The countries of reference, such as the world’s financial centers, are the ones that have done the most in-depth work on this issue and have the most consistent regulatory framework to date.

Having a regulatory framework in place demonstrates acceptance of the phenomenon as part of the system, and both Switzerland and Germany have taken important steps on this front in recent months.

Germany

In December 2020, the German government passed a new law authorising the storage of security transactions on electronic registers, no longer requiring, as before, additional paper documentation, i.e. certificates to document transactions. Paper documentation is still possible but, in the vision of the German finance minister, the future will be electronic only. The law talks about electronic registration leaving the way open for various technological solutions that could be available in the future, however, it was made clear that the measure is part of the federal government’s blockchain strategy.

BaFin

The issuance of electronic securities and the management of digital ledgers will be monitored by the Federal Financial Supervisory Authority (BaFin). The German approach is clear, but at the same time also cautious: the law passed applies to bonds, but not yet to shares.

The approval of the legislation is part of a path started in 2019 in which the Ministry of Finance recommended to proceed to recognise and regulate blockchain-based securities. It was clear to the authorities that an investment- and growth-oriented regulatory framework had to be created. In the financial sector, where blockchain technology has long since moved well beyond Bitcoin’s prominent use case, blockchains, Bitcoins and tokens were placed under BaFin’s supervision with a first regulatory measure in early 2020, coinciding with the transposition of the EU’s 5th Money Laundering Directive.

Crypto custody

However, the German legislator took the opportunity to take a special route within the EU and introduce the so-called crypto custody business as a financial service also under the supervision of BaFin. Crypto custody companies are companies that hold, protect or manage crypto assets.

Cryptographic assets, according to the German Banking Act are “digital representations of a value that has not been issued or guaranteed by a central bank or public entity and does not have the legal status of a currency […] but […] is accepted as a medium of exchange or payment or serves investment purposes on the basis of an agreement or actual practice and can be transmitted, stored and exchanged electronically”.

A safety-oriented regulamentation

Regulation of the entire environment of DLT, tokens and cryptocurrencies is important to gain the trust of service providers and investors by enabling them to operate in an environment with legal certainty. For this reason, the German government’s blockchain strategy has been welcomed. Investors will be able to rely on a high standard of protection and invest more securely in encrypted assets in the future. However, the German special position is rather controversial: while in many EU member states crypto activities do not yet require a permit, financial service providers in Germany now face an obstacle they do not find in other countries. This can also lead to complications; for example, if a foreign provider wanted to operate in Germany, it would necessarily need a permit from BaFin. The path taken by the German government is being observed by other EU countries and may serve as a model once its successful operation has been verified.

Switzerland

As a leading financial country, Switzerland has been paying close attention to developments in the fintech sector, particularly in the crypto industry, from the outset and has sought to be at the forefront of this emerging sector.

In recent years, over 900 new blockchain and DLT companies have emerged in Switzerland, and many traditional financial organizations have started to offer crypto services and experiment with new technology-based initiatives, including UBS and Credit Suisse. The numerous private initiatives have raised the political attention that has seen the authorities at various stages to propose legislation to further improve the framework conditions for Switzerland to exploit the opportunities offered by these technologies. At the same time, the government gave great importance to continuing to ensure the integrity and reputation of the Swiss financial and economic center in this area as well.

The need for a legislative intervention

In December 2018, the Federal Council published a report on the legal framework for the use of blockchain and DLT in the financial sector. The report indicated in particular where the Federal Council considered legislative action to be necessary. In March 2019, the Federal Council then put forward a proposal for legislation, which received favourable feedbacks. The Swiss approach was to avoid specific laws relating to blockchain, as the sector is constantly evolving, but rather to proceed with interventions in individual areas of law where targeted adjustments were necessary to increase legal certainty, remove obstacles for DLT- or blockchain-based applications and limit new risks. In September 2020, the Swiss Parliament therefore adopted the law on the adaptation of federal laws to the evolution of Distributed Ledger Technology.

The federal legislation

This general law required the adaptation of several federal laws in order to propose a consistent and solid regulatory framework to ensure that Switzerland can continue to develop as a leading and innovative country in the field of blockchain technology and DLT, but also to protect investors and service providers.

In the law, a distinction is made between payment tokens or cryptocurrencies and security tokens, which have the same legal status as traditional securities. With regard to the securities law, the main change was to allow the existence of tamper-proof electronic records. But bankruptcy laws were also changed to make room for crypto assets, as were insolvency laws, particularly for custodians of digital assets who go out of business. At the financial market level, the regulations will be adapted to create a new licence category for DLT trading systems, providing a more flexible authorization scheme. Subsequently, on 11 December 2020, the Federal Council approved the regulation making it possible to introduce electronic security based on a ledger. The consultation process with cantons, political parties and other interested parties will last until February 2, 2021. The changes to the laws and regulations are expected to come into effect on August 1, 2021.

New Exchange license on Security Tokens (DLT Trading Facilities)

This new type of license has been defined as a professionally managed venue for multilateral and non-discretionary trading of digital securities. The aim is to offer trading, clearing, settlement and custody services with DLT-based assets, not only to regulated financial companies, but also to private clients.

The Exchange focuses on trading in DLT securities. DLT securities include blockchain-based securities (Security Tokens) introduced by the DLT Act and their foreign equivalents. In addition to DLT securities, other digital assets, such as payment tokens and utility tokens, can also be used in DLT trading exchanges.

Contact us for more information on this new type of license.

Categories
Market

What is Bitcoin? A simple explanation

Introduction

In order to understand what Bitcoin is, it is necessary to go back to its origins and the reasons that led the inventor to conceive this system. On 31 october 2008, Satoshi Nakamoto, the pseudonym of Bitcoin’s inventor, whose identity is unknown (it is not even known whether he is a single person or a group of people), published the Bitcoin protocol on a Cryptography mailing list. In 2009, the article ‘Bitcoin: A Peer-to-Peer electronic cash system’ and the software that implements what is described in the article were published.
It is important to place the birth of Bitcoin in time: 2008 is the year of the economic crisis triggered by subprime mortgages, a crisis which also made its effects felt in the following years and which not only caused the failure of several banks, but also eroded trust in organisations in the financial sector.

Bitcoin was thus created as a system designed to disintermediate and, in its own way, democratise financial services, in particular the system of currencies and payments. According to the Bitcoin philosophy, there is no need for an intermediary (the bank) and transactions take place directly between the parties, in a peer-to-peer system that is designed to provide trust in the counterparty, through the use of mathematics. Bitcoin doesn’t need central banks, normally issuers and guarantors of traditional, so-called fiat currencies.
Bitcoin is thus designed, if not to replace, at least to offer an alternative economic network that should have the potential to create a better financial system for society.
Despite these positive intentions, Bitcoin has encountered many acceptance difficulties. Difficulties partly induced by the reaction of the traditional financial system and partly due to the prejudices of use for illicit purposes, with which it has long been cloaked. This is because Bitcoin has often been seen as a potential tool for money laundering and anonymity for illicit purposes. A few years later,

the situation has radically changed. 2020 in particular has seen the consecration of Bitcoin by institutional investors who have started to include it in their investment portfolios, as digital gold and an asset now cleared of previous skepticism. In the consumer sphere, the most important case among many has been that of Paypal, the well-known online payment system, which has announced that it will integrate Bitcoin from 2020 for US customers and from 2021 for other countries.

How does Bitcoin work?

Bitcoin is a network-based system consisting of a large number of computers (nodes) scattered around the world and connected to the Internet. A specific software operates on each node. This software keeps a copy of the transaction records of the entire network in a file on each node. The file in question is the so-called Blockchain. The Bitcoin computer network is public, i.e. anyone can add their own computer to the network and thus participate in the operation of the cryptocurrency. On the other hand, any node can be turned off or removed from the network without impacting its functioning. This is possible because within the network there is no central computer that governs the system, all nodes are of equal level and perform the same functions, therefore it is a decentralised system.
The way of recording transactions is based on cryptography and algorithms such that a certain block of transactions, once validated and stored in the blockchain, can’t be modified: anyone wishing to make changes would have to violate most of the nodes of the network itself, since there is a copy of the transactions on each node.

Who prints bitcoins?

As there is no central authority, the system itself has to produce new money. This is regulated by a specific algorithm that leads to the production of a progressively smaller amount of new bitcoins: the amount that is produced halves approximately every 4 years until 2140, when production will end. The production of new Bitcoins is done through a mining process involving a large number of network nodes in a competition to solve a mathematical problem within the transaction validation mechanism. The winner receives new bitcoins as a reward.

Who wants to buy bitcoins and then use them for payments, how should proceed?

On the Internet, there are various sites, known as “Exchanges”, which allow you to exchange fiat currency into Bitcoin. Payments made on the Bitcoin network give rise to transactions that spend the bitcoins and update the balance of the two parties involved. In reality, no transfer actually takes place, only the balances of the coins in storage in the accounts involved are updated in the ledger (blockchain).

To allow secure access to the account there is a cryptographic system based on the use of public keys and private keys, which are always alphanumeric codes.
Whoever owns the private key of an account is in fact the owner, being able to access it and make transactions.

On the Bitcoin network there is therefore no information on either the payer or the receiver.

Security

Since the credentials for accessing one’s account consist of the private key, forgetting it or disclosing it to third parties or having it fraudulently stolen would be fatal. According to recent statistics, the amount of bitcoins in accounts that are now inaccessible due to the loss of the private key is about 4 million, which, at the current exchange rate of about 20,000 dollars, is about 80 billion dollars.

Wallets, both software and hardware, make it easy to store such private keys and always suggest good backup practices to keep your coins safe.

Conclusions

Bitcoin brings with it new opportunities. Bitcoin was the first of the cryptocurrencies and has since been followed by many others, even if none has been able to match its value and strength.This process is now underway and can be observed in the growing number of initiatives undertaken in both public and private institutional settings, and by the gradual increase in Bitcoin investments. We are witnessing a historical moment of transition, where Bitcoin is becoming a key asset of reserve and value accretion.

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Market

What is blockchain? A simple explanation

Introduction

The blockchain appeared on the scene at the beginning of the last decade following the advent of cryptocurrencies. Since then, the blockchain has been frequently discussed in the media and has come to be described as a technology capable of having an impact similar to that of the internet. The blockchain was first used with Bitcoin in 2009, the cryptocurrency invented by Satoshi Nakamoto in 2008.

The term blockchain is often used in conjunction with another term: Distributed Ledger Technology (DLT). Blockchain is a subcategory of the broader DLT family. These are trustless systems for value transfer, organized in a decentralized way.They are often spoken of in reference to their application in the field of cryptocurrencies, or more generally in the fintech sector, but in recent years also in other areas of use such as fashion and luxury industry, food, art, etc.
But what do this technology consist of and what role does it play in the systems it helps to create?

Blockchain features

The blockchain is similar to a spreadsheet, in which the transactions that take place in the system are stored sequentially and chronologically. In essence, it is the equivalent of a ledger in which every operation that takes place is recorded.
The transactions we are talking about represent the transfer of an asset, a currency in the case of cryptocurrencies, from one account to another. By looking in the ledger you can see all the movements and deduce the current situation.
The blockchain has a number of particularities that make it different from a normal database used in other traditional applications. One of these is that the file is organized in interlinked blocks, hence the name ‘blockchain’. Each block contains a set of transactions and is linked to the previous one by a number that the system calculates using an algorithm applied to the content of the block that precedes it in the sequence.

Blockchain: a chain of data blocks

If we were to modify a block, the algorithm would give a different result and the chain would break, so if we wanted to check the integrity of the blockchain starting from the oldest block, we would find that when we arrived at the block following the modified one, the number stored in that block would be different from the one produced by the algorithm applied to the previous block and it would emerge that the data had been modified.
One might mistakenly think that to make the structure consistent again, after having modified a piece of data, it would be sufficient to rewrite the new number produced by the algorithm in the next block, but by doing so, the content of the next block would be changed as well, thus also modifying the result of the algorithm for it and breaking the link with the block following it. In practice, one would end up having to update the entire chain starting from the block that has been modified to the most recent one, an extremely costly operation both in terms of calculations to be carried out and in terms of time. Another property of the blockchain derives from this fact: the immutability of the stored data. This immutability applies to the most important blockchains, such as Bitcoin and Ethereum, while for other minor ones there is a cost, which under certain conditions can be economically advantageous, to attack them and succeed in falsifying their blockchain.

Blockchain and the Distributed Ledger Technology

Blockchain is only one of the components of the system. The other fundamental component is the consensus that determine whether a transaction has taken place or not. It is able to operate in a decentralized environment that can make use of a large number of devices (nodes) on the network, each of which is responsible for managing its own copy of the blockchain. Anyone wishing to attempt to modify data already stored on the blockchain would therefore have to do so simultaneously on the majority of all nodes, which is technically almost impossible. If, hypothetically, he managed to do so on one device, this system would no longer be aligned with the other ones and would therefore be excluded from the network.

The blockchain system in a world without computing

To make the system easier to understand, we can try to imagine how a similar solution could be implemented in a world where the information technology does not exist.

First of all, one would need a network of notaries scattered throughout the world, each with its own ledger. Then, each notary would have to send by mail to the other notaries in the network all the transactions requested by their clients. In this way, everyone would know the transactions carried out by the clients of all the notaries in the network, would be able to record them in their own ledgers and thus their respective ledgers would contain the same data. However, not all ledgers would be the same, because in the ledger of one notary the transactions would be recorded in an order probably different from that of other notaries due to the timing of the post service.

Consensus

So how can we maintain the same sequence of transactions in all ledgers and ensure that they are for all intents and purposes identical? Without computer science it would be very complicated, perhaps impossible, but in technological solutions a new group of transactions, before being added to the blockchain, must be validated. In blockchains using proof of work (PoW), each node validates the transactions that are next to be stored, but one will always finish before the others. The one that “wins” this challenge will have produced the next official block of the chain. This block will be sent to all the other nodes, which will add it to their own chain, i.e. their own file. In this way the chain will continue the same on every node in the network. Transactions not included in the winning block will fall into one of the following blocks. There is therefore no specific node in charge of validating transactions, but it is a group activity whose result will be produced each time with high probability by a different node.

Disintermediation

This way of operating makes the system decentralised and provides the capacity for disintermediation that is another feature of the blockchain: there is no central computer that governs the system, indeed, none of the nodes in the network is indispensable for its operation. Any computer can be stopped at any time, just as any computer can be added to the network, provided it is equipped with the appropriate software, without altering its operation.

Conclusion

It is very hard to describe in a simple way what is a blockchain and what is its functioning. Because there are different types, even with very different features. Fundamental elements are the technical protocol, the consensus system used, the governance, the openness and decentralization of the system, its real autonomy from any form of control.

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Market Services

Blockchain in the fashion and luxury industry

The blockchain, initially used in cryptocurrencies, has then spread to the Fintech solutions sector, but is gradually taking on an important role in other sectors, including the fashion and luxury industry. Many companies are beginning to experiment with this type of technology whose potential is capable of making their brand evolve considerably: from tracing the origin of the materials used to make the products to guaranteeing their authenticity, to guaranteeing the ownership of the goods by the customer, the blockchain applied to the fashion and luxury industry is therefore a challenge that is only just beginning.

The main uses of blockchain in the fashion and luxury industry:

– Traceability of the origin of materials

Blockchain technology makes it possible to trace the transactions that take place along the company’s supply chain in a certain and unchangeable way and therefore guarantees a high level of traceability and security of online transactions and of the product along the supply chain, production and distribution. International organizations also push for supply chain tracking, such as the UN and the EU. For companies, the use of the blockchain guarantees a series of advantages among which the traceability of the different buying and selling transactions up to the different steps of processing, distribution and even in some cases geolocation of the product. In this way, also the consumer is protected: monitoring products step by step in their path from the raw material to the factory up to purchase, is a strong guarantee factor for customers who are increasingly interested in the origin of the materials of which the garments or luxury goods purchased are made, for both ethical and environmental sustainability reasons.

– Proof of authenticity of the products

The track-and-trace capability, guaranteed by the blockchain, becomes an important weapon in the fight against product counterfeiting. The blockchain in the fashion and luxury sector guarantees incontrovertible certification of the authenticity of the origin of the products, thus promoting the fight against counterfeiting and stolen goods trafficking. In addition, it allows total transparency of information up to the moment of sale: the customer receives a personalized certificate of authenticity with an integrated cryptographic system and the buyer has the possibility to make payment by cryptocurrency. The blockchain technology applied in this area also opens the door to the development of direct communication with customers and a more effective marketing strategy that also involves improving brand storytelling: in addition to increasing public awareness of the harmful effects of buying counterfeit products, brands today must think creatively about identity building, giving due importance to environmental and social sustainability aspects and maintaining constant proximity to the consumer.

Notarization: proof of ownership

Through the blockchain it is possible to associate the customer with the purchased product in an immutable and permanent way, thus guaranteeing its legitimate ownership and being able to trace any subsequent changes in ownership. This possibility is particularly interesting for luxury goods that have a significant value and for which it is important for the owner to be able to prove both their authenticity and ownership.

Examples of blockchain implementations in fashion and luxury industry

Blockchain technology is also beginning to be explored by the major fashion and luxury industries as an effective means of ensuring safety and quality and thus increasing confidence in the product within the business and also by the customer. Louis Vuitton and Dior were the first brands to enter the platform and to be able to verify the traceability and authenticity of the products. The platform, open to all luxury brands, offers them the opportunity to exploit the great potential of the technology, allowing customers to have access to the origins and history of the product they have purchased, a decisive factor against counterfeiting that is now increasingly amplified by the growth of e-commerce. The luxury fashion brand Alyx by designer Matthew William also started using the blockchain in May 2019 to monitor the production of clothes from the raw material to the final product, to allow the customer through the QR code to understand in detail the origins of their purchases and their genuine quality, thus gaining confidence in the brand.

Conclusions

Blockchain technology offers great opportunities for the fashion and luxury industry through systems that can be integrated relatively easily, in order to allow luxury companies to quickly take their first steps and become familiar with the benefits mentioned above.

Fashion companies will be able to find a significant way of innovation using the blockchain: dialogue with consumers who are increasingly attentive to values such as those of traceability and authenticity, which must be told in a transparent manner, providing detailed and simple information.

BrightNode and Alpenite are working on technological solutions specifically designed for fashion and luxury brands, for more information please contact us.

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Market Research & Development

What is Decentralized Finance (DeFi) and why it is innovative

Introduction

In the last few months DeFi (Decentralized Finance) has found more and more space in the economic and market context. This trend is now in steady growth and is generating a real revolution in the field of finance with such a development potential for that a future mass adoption, currently still in its embryonic stage, is expected.

What is DeFi?

DeFi is an innovative financial ecosystem that refers to financial applications based on the Distributed Ledger Technology and Blockchain. More precisely, the concept of Decentralized Finance refers to an approach that aims to create open source financial services through public and decentralized, permissionless and transparent platforms that are publicly available and operate without any central authority and without the intermediation of financial institutions. In this scenario, users would therefore retain full control of their financial activities by interacting with this ecosystem through decentralized applications, the so-called Distributed Applications – DApps (P2P) that operate exclusively through blockchain.

The Ethereum platform and the smart contract

DeFi builds on Bitcoin’s and in general cryptocurrency pioneering concepts, but offers additional types of services. The DeFi system is not based on the Bitcoin network, but mainly on the Ethereum decentralized platform, that supports smart contracts, the software that are automatically executed by the network and that make up for the absence of the traditional intermediary making the financial transactions completely autonomous and free from administration overhead. The real paradigm shift is that the financial management takes place through an automatic mode implemented by open software verifiable by anyone, whose behavior is therefore predictable, based on pseudonym and the basic market logic. In short, the DeFi ecosystem completely eliminates the discretion of classic intermediaries, delegating the entire management of the system exclusively to smart contracts. This is only a first step towards the creation of a parallel financial system that is supposed to overcome those limits now evident and intrinsic in the classic financial modus operandi.

DeFi applications

DeFi’s applications are numerous, a major one is certainly open and decentralized lending and borrowing, which has clear advantages: by using public blockchain platforms the counterparty risk is minimized and lending and borrowing become consequently cheaper, faster and more accessible. Banking monetary services are also a common use case and include granting of mortgages and taking out insurances, once again eliminating the significant costs that in the traditional process are mostly caused by the involvement of the involved intermediaries: thanks to the use of smart contracts, underwriting and legal costs are significantly reduced. Blockchain technology through DeFi can also be used to issue and enable ownership of a wide range of conventional financial products, favouring projects that could, for example, enable the creation of decentralised forecasting markets. As outlined above, the greatest innovation and the resulting advantage of DeFi is the easy access to financial services. By avoiding the obligatory intervention of institutions as mediators, DeFi applications are much more efficient and faster, allowing users to maintain constant and direct control over their assets. In addition, another significant advantage is that the DeFi low cost and open system allow a particular ease of access to those people who remain for various reasons out of the current financial system whose services usually exclude low incomes citizens. In the DeFi approach, however, costs are significantly reduced. One of its main claims is in fact “bank the unbanked” which implies the involvement of low income potential customers.

Between innovation and risk

DeFi goes beyond the concept of open banking which, while guaranteeing access to data from banking and financial institutions and making new types of products and services possible, stand inside the traditional financial context. The world of Decentralized Finance offers users a completely innovative perspective to look at the financial world dynamics: the open finance, independent from the current infrastructure, is placed in the foreground and promotes new ways of interacting with financial instruments. The DeFi ecosystem, with its promise of decentralization, is certainly an attractive idea, but before we will see a real mass adoption of its new approach, there are some aspects to tackle: alternative investment systems create interesting diversified scenarios and are accessible to a very wide range of users, but the DeFi field, being extremely dynamic and autonomous, is necessarily potentially more subject to changes, exposing customers to a higher risk potential than the traditional model. A solid organization of DeFi with a clear information process to safeguard savings on decentralized financial platforms is the basis for the spread of a system that is already today evidently more performing than the traditional one due to its intrinsic characteristics.

Conclusion

Anyway, the DeFi is currently in continuous growth: traditional financial services and DeFi applications are moving on converging paths, separated by an ever decreasing distance. Whatever the future scenario that awaits us, we are undoubtedly already facing a progressive change in financial services, within which DeFi proposes a radical rethinking of the financial system: shifting the power of action from centralized organizations directly into the hands of the community and the individual himself, an autonomous and independent entity with the prospect of an increasingly less centralized and more automated future.

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Market

The Rise of #DeFi

Coinbase CEO Brian Armstrong said that the crypto-winter only exists for coin prices and that it’s summer for innovation.

This seems to be true, in fact, during the apparent calm, a lot of serious teams have been embracing and developing the underlying technology to achieve real results. One of the key developments that resulted from this period is the emergence of Decentralised Finance (DeFi) applications, who will likely drive the next wave of disruption.

DeFi is an umbrella concept describing financial services built on top of public blockchains like Bitcoin and Ethereum. Three core principles have been proposed to define the values of any company that wants to be part of the #DeFi movement:

  1. Interoperability and Open Source: Members of DeFi take interoperability into account when building their projects. This helps strengthen the compounding effects of all our projects as a whole. Open sourcing helps us reach this goal by allowing us to collectively understand how all of our products can be woven together on a technical level.
  2. Accessibility and Financial Inclusion : Members of DeFi strive to create a financial system that is accessible to anyone with an internet connection. The vision of DeFi is a world where value flows freely, regardless of one’s geographic location.
  3. Financial Transparency : Members of DeFi believe that financial services should not be built in opaque silos, but rather that market-level information should be transparent to all participants while still preserving individual privacy.

As mentioned DeFi applications aim to improve on different aspects of the current financial system through the introduction of a decentralised layer in order to disintermediate rent-seeking middlemen. As of today many different use cases for DeFi applications exist. Examples include:

Consistent among all of these services, is that it requires no third party, bank or clearing house, and often is entirely permissionless.

DeFi is advantageous compared to fintech mostly because it provides some extra functionality and fewer operational risks thanks to its decentralized nature of minimizing trust at the software level, which in turn reduces the bureaucracy compared to fintech (banks are still disposing of the apps users funds and data).

There is a number of other reasons giving DeFi application traction as a new tech layer set to re-invent conventional financial instruments. Some of them are:

  • DLTs are able to ensure that the individual is the sole custodian of their assets at all times (provided that the individuals directly control their private keys).
  • Due to DeFi’s open source nature, it caters to an increasingly large pool of developers, thus enabling virtually unlimited room for experimentation in the financial services sector.
  • Building on the previous point, it is likely that through DeFi, the digital economy will move from digitalised versions of legacy assets, to completely new classes of digitally native assets.
  • Blockchain assets are inherently accessible and transparent, so for example, issuances, repayments, and loan terms are both human and machine readable.

At the end of the day, DeFi is obviously in a very early stage, but is a promising movement that has the potential to redefine many aspects of the present day financial services and could subsequently drive mass adoption.

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Market Services

Interbank Payments: where incumbents meet the Blockchain

Many people, mostly in the aftermath of the 2017-2018 hype, are questioning whether the blockchain technology has any actual use case. In this respect, some of the harsh critiques it received were constructive and honest whilst others were clear attempts to create FUD (Fear Uncertainty Doubt) in the market.

While this debate is still open and has yet to be resolved, some interesting signs may foreshadow which side will prevail.

In fact, several incumbents have started large scale projects that involve blockchain technologies. In this article, we will look at some of them.

Project Ubin

In November 2016 the Monetary Authority of Singapore (MAS) announced it partnered with R3 to create a proof of concept project to conduct interbank payments through a DLT (Phase 1). Phase 1 was successfully completed in March 2017, Deloitte was commissioned a report documenting it.

In October 2017 the MAS and Association of Banks of Singapore (ABS) initiated Phase 2 of Project Ubin. This Phase explored specifically the use of DLTs for Real Time Gross Settlements (RTGS). Throughout Phase 2 MAS and ABS experimented with 3 different proof of concepts built on 3 enterprise-DLT platforms (Corda, Hyperledger and Quorum).

Ubin Phase 2 successfully demonstrated that RTGS functions could be decentralised without compromising privacy, furthermore it marked the significance of an industry-wide collaboration in laying the foundation for future innovation.

IBM BWW

IBM is transforming cross-border payments with IBM Blockchain World Wire (BWW), an integrated network for real-time clearing and settlement. This new global financial rail allows banks and financial institutions to send and settle payments around the globe with finality in a matter of seconds.

To build the platform IBM partnered with Stellar, BWW uses XLM as a settlement tool for “fiat-coins”. Recently six international banks have signed letters of intent to issue stablecoins (backed by fiat currencies). The BWW platform allows the creation of ad hoc tokens (e.g. for national currencies) but also opens up the possibility of banks using XLM (the native token of the Stellar blockchain) as a “bridge currency” when it is hard to trade a currency pair.

SWIFT R3

SWIFT, the largest global banking payments network that uses a financial messaging network to facilitate cross-border payments, has announced a collaboration with R3’s Corda Settler to begin testing GPI payments.

The Corda Settler platform focuses on the settlement of global cryptocurrency payments within enterprise blockchains.

The company also announced that this would be a trial to see how well the integrated system will perform. It will connect the SWIFT payment GPI gateway with R3’s Corda platform. The objective behind this is to create a transparent system where the company can easily monitor the flow of payment and also support application programming interfaces (APIs).

Conclusion

In this brief article, we only discussed a few examples of one very specific use case (interbank payments and settlements). Nonetheless, this brief extract already shows that the stakes are very high and sizeable incumbents players are working behind the scenes after acknowledging the potential of DLTs. There are many more projects being developed and even more to come, so while blockchain is definitely not the panacea people tried to sell during 2017-2018, it has the potential to shake the foundations of several industries and enhance them.

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Market Uncategorized

Areas of use of Blockchain technology

Blockchain has become a term so abused that it is difficult to understand, given the vast and indefinite technological environment to which many would like to apply it. This is due to the excessive hype that accompanied the initial discovery phase of this new technology, where blockchain was advertised as a magic recipe capable of innovating any business. In 2017 and the beginning of 2018 blockchain has enjoyed great popularity thanks to the prodigious increase in the price of cryptocurrency and the rapid and impetuous success of tokens.

All this has generated great expectations of innovation and technological improvement, so many companies have felt compelled to include blockchain in their marketing plan, indicating it as a factor in the success of their business, even before having evaluated and thoroughly tested it.
When the speculative bubble burst and the ambitious promises had to leave room for the evidence of the facts, it clearly emerged that blockchain is not the panacea for all businesses and that its best application is limited mainly to certain areas. Furthermore, it is clear that the illusions of its rapid implementation and consequent immediate success of the relative products derive from a poor study of technology and a superficial understanding of its limits and opportunities.

Let’s see below what are some areas in which blockchain today shows real added value compared to other existing technologies:

Digital currency

The first and still most important application of the blockchain technology is that of allowing the creation and transfer of cryptocurrency without the need for any intermediary. The cryptocurrency native to a specific blockchain (Bitcoin, Ethereum, Ripple, EOS, etc.) and tokens created in a personalized way, represent a new way of transferring value.
Most important use cases:

  • Payments
  • Exchanges
  • Loyalty Systems


Financial sphere

The traditional financial system can be rethought and rebuilt over a blockchain infrastructure that offers security guarantees, automation and programmability of assets, disintermediation, efficiency and speed, superior to current systems. The audit and transparency of these systems, combined with the borderless nature of technology, make blockchain the perfect financial protocol.
Most important use cases:

  • Digital Asset Trading Platforms
  • Automation of financial products and services with the use of Smart Contracts
  • Tokenization of physical and digital assets
  • Financial inclusion for unbanked


Crowdfunding & Fundraising

Financing of a new business project or raising capital for an existing company can be more effectively implemented using a token. It represents rights and / or utility that can be transferred and exchanged more easily and quickly on the market. The token offers to companies an opening to international investment markets. In countries where regulation is clear and lean, it offers more opportunities to start-ups, thanks to easier and faster access to potential investors.
Most important use cases:

  • Financing of a future project (ICO, DAICO, IEO)
  • Capital raising (STO)


Certification and Copyright

The certification or notarization of a digital data on blockchain creates a non-modifiable register that can be used as proof of existence of that data. This applies to certificates and educational qualifications, which can be rendered demonstrable and non-falsifiable. In the same way it achieve the confirmation of authenticity of a product in supply chains where counterfeiting is otherwise difficult to verify.
Most important use cases:

  • Academic and professional titles
  • Anti Counterfeit Products
  • Verification and economic management of copyright


Digital Identity & Privacy

Digital identity is an increasingly important and delicate aspect of our lives, crucial for security and privacy, fundamental for democratic access to the online world.
Current authentication systems require the registration of personal data and the sending of identity documents that are not born natively digital. The security and privacy of such data are often violated without the users being able to defend themselves in any way. Blockchain, through public and private key pairs, and a cryptographic management of data, can greatly improve the current situation and provide a more efficient ID in line with privacy. Furthermore, there is no central entity that owns the data and can therefore be easily attacked.
Most important use cases:

  • Decentralized authentication systems
  • Management of personal data
  • Recognition and identity documents
  • Healthcare data
  • Online voting systems


Supply Chain Management

The complexity and quantity of subjects involved in supply chain management is now resolved by a plurality of systems, both online and offline, which make management very demanding and data exchange is not very efficient and verifiable. Using a common decentralized infrastructure on which to build shared applications among the various parties involved in the supply chain, up to the consumer, constitutes a great simplification and a guarantee of greater reliability of the information exchanged.
Most important use cases:

  • Open protocol for product history
  • Traceability systems and transparent data connection


Integration with other technologies

So far we have listed some of the most well-known areas, which represent the most common cases of real use developed in the industry. However, there are other interesting areas of real added value for the application of blockchain technology. These areas can be closely integrated with other technologies, or represent different products and services.
Most important use cases:

  • Prediction Markets
  • Integration with the Internet of Things
  • Decentralized storage with IPFS
  • Videogames & Gambling online
  • Automation in insurance
  • Energy market management


Conclusions

Blockchain is a recently developed technology, not yet consolidated and far from a stage of maturity. At the same time, innovation is rapid and continuous, as is the potential discovery of new real use cases. This scenario offers great opportunities for companies that will first be able to effectively apply blockchain, increasing the added value of their products and services and thus improving their business.

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Market Token Sale

The future of token issuance (STO, IEO & DAICO)

As everyone probably knows 2017 and early 2018 represented the ICO frenzy moment. Reminiscing those days we mostly think about how every new company had the best and most disruptive solution to X Problem, on (white)paper, and absolutely needed blockchain and a utility token to do that. Needless to say, most of these projects proved to be either impossible to implement or were outright frauds.

However, ICOs were not entirely bad, they were revolutionary as they democratised the access to early-stage investment; something that in traditional financial markets is mostly reserved to Angel Investors, Venture Capital Firms and Private Equity firms.
As the excitement for ICOs wanes and the flaws of this financing model become more evident, a number of contenders is emerging to leverage the untapped potential discovered through ICOs.
The most well known new model is the STO, but some new popular token issuance models are IEOs and DAICOs. So what are these new names and how do they stack against each other?

STOs

STO stands for Security Token Offering. After investing in the project, an investor receives a crypto-token (specifically a Security Token), just like in an ICO. However, an STO is different, because a Security Token represents an underlying asset, for example, the issuing company stocks (in which case an STO is similar to an IPO).
A company is not forced to tokenise its share, in an STO it could tokenise its revenue streams instead. In this case, the investor would receive a share of the company revenues proportional to the number of tokens they hold.

Compared to ICOs, STOs are heavily regulated. They are costlier, take longer time and are more difficult to launch; in exchange, they provide much more reassurance to the investor.

Another important difference is that ICOs required a company to have a blockchain-centred business model. In contrast, any company could potentially undertake an STO, even if its business model does not require the use of blockchain.

In turn, compared to IPOs, STOs give the company greater flexibility (as they are not limited to sell tokenised shares), while being more cost effective and less cumbersome. Of course, a traditional IPO usually offers a much larger liquidity pool.

DAICOs

The term DAICO was initially proposed by Vitalik Buterin in January 2018 as a solution to the dishonesty issues affecting ICOs. It stands for Decentralised Autonomous Initial Coin Offering.

It allows token holders to vote on the use of the capital raised by the DAICO.

For example, the token holders can decide to release the funds over time as the development team reaches certain milestones. In the most extreme case, the token holders can vote and decide for the project to shut down and return the contributed funds to the respective investors if they are not satisfied with the progress being made by developers.
Essentially, a DAICO makes the developer team accountable towards their investors.

IEOs

IEO is another form of token issuance that relies on Cryptocurrency Exchanges. The term stands for Initial Exchange Offering.

In this case a project partners with an existing Exchange (the partnership includes and goes beyond the simple listing). The project gets directly and listed on an Exchange. In order to participate in the IEO, an investor has to open an account with that specific Exchange.
The project team is no longer the direct counterparty for the investors. The Exchange acts as a trusted third party overseeing the operation and acting as the point of contact for the investors. The exchange also performs the necessary due diligence to protect its existing customers. The regulation level is similar to the one of ICOs.

One of the most notable IEO services is Binance Launchpad. Recently Bittrex responded to Binance by launching its own IEO platform.

The Bottom Line / The Verdict

One of the obvious questions that come to mind is “Which method of token issuance will eventually prevail?

Simply put there is no right answer as this is a complex matter, one can just try to make educated guesses. In my opinion, all of them will survive because they have different use cases and serve different niches.

STOs are more evolutionary than revolutionary and play an important role in bridging the crypto world with the classic finance world. Furthermore, they promote asset tokenisation, which is a use case with huge potential and implications.
IEOs are also revolutionary in a way, as they bring ICOs closer to IPOs (in a different way than STOs), as they also give more importance to the Exchanges as a key player.
For these reasons, I foresee a convergence of STOs and IEOs in the future.

The DAICO will probably be the best solution for pure-play ICOs that do actually need a utility token and who do not just use Blockchain as technology but also follow a decentralised philosophy in their business conduct. It will probably take longer for these projects to emerge compared to the two aforementioned methods.