Lykke: the early pioneer in the next generation of Global Digital Asset Marketplaces

Lykke has been ahead of the curve in the Capital Markets 3.0 evolution, in multiple ways. I confess it is difficult to put an order to all the aspects of the Lykke venture, simply because it is a Big Hairy Audacious one.

Lykke is open-source (if you fancy, go to Github here and download here). And maybe retail like you and me, doesn’t care, but it is a big deal in the 4th industrial revolution. Open source is the first pre-requisite to hope for network effects. Financial markets and especially, asset trading has not been used to business models with network effects. On the contrary, it has been operating in proprietary mode either on the data side or on the modeling side.

Lykke is real, live and way beyond beta mode. You can register on the Lykke App and not only get quotes for several cross pairs (from fiat exchange rates to crypto crosses) but you can also see the order book real time!

Lykke seems for now, like an FX trading app that keeps adding more crosses. True that it keeps adding more “assets” to its menu of capabilities; the most recent one being Ether crosses. True that it also has some commodities like Gold, Palladium etc; and some less known colored coins like the Solar colored coin, the Tree colored coin etc.

Lykke isn’t just another trading app using the colored coins protocol. Lykke wants to become a global marketplace for all digital assets. All the magic is hidden in the new understanding of “Digital assets” and “marketplace”.

Coming from an upbringing in the old world, we can imagine mapping “Digital Assets” to fiat currencies, all sorts of financial instruments typically issued by businesses (currencies, public or private equity shares or bonds from corporates or governments ect.). Such thinking is a linear extrapolation from current reality; i.e. take shares in a public company or gold in a vault and create a digitized version of it.

But Lykke is going after the new world that is allowing for the creation of new asset classes, the true digital assets, the tokenization of all: e.g. utility tokens in the protocol layers that are being built as we speak (e.g. Tezos TEZ, Golem GNT etc), or tokenized values like the TREE colored coin which entitles the holder to a Mangrove tree CO2 certificate or the TIME colored coin from Chronobank which is a labor market; or tokenization of business processes like the IATA token.

Lykke wants to be the global marketplace with the new understanding. They want all business to be launched and executed on their app. When I say all, I literally mean all. The Lykke app wants to be the center of the world. Whether you are a retail individual (investor, trader in the old sense, or not) or a business (to be built or grown up with complex business processes) or a government; Lykke wants to serve your needs. The accelerator they launched recently, will grow the ecosystem and have the desired network effects. Lykke is open of course, to all sorts of business partnerships, for example, the recent partnership with Splendid, a Swiss student loan lender, for servicing international students via blockchain transfers, a process which cuts costs of such cross border transactions and simplifies the process.

Lykke is using the colored coins protocol, not the ERC20 token standardization which has become the most popular software during the recent ICO boom. The colored coin protocol is of open-source and requires programming to be used (one of the reasons that the ERC20 standard has been massively adopted is the ease of use).

The colored coin foundation started in 2013 and is based on the Bitcoin ecosystem. Currently, there are 4 entities that have joined the consortium: Lykke, Colu, Bitt, and Etoro. Bitt is the venture focused on the launch of the Barbados Dollar on the blockchain with the local central bank. Colu is an Israeli venture focused on standardizing the colored coin protocol and the development of their mobile wallet. EToro the social trading platform just recently announced a pilot crypto-wallet that aims to tap into the ICO market.

Lykke’s approach

The exchange that Lykke has created is running on the colored coins protocol. What differentiates it from the newly launched (only beta version running) Bancor venture which broke the record in terms of ICO funding, is that it Lykke’s exchange is based on a P2P matching process whereas Bancor claims to have a secret sauce that creates liquidity and allows for automatic price discovery without requiring a counterparty (which is a breakthrough). Lykke is on the colored coin protocol and Bancor is using the ERC20 standard.

BNT (the $153million ICO) are utility tokens for their exchange (to be built). LKK the colored coins trading on the Lykke app (for now) are not utility tokens but equity shares. 100 LKK coins represent one share in the Swiss registered and regulated company. Lykke is going international in Asia but is not yet available in the US.

The shares of the company have surged in the past months (read more about this from the CEO Richard Olsen here).

Screenshot_20170619-155044

Lykke was early in using the ICO funding mechanism. They placed their first public shares last October and raised CHF1m and in February-March this year they innovated in placing 1yr forward Lykke shares (LKK1Y colored coins) raising CHF2m. They are leading the way in showing others how Capital markets 3.0 can work on their app. I expect that they will be innovating more going forward.

Their most recent innovation already operational (for now only for Bitcoin) is the Offchain Settlement integration on their exchange. This makes the network faster but still has the safeguards of the blockhcain.

Disclosure: I am a shareholder of the LKK coins and look forward to the experience of the first Digital annual shareholder meeting on the 29th of June, were more than 3000 shareholders from 87 countries will come together and vote. Stay tuned.

The race has picked up speed at the protocol layer and at the Dapps layer (payments, exchanges etc). Lykke was live early with a stunningly simple UX and will now has to compete with the recent “white papers” and “MVPs” that are getting piles of funding to accelerate their development. The Lykke “Go-to-Market” strategy is taking the regulatory route (i.e. obtaining exchange licenses in Singapore and the US, payment licenses and even investment licenses in Europe) and aiming to become the center for exchanging value for everybody (from consumers to businesses).

The invitation to join the great global conversations referring to Lykke on the Fintech Genome, is open. Join to learn and contribute here.

Efi Pylarinou is a Fintech thought-leader, consultant, and investor. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

 

A great Fintech DogFooding story in SME equity fundraising: SparkUp

logo new

The future has arrived and the pipeline of ICOs is active. Keep in mind that this glove does not fit all.  Capital Markets are being re-shaped left and right. We are following the process as it evolves.

How to raise funding, especially for small businesses, remains “The challenge” for the entrepreneurs involved at all stages of their business development,

despite the multiple alternatives, like Alt loans from Kabagge or Sofi, equity crowdfunding from Angel List or Circle Up, equity financing from investment boutiques like FT Partners or Zelig Associates, or equity financing from Corporate VCs like Google Ventures or Citi Ventures, or traditional VCs like Accel Partners or Bessemer.

SparkUp’s value proposition is empowering small business owners to raise funding

whether it is at the early stage or even later when ready to tap into the public markets. It is also empowering investment managers that are looking to leverage their data.

Jeremy Ley is the French young co-founder and CEO of Sparkup, whose disruptive energy one cannot ignore. I spoke to Jeremy last week because SparkUp caught my attention, as they are

“Eating their own Dogfood”, which means they are fundraising using their own AI sales technology that taps into their own network to quickly and effectively do the fundraising.

SparkUp is not an investment bank. SparkUp is not a crowdfunding platform. SparkUp is a sales technology tool with a focus on financial securities.

It is in the same space as CustomerMatrix or Salesforce with their AI CRM system. However, these technologies have a broader scope and are used mostly to improve revenues and sales pipelines in businesses. SparkUp has a laser focus on the sale of financial securities for SMEs, which is a multi-billion dollar opportunity.

SparkUp can tap into your existing business network with their AI CRM and generate leads faster and more effectively. They received their pre-seed funding in 2015 (1.1M€). They are operational currently in France, the UK and Norway. They have contributed to 7 equity public offerings, signed 8 Investment Managers with 3 Bn+ in assets under management and facilitated the equity fundraising of 40+ SMEs.

The average size of equity financing for SMEs is currently around 150k€ and rising. The value that SparkUp brings to the SME market is obvious since it remains a hugely untapped opportunity. SparkUp has its own online diagnostic test that allows SMEs to very quickly (3min!) estimate their fundraising potential, a digital process that improves the efficiency of SparkUp in serving prospects (i.e. not wasting time on SMEs that are not worthy clients).

Publicly trading companies that could benefit from a boost in retail demand or companies IPOing, are the ones using SprakUp. SparkUp can “smartly activate their databases” which results in improved retail distribution in a cheaper way than ads on online brokers or other digital strategies. In addition, brokers can use the SparkUp sales technology on a revenue sharing basis, to leverage their databases and sales people.

Investment managers have been using SparkUp to cross-sell more of their products with the smart use of their databases.

SparkUp is already operating in France, the UK and Norway. They are currently looking to fundraise funds for the R&D development of their algorithms and their scaling up. SparkUp will accomplish this by tapping into its own network and through algorithms identifying contacts at the right level, emailing them, managing the project of fundraising with its own technology. They are an AI CRM that serves the specific purpose of raising funds and currently, demo-ing live its use. This is a great example that we have not seen neither in the crowdfunding space (i.e. still looking for a crowdfunding platform that has crowdfunded itself) nor in the Market place lending space (i.e. an MPL financing its growth by borrowing on its own platform).

Efi Pylarinou is a Fintech thought-leader, consultant and investor. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

 

 

 

 

How Bitcoin will disrupt Wall Street West and East

We will be discussing how the Wealth Management business can profit from Fintech by gaining access to previously inaccessible assets and managers, at our first Round Table in Geneva on 28 June. The Bitcoin, Blockchain and Crypto revolution will be one of 7 subjects on the agenda.

Today we look at how Bitcoin will disrupt the current nexus of power between top tier Silicon Valley VC Funds and bulge bracket investment bankers in New York – what I call Wall Street West and East. This may lead to new opportunities to invest at the early stage with better risk adjusted returns than current models. Or it may lead to scams and bubbles and become a footnote in history. Or, like most disruptive innovation it might be scams and bubbles first and then change the world later.

Wall Street West is my name for the permanent aristocracy of top tier VC Funds on Sand Hill Road. Today they are far removed from their founding days as early stage investors. Today they are more like momentum investors who accumulate large % stakes in private companies before taking them to their connections in Wall Street East (i.e. the bulge bracket investment bankers in New York).

John Doerr of Kleiner Perkins Caufield & Byers famously called the personal computer industry’s growth from zero to $100 billion in 10 years “the greatest legal accumulation of wealth in history.” Then he saw how that the PC industry was a small wave compared to the Internet which went from zero to $400 billion in 5 years. “There are waves,” says Doerr, “and then there is a tsunami.”

It has been a great ride, but it is coming to an end.

The tsunami referred to by John Doerr is what we will in future call the Centralized Internet and recognize as a 20-30 year period in a multi-century history of the Internet. The next tsunami, powered by Bitcoin, Blockchain and Crypto will be the Decentralized Internet. This brings the Internet back to its founding days as a decentralized network. Bitcoin, Blockchain and Crypto technologies will enable the Decentralized Internet by creating a digital value exchange system.

The Decentralized Internet will also be funded in a decentralized way. This is what will disrupt Wall Street West and East. The value creation will be even bigger than the Centralized Internet, but these gains will be much more broadly distributed (good news for reducing inequality).

The Decentralized Internet will be powered more by the Rest than the West.

A big theme on Daily Fintech is “first the Rest then the West”.

For most of the 20th century, technology was limited to the West. Countries in the Rest (formerly known as developing, then emerging, then rapid growth economies) were “tech deserts” until those economies started to open up (first China, then India, then Africa). Then technology adoption started to flow from the West to the Rest; the last decade has been a boom time for Western tech firms selling to the Rest.

Now the flow is reversing as technology adoption starts in the Rest and then goes to the West. For example, look at Xiaomi to see the future of mobile phones and Alibaba for the future of e-commerce and Paytm for the future of mobile money.

Firms in America and Europe will profit from this shift, but will not drive the shift. This is the same as Britain making money investing in America (when America was an emerging market); British firms made money, but American firms drove the shift and took the lion’s share of the profits.

This megatrend is not limited to Fintech, but within Fintech mobile payments and mobile e-commerce is the big disruption and that is happening first in the Rest and then will flow to the West. Note that I am referring to technology adoptionWhere something is invented matters a lot less than where and how it is adopted, as Steve Jobs taught us after wandering around Xerox Parc and seeing the first graphical user interface and using that for the Mac. Network effects and branding have replaced patents as the technology moat.

The Centralized Internet was dominated by Silicon Valley companies. The top tier Silicon Valley VC Funds could network with the best ventures without using more than half a tank of gas in a Ferrari. This was fortunate because VC Funds have had trouble globalizing and many have given up the challenge.

This opens the market up to new innovation such as Initial Token Offerings (ITOs). These are currently at the bleeding edge stage, with lots of risk, scams and sketchy characters that are typical of the early days of a disruptive technology (think Silk Road and Mt. Gox). You can learn more about ITOs and attempts to create a self-regulatory code of conduct on this discussion on the Fintech Genome.

This is still very early days, but the key point about Initial Token Offerings is that they are a) permissionless and b) global. Anybody can invest from anywhere. This is the power of a global network that the top tier VC Funds catalyzed with their investment in Centralized Internet players. Now the genie is out of the bottle and those same top tier VC Funds have to compete on a level playing field with anybody who has capital and insight.

Watch out when this tsunami crashes on the shore

Bull markets end in a frenzy. The bull market in Centralized Internet ventures is currently in a frenzy. People look for historical analogies to the Dot Com era, but as the old saying goes “history does not repeat but it does sometimes rhyme”. Most of the frenzy/overvaluation this time around is in private not public markets. For more data on this, see this post.

This led to a strange inversion of the norm during 2015 and 2016 when private companies were valued higher (on paper at least) than public companies.

Thanks to artificially low interest rates for a long, long time, even public stocks are overvalued on historical norms. So the ending of the Centralized Internet will be brutal. From this rubble will emerge the new Decentralized Internet.

Liquidity

For many reasons, the IPO bar keeps getting higher. So ventures need much longer and much more capital before getting to liquidity. This is good for really big funds in the short term, but will end badly when the public/private inversion ends. ITOs in contrast offer liquidity from day one.

Don’t need $ billions for data centers

The key point about the Decentralized Internet is that you do NOT need $ billions for data centers, because the network is powered by the computers of the users in the network.

This ends one of the wonderfully simple ways that top tier VC Funds made money. They tracked ventures until they saw signs that hyper-growth was about to start, knowing that large amounts of capital for data centers (and other things) was needed to fund that hyper-growth.

Some centralization, but permissionless

Bitcoin today has a scalability problem. For more, read this post. To put that in perspective, pundits for decades have talked about the Internet’s scalability problems (and yet it has scaled very well).

To scale Bitcoin, it is likely that some form of offchain processing is needed; about 80% of Bitcoin transactions today are offchain. The cyber purist view that every human will run a full node that records every transaction is clearly not technically feasible at scale.

It is likely that this will happen in future through something like Lightning Network.

This is not the post to explain how Lightning Network works. Here are a couple of good introductions:

https://www.youtube.com/watch?v=jUhe7J6-aG0

https://www.youtube.com/watch?v=BFXrTS_MJlQ

The assumption about offchain processing is that it has to be centralized. Offchain processors today such as Coinbase and Bitpay are centralized.

That assumption is false. As we have seen from services such as Skype, large scale services can be decentralized. However, there is something more important than centralized vs decentralized which is permissioned vs permissionless. Skype is decentralized but it is controlled by Microsoft. The idea behind Lightning Network is that anybody can choose to run a full node or a Lightning Network node. Permissionless adds economic incentive and makes it scalable.

A global Wall Street, spanning both early and late stage that is truly decentralised and permissionless will change the game.

Join us in Geneva on 28 June

One of the subjects for our Round Table in Geneva on 28 June will be:

Bitcoin Disruption and the possibility that permission-less innovation and decentralization will change the game.

Note; this is one of 7 subjects on the agenda.

If you are interested in attending this Round Table, please email julia at daily fintech dot com and we will send you the full agenda and other details. Please note that this Round Table is invite only for Family Offices, Private Banks and Asset Managers.

The Big Hairy Audacious Goal of Numerai: network effects in Quant trading

It was Jordan Hauer, CEO of Amass Insights , who introduced Numerai to the Fintech Genome community, earlier this year in a conversation thread around AI in wealth Management.Screen Shot 2017-06-05 at 07.33.56

What is the mission of Numerai?

Numerai wants to crowdsource quant models from Data scientists that develop better ways of trading financial securities. Numerai is creating a meta-model from all the Machine Learning (ML) algorithms developed by “the crowd” with cryptographic data.

Numerai aims to offer a platform that generates alpha in a novel way. It wants to structure a rewarding mechanism for its traders that not only eliminates the typical competitive and adversarial behavior between them but actually, penalizes them.

How Numerai works?

Numerai hosted 12,000 data scientists earlier this year in a tournament. The data used for the predictive models, was encrypted. The participants were anonymous and the aim was to provide ML algorithms that improve Numerai’s investment calculations.

Numerai was initially compensating data scientists with Bitcoin, based on their contribution to the performance of the meta-model. They have now, changed their reward mechanism in order to create a collaborative reward mechanism. Their Big Hairy Audacious Goal (BHAG) is to be the first use case of creating network effects in finance.

Imagine a world in which proprietary data is not the secret weapon, profitable traders are not adversarial and competitive, and there is a financial incentive mechanism that makes traders collaborate to create an even better trading algorithm.

This the BHAG of Numerai: a blockchain world that can solve the classic prisoner’s dilemma by creating a cryptocurrency that is structured in a way that incentivizes “the prisoners” to keep each other out of jail.

This is exactly the aim of the new cryptocurrency that Numerai recently issued, the Numeraire token issued over the Ethereum blockchain. Each participating data scientist receives some Numeraire tokens based on their historical performance. At this point, the new world that Numerai is designing starts.

Numerai introduces a staking mechanism that is the heart of their BHAG!

The data scientist with send his Numeraires to the Ethereum smart contract along with a confidence prediction. Now the predictive model is live and the data scientist will be rewarded based on actual (not historical) performance and his/her confidence prediction. If the predictive power is poor, his/her Numeraire token is permanently destroyed by the smart contract.

As a result, data scientists can only gain by building models that perform well on live data, and stand to lose on models that overfit the past. Their compensation is denominated in Numeraire, which is linked to all the stake payouts which will increase over time.

How is Numerai different?

A data scientist who is getting compensated in Numeraire, has an incentive to invite another data scientist to participate in a tournament, who has the potential to improve the network. This is the collaborative mechanism at work, even though the process is anonymous and decentralized. This is Numerai’s BHAG part 1, which if successful it could become the first business model in finance with network effects.

Numerai’s BHAG part 2, is creating a mechanism of true alpha generation by crowdsourcing algorithms based on actual performance not back testing. Numerai’s target audience is data scientists who can master non-contextual data sets.

Numerai is unique also because they introduced their token, Numeraire, in their already existing platform, without launching an ICO! Numerai has control over the issuance of their tokens and has the right to introduce new features of the token. In their first tournament, Numerai paid out 1 million tokens; the maximum supply is 21 mil Numeraires.

Numerai is backed by Fred Ehrsam, Joey Krug, Juan Benet, Olaf Carlson-Wee and Union Square Ventures. Watch their intro video about their BHAG with Numerai investors Andy Weissman and Fred Wilson of Union Square Ventures; Joey Krug of Augur and Juan Benet of IPFS and Filecoin.

Efi Pylarinou is a Fintech thought-leader, consultant and investor. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

Fintech solutions in Quant land – Quantopian

keep-calm-and-study-algorithms

Quantitative trading isn’t a new idea by any stretch of imagination. Searching for the Holy Grail in quantitative trading continues to fascinate both financial professionals and all sorts of scientists (physicists, engineers, mathematicians, etc). Data scientists are used to handling data sets and modeling them, knowing that their prediction model WILL NOT affect the hypothesis or the phenomenon that they are modeling. However, this is NOT true in financial markets.

I see four types of challenges in quantitative trading in financial markets beckoning solutions that have existed forever:

  1. The amount of Subconscious biases amongst Financial professionals developing and implementing quantitative strategies, is significant.
  2. Acting as adversaries on a Survival TV show, is the modus operando?? amongst Financial professionals.
  3. Allocating capital towards quantitative strategies is a process dominated by subconscious biases.
  4. Network effects has had no place in developing superior quantitative trading strategies-products.

As you already sense, I am focused on the human-related issues of quantitative strategies-trading. Don’t forget that even if we end up overweighting quantitative strategies in the allocation of our capital resources (as individuals and as institutions), we are still depending on humans that are coding, fine-tuning, adapting, etc these algorithms.

In this post, I will revisit Quantopian, a Boston-based Fintech that I covered in the very early days of my Fintech content creation journey. Check out Quantopian – DIY open-sourced trading algorithms and a crowd-sourced hedge fund. At the time, Quantopian had received around $23mil in funding (by March 2015). Today, they have another $25mil from Point72 Ventures, Bessemer Venture Partners, Andreessen Horowitz (source:VentureScanner). More importantly, they have partnered with Point72 Ventures who has promised to allocate up to $250mil to quantitative strategies managed by Quantopian.

At the lunch organized by the Swiss FinteCH association, the Director of Academia of Quantopian Delaney Mackenzie, said that Quantopian is now allocating to 17 strategies that are benefiting from the first batch of capital from Point72. This is crowd-sourcing quantitative strategies not crowdfunding, in action.

The lunch gave me the opportunity to understand the kind of people Quantopian is looking for, the kind of strategies they seek, and the way their business works.

Quantopian has currently, around 130,000 users from which they crowdsource strategies. This is a platform that can give the opportunity to non-professionals to validate a hypothesis that is coded into strategy. Quantopian is avoiding subconscious selection hiring biases, by giving the power of algorithm filtering to a machine. Quantopian has automated the process of creating a short-list of algorithms and authors-coders. Their platform at this stage is

Acting as a Discovery platform for Talent that is left unexploited for various reasons.

This may include academic staff that may have one-off brilliant strategies, data scientists that have no access to high quality financial data, young techies that are unbiased from the traditional financial modeling frameworks. From the current 130,000 user base, Quantopian has detected concertation of talent: (a) geographically, in 5 countries; (b) educationally, with tech related backgrounds; (c) in gender, men rather than women. The gender imbalance is actually an area that Quantopian, whose role is at the same time educational, wants to improve. They are currently, exploring various initiatives that can improve that split as they genuinely believe that that kind of diversity can improve the quality of the diversification they are looking for.

The kind of strategies that Quantopian is looking for, are Alpha-generating algorithms.

They have been concentrating in the US market due to the maturity and the availability of data for back-testing, live-testing and validating.

Quantopian offers a 10% payout to the “author-coder” that is selected and allocated capital. This is 10% of the net performance of the author’s algorithm; a rate probably above the average “bonus” of a proprietary trader but lower than most hedge funds (which come with other kinds of risks and responsibilities).

Quantopian is fairly open-source for the most part of the journey of its users. So, any user, for example, can build on top another user’s code (permission from the other user needed). Users own their own IP during the phase of coding, tweaking, and back-testing. Naturally, there is an inherent trust towards Quantopian who would not jeopardize its brand name, by stealing the IP from any user. This kind of relationship (based purely on trust and with the user-coder in the driving seat), comes to a halt once the code-algo is selected and ready for capital deployment. At that point, there is a boat-load of legal agreements that coders-users and Quantopian sign to license the IP to Quantopian. This is the point that Quantopian shares profitability of the strategy and reaps the benefits of creating an alpha-generating crowdsourced quantitative investment firm. What is important here to bear in mind, is that Quantopian has to keep up the game of “feeding algorithms” that continue to generate alpha, in a financial world that is affected by the trading patterns themselves.

Quantopian is addressing two out of the four challenges, I mentioned earlier. It is addressing both subconscious biases 1 and 4, traders themselves and those allocating capital to traders.

Stay tuned for a totally different approach to generating value using quantitative methods.  Next Tuesday.

Efi Pylarinou is a Fintech thought-leader, consultant, and investor. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

 

 

 

 

 

Fintech Zuper to tap into $2 trillion superannuation opportunity in Australia

This week I’m deviating from my usual small business themed post to bring you exciting news about a new fintech venture I’ve joined.

After 6+ amazing years working at Australia’s flagship fintech Tyro, across business development, marketing and product, I’ve decided to jump into startup land, taking on the role of co-founder and CEO at a superannuation startup called Zuper.

What is superannuation?

For those of you further afield than Australia, superannuation is the equivalent of the UK’s pension scheme, or 401K in the US. Since it’s inception in 1992, the industry has amassed a phenomenal $2 trillion under management. I say ‘under management’, because despite growing evidence passive investment strategies, not active, are possibly the cheapest and most effective mechanism for long term investing for the masses, not many Australian super funds (or their armies of well paid fund managers) seem to agree.

As early as 2015, Sunsuper was one of the few super funds to buck the active trend, partnering with Vanguard to reduce its reliance on stock pickers. A more recent blow to active managers across the broader funds management industry was an announcement in May this year by the Future Fund, Australia’s biggest investor, that it too would rejig its portfolio towards passive vehicles.

The opportunity and problems to solve

We think superannuation as we know it in Australia needs to be retired. Alongside a massive digital overhaul, we want to use Zuper to empower Australians to align their values with how their money is invested, for a future they care about. We’ll also be using passive investment vehicles to do this.

To give you some idea of the opportunity in the space, here are a few startling superannuation stats.

High costs for little real value 

  • According to the Productivity Commission, in 2014-15, Australians paid about $12 billion in fees to APRA-regulated funds. Just over $2 billion of this is attributed to investment fees alone.
  • For FY14, a Rice Warner report estimated fees averaged out for members across the industry at 1.10% (110 bps). And while fees should never be looked at in isolation from performance and value, the lack of product differentiation across the sector makes for slim pickings on the value front.
  • According to the Association of Superannuation Funds of Australia (ASFA) March 2017 Superannuation Statistics report, the average 5 year investment return for the industry is 5.2 percent. Compare that with the Vanguard Australian Shares Index ETF, which tracks the S&P/ASX 300 Index, and managed to return just over double that, 10.61 percent, over a similar period for 14 bps. As a result, the industry is facing churn from members with $250K balances and above into Self Managed Super Funds (SMSFs) that invest in products like this.

Systemic implementation problems make it hard for average Australians to build wealth

  • According to the Productivity Commission report, 40 percent of Australians hold more than one super fund, paying multiple sets of investment fees and insurance premiums (life insurance, income protection and total permanent disability insurance is often wrapped into superannuation products). This dramatically reduces the effect of compounding. There has been a lack of will and coordination by the industry as a whole to tackle this consolidation problem.
  • Despite it being 2017, Australian women retire with half the balance of men. In 2013/2014 men, on average, retired with $292,500 while women ended up with $138,150. This can be attributed in part to a gender pay gap of 16%, time out of the workforce to raise children, and no superannuation payments on the unpaid portion of maternity leave. The disparity exists today for younger Australians, suggesting the trend will continue without intervention. Oh, and need I remind you women live longer than men? Double whammy.
  • Of the 176 retail and super funds, roughly 10 have a mobile app, resulting in disengagement and apathy.
  • Each year an estimated $3.6 billion in superannuation payments aren’t even made by employers (mainly small businesses), leaving 30 percent of the Australian workforce out of pocket to the tune of $1,489 each year.

Housing used to be most Australians retirement stop gap. But even in a low interest rate environment owning a home in Australia’s major cities is now almost completely out of reach for the millennial generation . The median house price in most centres is over $1M.

And, due to over-leverage during an individual’s working life, many retirees will be forced to use their super to actually finish paying off their mortgage. Those who own no property at retirement will also still need to pay rent. Deloitte estimates that the projected retirement balances of millennials of $1.1M will fall short by around $500-$600K – with rental added this could be even higher.

Superannuation is an awesome idea. We are incredibly fortunate to have it in Australia. But how it is executed has room for improvement, and only the whole industry can benefit as a result of increased digitally minded competition.

I’ve written more about why I joined Zuper in the post below. I’d love you to read it, share with me your thoughts and if you believe in what my co-founders and I are doing, help us spread the good Zuper word!

https://www.linkedin.com/pulse/why-i-started-superannuation-fintech-business-jessica-ellerm

 Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

The infrastructure for asset management of Digital Assets – Melonport

cryptovalley

I confess that I hadn’t been to Zug in 2017 and I grabbed the opportunity of the Crytpovalley meetup last Thursday at GG6 with its catchy topic “Crypto Valley – A better Silicon Valley?”. Max Wolter and Alexander Bremin, have captured moments about the people that have made and continue to make Crytpo Valley in Zug a unique and vibrant place. Read more in Alvalor Mission to Crypto Valley – a tale of the big world of crypto around the little town of Zug and about the many amazing people who make this place a reality. From Bitcoin Suisse, one of the first startups in Zug before Crypto Valley’s birth; to Monetas, one of the instrumental ones in nurturing the Crypto ecosystem in Zug, all the way to Søren Fog, founder of the Crypto Valley association and the crypto-expert legal partners MME.

The Alvalor project is a live example of a venture in its very early stage that is choosing to grow in the vibrant Zug ecosystem. As we were sipping wine, Max shared his excitement around the Alvalor new blockchain platform “that extends state channels to allow arbitrary applications to be executed, eliminating limitations of block space and blockchain size. We are modeling after the Ethereum foundation as a non-profit Open Source project, with a focus on research.” Max and Alexander also confessed “Opening our offices near teams that serve as an inspiration to the blockchain community, such as Melon Port, Akasha and SingularDTV, will be a privilege. There can be no doubt that Alvalor is primed for success in a location as unique as the Crypto Valley.”

Melonport is my pick today for many reasons that I can sum up in one word as “My biases”:

  • Melonport is co-founded by a woman, a young ex-Goldman Sachs trader and a Swiss blockchain developer who is an expert in the Ethereum world
  • Melonport is a blockchain venture focused on digital asset management
  • “Melon” is the Greek word for “Future”

A Swiss Ethereum expert with a background in mathematics from ETH Zurich and a female tech leader creating a venture that brings transparency, lower entry and running costs for hedge funds and asset managers, and access to a new asset class that promises genuine diversification; a vision that is broad and will be needed in the future world that is under construction.

melonport

I will start from the future that is beckoning infrastructure that can accommodate the new financial instruments and the new value creation.

  • Melonport wants to be able to accommodate all kinds of Digital Assets.
  • Melonport wants to be able to accommodate all kinds of Digital Asset management strategies (passive, active, open-end, closed-end). This encompasses the entire lifecycle from setup, to trading, custody, redemption, valuation, etc.

Melonport is a Decentralized blockchain protocol relying on the Ethereum Blockchain. In plain vanilla terms, Melonport is a protocol which means that they are building a core part that allows all sorts of Modules, that can function on top of the core part. Melonport is expecting a live beta version over the next couple of months. This will include the core part and 7 modules that Melonport has promised to offer in their green paper. These are the basic functions that a portfolio manager (PM) needs to setup his/her business. Once the PM chooses the parameters of the modules, the portfolio is ready for deployment in a secure and decentralized way (to be explained later).

Foundational Melonport modules:

  1. Registar: this where the PM chooses which assets will be traded. I love this, because the smart contract that operates this module, re-assures me that when I invest with a hedge fund manager who has promised to offer Alpha by a Long/Short strategy in one sort of tokens; the PM can’t “punt” on the bitcoin/TUSD rate.
  2. Functionality: PM can customize the rights around the use of the funds which may vary from one asset to another. This module determines whether penalties apply or not for certain actions by the PM.
  3. Price Feeds: PM picks the feed module (one or several) that will be used to evaluate the portfolio for mark-to-market purposes. This smart contract solves in a secure and transparent way the problem of ambiguous pricing for various assets and manipulation by the PM.
  4. Exchanges: PM chooses on-chain exchanges for trading.
  5. Trading: PM sets various rules around trading and risk management. For example, caps on leverage, caps on trade size with respect to total volume of the asset, caps on concentration exposure etc
  6. Management Fee: PM specifies the calculation of the management fee which typically is linked to the gross value of AUM.
  7. Performance Fee: PM specifies the calculation of the performance fee which typically is linked to the increases in the gross value of AUM. It also typically, involves a high-water mark, which means that if the PM is performing below a designated benchmark since inception, then the performance fee is not paid. This module will allow for more customization by the PM

Since Melonport is an open-source protocol with these 7 basic functionalities, anyone can develop more Modules on top of the Melonport protocol and create a new portal to access it.  If a hedge fund manager or a passive asset manager designs his/her portfolio parameters using the 7 basic Melonport modules, that can be seen in Blockchain land as the offering of a legally binding contract. The contract terms are defined by the smart-contract terms that are operating the modules. Melonport will be partnering with data feed providers and exchanges like CryptoCompare for price feeds from various exchanges, or  Oraclize for fetching data.

I won’t get into the tech details of how shares are created and how they are redeemed in the Melonport world (anyone interested can read the green paper). I will however, outline what value is created in the Melonport world. I foresee, that this will be a world that will reduce substantially the costs of setting up a fund for many reasons but mainly because the costly custodian and fund administration function will be given over to a few modules operated by smart contracts. The cost of using the Melonport protocol is MLN tokens. At the same time, there will be large efficiency gains because the processes will be real-time, without human errors, and fully transparent. These features are absolutely necessary for investing in protocol tokens and their derivatives.

The Melonport protocol is creating a digital asset management world that offers both Decentralized storage and Decentralized execution. I am excited about this future world that the assets, the track records, and the smart contracts are stored on a decentralized Blockchain. This reduces the centralized custodian risks that showed their ugly head especially during the 2008 financial crisis. In addition, decentralized execution using the Ethereum virtual machine, reduces counterparty and settlement risks.

We can all foresee a future world in which a variety of hedge funds are using the Melonport portal but also for the creation of passive investments focused in the protocol token asset class. We can foresee that Funds-of-Funds (FOFs) will be able to offer value since costs will be reduced and multi-layered risks mitigated. We can foresee better diversification across digital asset classes that would be expensive to design in the analog fund world that we currently live in.

Before ending my coverage of the Melonport protocol, I want to circle back to the variety of Digital Assets that are being created by companies like Lykke, Digix, T0 platform etc.

I like to think of the growing Digital Assets space in 3 main categories:

We will be watching Melonport rollout the infrastructure for asset managers to create new strategies focused on digital assets: protocol tokens, derivatives, and tokenized old assets. Mona El Isa says:

We are primarily building “Melon”, as an infrastructure to set up and manage funds built around protocol tokens — an asset class which we fundamentally believe will have a place in every single diversified portfolio ten years from now.” Source The Difference Between Protocol Tokens and Traditional Asset Tokens

Efi Pylarinou is a Fintech thought-leader. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.