“Web requires a bridge to connect words of the past and present. This is findability. Findability is just the bridge that connects the world of physics and numbers, enabling us to interchange between the two concepts freely.”
— Peter Morville
This article will explore the keystone concept of "Findability" in an era of Open Finance. Why do we need it and how does it fundamentally shift the structure of the financial system upside down.
In the era of Open Finance, the monetary property of an asset enabled its convenient conversion to mortgages at any time. When the need for new capital emerges, we simply just need to mortgage the corresponding equity. When capital is recovered, the mortgaged equity could then be redeemed. Either past or future equities such as usage rights of products and dividends could be used for such purposes. In this way, our financial world would be greatly enriched.
Before we discuss how the tokenization of assets brought about a reform in Open Finance and how it creates opportunities for our current financial system, it is important to first understand how the Internet has benefited the human race. “Findability” is one key concept to be taken note of. In the early years of the Internet, people were fascinated by how they could search for any information quickly and conveniently with a few clicks compared to a physical and time-consuming search from an encyclopedia.
“The Web is a public place without ‘space’…, we can go anywhere from where we are, but there is no movement in actual ‘distance’”, expressed excitedly by David Weinberger, the witness of the Internet age.
This is arguably a huge revolution.
In those days, people tried to visualize the usage of internet as having different “spaces” for specific scenarios. However, these visualization attempts were futile. The Internet had no constraints of “spaces”, which made information dissemination much more fluid.
Peter Morville was the CEO of Argus Associates, an information architecture consultancy firm. While he witnessed the Internet bubble and the rise of Google, Peter wrote a book, titled “Ambient Findability” during the first wave of Internet entrepreneurship. The key concept highlighted in this book was “Findability”, which he believes is the key to the success of the Internet.
Dubbed as the secret behind the success of numerous Internet giants, it appears that many have yet to grasp the concept of “Findability”.The World Wide Web has redefined the ideological concept of “geographic space” and has subconsciously changed our habits and way of life. Subsequently, there has been a fundamental shift in how people view the value of space: from “ownership of territories” to “ease of discovery”.
While technological breakthroughs complete at a certain point of time, adapting to these technological changes is a longer process. Although innovators face tremendous pressure, but as Peter Morville advised, to innovate is to abandon the past in order to embrace what’s truly possible.
The Expansion of the Open Financial System
The economist Carlota Perez predicted in her book “Technological Revolutions & Financial Capital” that as the Internet reaches its maturity phase, it will become a medium, inevitably becoming the basis of great changes in the financial infrastructure. In this period of exponential evolution, the traditional geographically concentrated financial system will be replaced by a ubiquitous data-driven modular financial system — “Open Finance”.
However, the realization of Open Finance is restricted by the inertia of the masses and the current institutions. According to Perez, the results of such limitation will be manifested as a form of a gigantic bubble. Indeed, we had witnessed the bubble forming and bursting in the cryptocurrency market in 2018.
What’s next is the slow but steady implementation of the infrastructure that allows Open Finance to grow exponentially when the time comes. Our researcher Robin wrote that digital assets such as blockchain token can simultaneously possess the qualities of commodity, currency and security. In other words, assets, especially digital assets, can exhibit the qualities of commodities, currency and security through tokenization.
It is based on this premise that we hope to explore the findability of Open Finance through this article.
So why do we still need to look at token in the respective lens of security, commodity and currency? Simply because to truly innovate, we have to examine the fundamental assumptions of what have been taken for granted and make interesting inquiries.
What happens if securities acquired the attributes of commodities? What would happen if commodities adopted properties of currencies?
The Open Market : When Securities Acquired the Characteristics of Commodities
What is the security market? For the layman, it is simply opening an account in an exchange to buy and sell securities. Such answers would prevent us from seeing that security markets are a marketplace, and instead give us the impression that security markets have to exist on exchanges.
Which one comes first, security or security market? Investment banking professionals will say that securitization is the first step for assets to enter the securities market with the pretext that there are available securities. Yet we have to ask: without an exchange, where can I trade my securities? In other words, why would exchanges be the bottleneck for security trading?
Before tokens, securities were confined to their respective exchanges. The purpose of the exchange is to provide a clearing system that is not prone to errors. Put simply, the clearing system acts as a ledger for all of the securities traded on its exchange. Due to the exclusive rights of an exchange to clear trades and keep record, the securities trading on an exchange would hence be seen as exclusive to that particular exchange, making it almost impossible to be able to transact across different exchanges simultaneously.
Keen eyes might notice that since transaction bookkeeping right is exclusive to the exchange, the operating performance of exchanges would have a material impact on the price of the securities traded. Therefore, if the securities cannot exist without the exchange, or if the securities can only be recorded in the exchange’s settlement system, then the exchange would be the only means for transaction verification.
If so, then what is the relationship between the continuous existence and operation of a company and an exchange? None. Therefore, by tokenizing securities and giving securities the quality of commodity, the limitations caused by exchanges can be overcome.
In the world of tokenized security, clearing systems based on distributed ledgers do not require any maintenance by exchanges. Exchanges are only responsible for matching orders, which significantly reduces workload for exchanges. Under such circumstances, exchanges become the channels to trade. Therefore, people would own securities just as they own commodities. in other words, people can freely store, trade or gift securities like commodities. Security markets become like any other markets — a place to trade. We call such tokenized security markets under the Open Finance framework “Open Market”.
Open markets are naturally fragmented. A large number of exchanges in a wide range of quantities and sizes have been created and closed in 2018 alone. The low cost of setting up and closing down greatly increase competition between exchanges, giving much more possibilities for the token world to experiment quickly.
Self Measurement of Commodity: Currency Properties in Commodities
Despite appearing to be entirely different concepts, commodities and currencies do share more similarities as people expected. Imagine an interesting scenario where egg is used as a medium of exchange. The scenario was in truth a historical fact recalled by the famous economist Wuchang Zhang in his hallmark work “Economic Explanation”. He used it to demonstrate the three traditional functions of a currency: 1. Unit of Measurement, 2. Medium of Exchange, 3. Store of Value.
You may think using currency as a unit of account is a matter of expediency. In “Theory of Interest”, Fisher said there was no currency. Our researcher Robin found that Fisher used a exchange measure of account “numeraire”. It is simply that so far, there is very little reason for us to use asset itself as a medium of account because a measurement system requires the society to adopt it, and not just to be only used for one’s account. Meanwhile, say if we were using egg as currency, we still need to know information such as the total amount of eggs and where the eggs were, also, when things like eggs went rotten, the ledger had to be updated to “burn” the amount of rotten eggs from the ledger.
In the process of exchange, the measurement can immediately change according to changes in transaction and be verified by the public. This requires measurement to be ensured by contracts that can immediately reflect the reduction from the total egg volume the number of rotten eggs. Normal contracts cannot achieve this function; currency is the first contract ledger that is widely circulated. When there is a simultaneous strong need and a lack of a measurement system that is bound by contract, currency is the most convenient and cost-effective alternative.
“The main utility of currency is to manage the rights to future benefits of debts, thus a piece of fiat currency or cheque is a contract.”
— Professor Steven Cheung, author of “Transaction Costs and Property Rights”
After tokenization, commodities automatically become contracts in distributed ledgers; thus, the measure of account for commodities is inherently included in contracts. If objects in the physical world needed to be mapped onto the digital world, then digital commodities (including digital services) inherently come with a unit of account system when they are created.
We hereby term this quality as Self-Measurability. This concept can be used to demonstrate whether commodities or assets have the inherent property of unit of account contract. Tokenization allows commodities to naturally acquire Self-Measurability.
The concept is significant because all tokenized assets possesses it, and it is an important prerequisite for serving as a store of value. Self-measurability of commodities allows bartering in the token world to be surprisingly convenient. For instance, on a decentralized exchange such as Uniswap, one type of token can be easily swapped for another type of token. By using the tokens themselves as units of account, we can conveniently price other tokens without any additional technical difficulties.
This significantly improves the activeness of the open market and makes it much harder to control the flow of capital from or to any one token.
Currency Channel Model: Simplification of Currency is the Key to Open Finance
The commercialization of securities has brought about open market; giving the property of currency to commodities has brought about the Self-Measurability of commodities. Under the Open Finance paradigm, the definition of currency will be changed. When currency no longer needs to serve as a unit of account, we could focus more on the other two properties of currency: store of value and liquidity.
To elaborate further on the utility of such an autonomous currency, we need to construct a new model. Let’s borrow the idea from Lightning Network and construct a Currency Channel Model. The heart of the model is that under Open Finance, currency will be seen as the total sum of all the channels through which tokenized asset flow.
Viewing the store of value function of currency from such a model, we are able to place the function of the store of value within the commodity property and security property of assets. In this case, the retained value within currency channels will only represent the circulating value within the channels. If we could open or close one or more channels simply by staking assets, then the value of any tokenized assets will equal the sum of retained value from past rights, the value of future rights and the value retained in channels. This greatly simplifies the treatment of asset value properties.
However, something needs to be said here. Because most people think currency is a store of value at the moment, this allows currency to become a meaningful store of value for the time being. We will have all kinds of cash reserves and treat them as a part of our wealth.
An evolutionary perspective would allow us to better understand the three stages of asset value transfer.
Before the Internet era, bartering is heavily constrained by space and time, thus the cost is extremely prohibitive at scale. In order to preserve value, we had no other choices but to rely on objects whose value is “relatively stable”. When we own currency, we are actually announcing our perceived value of the total sum of the equivalents of all sorts of rights. In other words, currency reflects our labour rewards.
Without token, we are not able to count, nor even learn about the value of these equivalents. Meanwhile, because the value of rights is contingent on expectations of the future, we cannot mortgage based only on commodities and rights themselves. We have to rely on currency to signal trust, thus leading to the association of trust and currency. This is the second historical stage.
Nowadays, creditization of currency has reached a degree unmatched in previous times, which led to many problems. Self-measurability of tokenized assets solved this problem. We can measure inherent value through self-measuring the value of assets. Consequently, we are able to creditize asset itself while treating currency only as channels by which the speed and bandwidth of the flow of value are measured, turning currency into parameters for evaluating network properties.
The picture below shows the evolution of asset value creditization. It demonstrates that currency starts from using gold as the central value provider, to fiat currency replacing gold, and eventually to the opening and closing of many ch annels. In simple terms, currency can be created or destroyed at any time through the mechanism of staking assets. The amount of currency is determined by the change in the overall value of rights within its commodity and security property.
Creditization of Assets: The “Findability” of Open Finance
Turning currency into channels corresponds to the creditization of assets, people no longer need currency to create credit, instead credit can be directly via the commodity and security properties of assets. Open Finance allows asset creditization to be independent from currency, allowing diversity in the market to grow exponentially. In a way, the emergence of all kinds of crowdfunding projects and IXO models in the past few years gives a glimpse of the potency asset creditization has in extending value.
Some professionals in the finance industry may dislike the concept of creditization because of the enormous destruction that could manifest through the bursting of financial bubbles such the 2008 Subprime Mortgage Crisis. However, we would like to propose an alternative viewpoint: The out of control creditization of currency is the root cause.
The issue is that if credit kept accumulating on the currency layer, then currency would become a bottleneck that made managing credit extremely difficult. Self-measurable commodities and mortgaged security credits turned the everything upside, stabilizing the entire financial order with the interconnected web of assets that are directly exchangeable without any external forms of unit of account.
MakerDAO can give us a real case of how this might look
Many people think of MakerDAO as a stablecoin project. In reality, the production of Dai’s (MakerDAO’s stablecoin) is a clear case of using currency as channels. In our opinion, the most important innovation of MakerDAO is its ability to facilitate the easy creditization of assets.
Cyrus Younessi, the director of trading at MakerDAO, showed in “An Elegant Relationship (DAI, ETH, MKR)” an analysis of the relationship between MKR, ETH and Dai. In his eyes, ETH plays the role of the store of value for the entire Ethereum ecosystem.
However, while ETH has the property of currency, it is not the best when it comes to payment. Therefore, Dai serves as the currency channel for people to stake their ETH and get access to fast and easy payment, allowing ETH technology to be directly integrated in real world use cases.
MKR is the guarantee mechanism for ETH asset creditization. All the value is stored within ETH, the value of Dai serving as channel exists because of the mortgage of value through staking ETH. We thus require a mechanism that makes the mortgage and redemption of ETH to become simplified. Such a mechanism should best be transparent and open, as well as self organized. We recommend using Makerscan.io to continue to observe trials and experiments MakerDAO will make, and evaluate whether the transparent and open staking mechanism of MakerDAO would be more reliable and stable than unsecured credit creation.
Along this line of thoughts, we may eventually reach a deeper understanding of why the creditization of assets ficilitates the creation of currency via mortgage.
If we carefully considered the value of currency channels, the only remaining value for currency is from transaction cost. This is a remarkable conclusion because ever since the decoupling of currency and gold, currency no longer has to map to the value of any commodities.
Both Steven Cheung and Milton Friedman once proposed that a price index made up of a basket of goods can be used as an anchor for the value of currency. Both see the it as a solution to the problem that would arise once currency loses its anchor. The decoupling of money and gold had far-reaching implications because while gold can store the value of commodities or rights created in the past, it is not a good store of value for securities or benefits created in the future.
The creation of fiat currency allows currency to store the value of rights created in the future, and through the further creation of securities and derivatives from currency, our current massive financial system came into being. Distributed ledger gives us the ability to more conveniently measure future benefits, which allows us to describe the currency property of assets as the closing or opening of currency channels at any time via staking of the assets. In this way, we are able to focus solely on changes in benefits itself without too much consideration of currency.
Hence, we only need to stake benefits to create currency of equal value; and release benefits to “burn” or reduce currency of equal value. We can stake benefits created in the past such as the rights to use commodities; we could also stake benefits contingent on the future such as rights to future stock dividend.
To demonstrate, Let’s consider Steem’s economic model. Steem proposed a three token model, which at first sight seemed overly excessive. Let’s evaluate Steem’s economic model with the aforementioned framework.
The first type of token, STEEM, is used to denote the value of assets on the network. The second type of token, Steem Power, represents the value of the staked assets that are used to create instances that give rise to currency channels, using Steem Dollar to maintain circulation within the instances. From this len, the considerations going into the token design of Steem can be laid bare.
It is Time to Embrace the New Era of Open Finance
If “securitization” enabled the creation of modern finance, tokenization would serve as a precursor of Open Finance and gives a glimpse of the blueprint of future financial infrastructure.
We are about to see the great potential that Open Finance has in catalyzing our networked and automated future. Fragmented open markets and self-measurable assets will greatly stimulate creativity and innovation in reimagining internet and bringing about a new age of asset creditization and asset creation on the web.
The author, Nathan Chen, is a senior analyst at X-Order — we invest in blockchain, data science development, and theoretical research to propel the emergence of a new financial infrastructure natural to the web.
This article is part of the “Open Finance” series. The author attempts to explains the “findability” concept in conjunction with the “Super Carrier” paradigm we discussed in the previous article (Part 1 & Part 2).
