Decentralized Finance: What are its implications?

7

October

2020

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Many of you have heard of blockchain before. It is a widely discussed topic and its prospects are acknowledged by many researchers as something that potentially can be revolutionary. One of the most exciting use-cases is the implications it can have on financial services. Decentralized Finance (DeFi) is the interlocking of the financial system denominated in cryptocurrencies and can address many of the difficulties faced in the existing financial system. It offers many parties the opportunity to utilize this technology to provide access to the financial system. Moreover, it offers a wide range of services such as lending, and derivatives that can be accessed globally, peer-to-peer, and without any intermediaries. Anyone can access this technology just with the use of the internet. However, how do smart contracts work and what specific implications does it entail?

First, all Decentralized Finance services are offered on the blockchain. Parties can establish laws, rules, and regulations which are programmed on the blockchain to automatically enforce protocols that are established and agreed between two parties that entered the contract. These contracts are intended to automate and replace many of the functionalities in financial services that are currently necessary for parties to go through. Think of the long waiting times when you apply for a small loan. Many of the contracts can include for example insurance, loans, and investments. Second, what Decentralized Finance offers is that it is secure and readily available to the involved parties. Research of PWC has shown that 45 percent of financial intermediaries such as money transfers and stock exchanges suffer from serious cybercrimes every year. Through the use of Decentralized Finance, smart contracts can act as legal evidence including information such as ownership, auditability, and traceability that are also more troublesome for third parties to commit cybercrimes. Lastly, Decentralized Finance can act as a platform for those that are not fortunate enough to have access to financial services as it offers transparency and interoperability due to it being borderless. Parties can easily access many of such contracts without the need to go through traditional channels that consume much of your time. Thus, Decentralized Finance has a high-value proposition.

However, to this day, Decentralized Finance is facing many difficulties. As Decentralized Finance operates on a peer-to-peer network, it needs to create a healthy ecosystem in which it needs to generate distributed trust, generate liquidity, and stability. Additionally, currently, decentralized finance faces substantial regulatory uncertainty as governments are not sure what the effects of this technology have on many practices today. Hence, there is still a long way to go for Decentralized Finance to reach its full potential.

Please let me know your thoughts on this topic. Do you think that blockchain technology has the potential to establish a Decentralized Finance system in which parties can enter contracts without any intermediaries? Can it replace the current financial system or do you think that it will coexist next to our financial system and provide a platform for those that are not privileged to have access to the financial services? Is there any chance that it can reduce many of the difficulties faced by financial institutions?

https://www.ft.com/content/16db565a-25a1-11ea-9305-4234e74b0ef3

https://www.forbes.com/sites/ilkerkoksal/2019/09/29/the-shift-toward-decentralized-finance-why-are-financial-firms-turning-to-crypto/#36f7ff356392

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Click to access Blockchain-Disruption-and-Decentralized-Finance-The-Rise-of-Decentralized-Business-Models.pdf

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Author: Ting Fung Lee

TIng Fung Lee

The Potential of Quantum Computing

7

October

2020

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On 23rd of October, Google announced that it had achieved a long-sought breakthrough called ‘’quantum supremacy’’. Its new device solved a mathematical calculation in just 3 minutes 20 seconds compared to what today’s best computers could not complete in under 10,000 years. This event was marked by the New York Times as comparable with the achievement of the Wright Brother’s first plane flight, meaning that this had marked the start of a new movement that can revolutionize in today’s practices.

But what separates quantum computing from traditional computers? The answer is simple, a quantum computer can perform certain calculations faster than any computer can do. The difference lies in how quantum computing operates. In classical computers, bits are stored as either a 0 or a 1 in binary notation. However, Quantum computers make use of quantum bits — or qubits — which can be both 0 and 1, meaning that computations can be solved simultaneously. There are much optimism and reliance that quantum computing can solve many of today’s questions.

For example, scientists are excited about the emergence of quantum computing as it allows precise simulations that are not possible today. John Preskill (2018), director of the Institute for Quantum Information at Caltech, is confident that quantum computing would be able to efficiently simulate any process that occurs in Nature. It can be used to explore fundamental physics in new ways, for example by simulating the properties of elementary particles, or the quantum behavior of a black hole, or the evolution of the universe right after the big bang.

On the other hand, quantum computing also has many other use cases. In 2017, IBM established its ‘’Q network’’, a cloud-computing service that lets clients use the firm’s quantum computers. IBM aims to provide companies such as financial institutions to solve the uncertainty and constrained optimization they face daily. For example, IBM has estimated that financial institutions are losing between $10 and $40 billion in revenue a year due to fraud and poor data management. Using quantum computing, these institutions can replace their inaccurate fraud detection systems using analytical models that shift through behavioral data much faster. Another instance is trading optimization. Institutions can gain a first-mover advantage that would realize new arbitrage opportunities much quicker through many potential scenarios using simulations. Just imagine what implications it can have on the financial markets.

As a result of these possibilities, many large companies are heavily interested in this technology. In 2019 alone, investments in start-ups from companies such as IBM, Microsoft, and Intel alone have exceeded $450 billion. Not only are large companies highly interested, governments too are dedicated to developing this technology. The previous year, China spent more than $400 million on the creation of a national quantum lab. At the same time, the American government promised to spend $1,2 billion on quantum research. Visibly, quantum computing has become an important subject for many organizations.

However, the Economist has stated that the emergence of quantum computing is still yet to be commercialized and used on a large-scale. The first relevant applications expected are to be launched within two or three years. Please let me know what you think what the implications of quantum computing may have on society. Do you think that quantum computing can have such a big effect on society or is it something that its potential is being exaggerated?

https://www.economist.com/science-and-technology/2020/09/26/commercialising-quantum-computers

https://quantum-journal.org/papers/q-2018-08-06-79/pdf/

https://reader.elsevier.com/reader/sd/pii/S2405428318300571?token=90D455E50E62F3579A5CB5D40E8B3E4C0072F279DB26008F386865C19887322A61681A145EDA298C59C95F0A5074523E

https://www.ibm.com/thought-leadership/institute-business-value/report/exploring-quantum-financial

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Author: Ting Fung Lee

TIng Fung Lee