DIY smart contracts and customisable crypto derivatives on demand
If everything's going on the blockchain, the blockchain needs a derivatives market.
Blockchain development is tough. Unlike other systems, someone who wants to build an entire platform of their own has to get their heads around the multi-faceted nature of decentralisation, and balancing technical foundations and economic theory.
Even building on an existing platform is tough work and experienced blockchain developers can now pull seven figure signing bonuses from prominent companies.
Ethereum in particular poses a unique challenge. Thanks to the complexities of its own unique Solidity programming language, thousands of Ethereum contracts end up being flawed or even outright broken when they go live. Projects around the cryptosphere are being slowed by difficulties finding experienced developers, and users are still firmly bound by the limits of what someone else develops.
Different projects are trying to solve this in different ways. One of the most common approaches is to create Ethereum-style smart contract platforms that use existing programming languages, rather than complex oddities like Solidity.
Others like 8base go a step further and aim to create a blockchain development platform so simple that absolutely anyone can use it, even with minimal programming experience.
And others like Firmo go a step further still, creating a new ultra-simple programming language called FirmoLang that is specifically designed to let anyone create a financial smart contract of their own, which can then be deployed to other blockchains. So far it's Ethereum only, but it's looking at integration with other platforms.
As many have noted, there's not a lot you can do with crypto yet, especially if you're more interested in the price gains than the technology. You can buy it and sell it, hopefully do the former at a lower price than the latter, or trade crypto CFDs and that's about it.
Once again, different projects are addressing this need in their own way. SALT and other crypto-lending platforms took a direct approach by letting people borrow and use fiat on crypto collateral. A platform called Compound builds on that by adding peer-to-peer lending elements, dynamic interest rates for different types of crypto assets, pooling systems to reduce risk for all participants and a foundation for dapp development.
And Firmo makes an appearance again, aiming itself and FirmoLang at the goal of letting anyone create their own crypto derivatives. The contracts themselves can be executed through Ethereum, with liquidity provided by Bancor Network.
What does it mean?
If it all runs as intended, the result is a system where anyone can create their own financial products based on a wide range of cryptocurrency assets.
The dark side of this is that scams might be rife. Derivatives markets already host scams like dodgy binary options, which are essentially contracts deliberately designed to work against the other party. Letting anyone more easily create these might open the door to many more scammers trying to hawk shady derivatives.
The upside is that these might be much easier to spot. Being fully digitised, the system might more easily be able to automatically pick up red flags, and individual contracts might get more scrutiny in a more public venue. At the same time, a growing library of reliable contracts can expand the safe functionality of the system over time.
The more immediate uses might be more institutional users. Goldman Sachs, for example, recently decided to start offering a set of bitcoin derivatives in the face of client demand, which are essentially just products whose value is linked to bitcoin prices. But even for a well-resourced investment bank like GS, it's tough going and opened up a lot of new challenges.
The ability to quickly roll out customisable and highly personalised derivatives for individual customers is an invaluable tool for personal wealth managers, banks and other institutions.
For example, an investment bank might whip up a derivative for a customer to let it hedge its risks while engaging in specific business activities. Consider a mining company (either crypto or metals) that wants to expand its operations but is gambling on asset prices (either crypto or metals) staying high enough to make the expansion worthwhile. They might go to a bank that can then whip up a customisable futures contract to let them hedge in that specific situation. Existing futures markets are widely used for this purpose, but the ability to create derivatives on-demand can let institutions undercut the market with cheaper and more fully automated contracts as well as offer derivatives for a much wider range of assets.
Couple this function with the ongoing trend of asset tokenisation, where everything can be turned into a blockchain asset and essentially become a cryptocurrency of sorts, and you can imagine how important these kinds of DIY derivatives smart contracts tools might be in the future.
To get a sense of how widely used these kinds of systems might be, it's worth noting that in traditional markets, derivative contracts are valued at more than $20.7 trillion, according to Firmo, with notional values exceeding $1,200 trillion – or more than 10 times the global aggregate GDP. If they ever exist, and if tokenisation continues, instant, customisable derivatives for blockchain assets stand to be an extremely common yet very powerful tool.
Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VET, XLM, BTC and XRB.