Fusion Founder Dejun Qian’s Keynote Address at Digital Asset Summit May 15
‘Hi, I’m DJ Qian and I am the visionary and founder behind Fusion. It’s truly humbling to be here today among so many thought leaders from the financial and investor community. Thank you to Michael, Jason and Julie for putting this together.
Just 7 years ago, I was a senior member of the executive team focused on business operations in IBM China and I had just come across bitcoin and the blockchain. As I learned more, the technology fascinated me and, like many of you, I decided to immediately immerse myself full-time. I created an incubator which founded projects that many of you may be familiar with today such as QTUM and VeChain. But the area that kept calling to me was always finance. There just was no project I found that pushed digital assets to their full potential. That’s why I started Fusion, an open-source foundation building the financial fabric of the digtial economy.
The reason why I am here today, is to share with you the transformative possibilities of blockchain for finance. I have two insights I synthesized from discussions with partners, that I hope will change how you think about blockchain.
In just a little over two decades, the Internet has completely transformed our lives in ways none of us could have imagined through the confluence of digitization, automation, and connectivity.
At the turn of the century, to meet the needs of a connected world and a global economy, we freed digitized information from the local environment such as our computer, and moved the information to the global network of the Internet.
This first phase of Internet adoption is known as the Internet of Information. The global access to digitized information paved the way to automation that replaced many redundant and manual workflows. Account balances stored in one office could be shared instantly with another office, and unlimited number of reports could be generated without re-entering the same information multiple times.
As technological advances in sensors, connectivity, and processing speed continued, the Internet expanded again, to what is referred to as the Internet of Things, and which I think of as Internet of Information 2.0. This new source of information gave rise to another wave of automation workflows, such as being able to track food shipments real-time and monitor the environmental conditions.
Finance has been transformed by these two internet phases as well: we can buy stocks from around the world, mobile banks are disrupting brick and mortar banks, credits are being offered to businesses in minutes as opposed to weeks.
However, there are still large areas where inefficiencies persist and impose heavy cost on the financial industry.
For example, a typical international payment takes 3–5 days to settle and has an error rate of at least 5%. With $180 trillion worth of cross-border payments made every year globally, combined cost is over $1.7 trillion per year!
Another example is the fixed income market and over-the-counter market Despite being greater than a $100 trillion market, over 75% of the market still takes place over voice or chat.
Why do these inefficiencies exist in the face of digitization and automation? There are a few reasons, including the challenge of heavily integrated legacy systems. However, the main reason is that while information has been digitized, the value of the financial market has not. I’ll say that again, the value has not been digitized.
There is great news though. Thanks to the connecting capabilities of blockchain and the digitization of everything, we now stand at the cusp of moving value as efficiently as we do with information.
This third evolution, is known as the Internet of Value — the ability to exchange value online, with minimal middle-men and third party costs.
Many of you in this room, if not all, are already pioneers of this third evolution. For example JP Morgan is taking a lead role in building the Interbank Information Network (IIN), providing a decentralized alternative to SWIFT. DTCC and Axoni are working to revolutionize settlement in securities. Fidelity, is helping to make crypto assets more accessible. There are many more, but the point is: industry heavyweights are bringing to reality the possibilities of the Internet of Value.
Through the Internet of Value, not only can transactions occur instantly with minimal fees, but we can open new avenues of capital and new opportunities of investment.
As we stand at the entrance to this exceptional era, the decisions we make now will have a profound impact on how quickly and fully the Internet of Value could be realized. We must be especially thoughtful and careful. Based on my learnings from banks, technology companies, and governments, I have seen two concepts we should examine critically in Digitization and Automation.
Digitization and Automation are not new concepts. As I mentioned before, we already enjoy the revolutionary productivity gains brought by successful implementation of digitization and automation in the Internet of Information.
However, the path was not a straightforward one. Along the way, the world tried different ways of digitization and automation, which led to different levels of productivity outcomes — some positive, some negative.
What do I mean? For example, the productivity gains of scanning a document is drastically different from entering the data in a database.
So, here is the question, how to digitize value in the age of internet of value?
Sometimes it is a straight-forward task, although there are complex regulatory conditions that need to be adhered to. However, from a technology and architecture standpoint, which is my perspective, there are many ways to digitize and some ways are better than others.
I will explain my observations using stablecoins as an example. Stablecoins were created to be used the way cryptocurrencies were intended: a stabilized, scalable, and highly secure means for transactions. They are benchmarked to traditional fiat currencies or commodities, and remove the volatility associated with cryptos such as bitcoins.
We’re seeing governments and large banks take stablecoins very seriously — the IMF published a paper this April on what central banks are doing with stablecoins in the form of Central Bank Digital Currencies. I have met with participants in both private and government entities exploring stablecoin related projects in South Africa, Switzerland, and UAE.
I believe that in the next 5 years, we will see mass adoption of stablecoins in our economy. They will be used not just as a form of value storage, but also across the economy for remittance, issuing debt, financing trade, hedging exposures, and more. This wide variety of adoptions, will in turn require many financial instruments to be created digitally.
How will these instruments be created in digital form? I see many solutions today taking the most obvious and straightforward route — creating a new token for each instrument. However, this means, that on blockchain the stable coin and a bond based on the stable coin, have no relation with each other, even though they really have the same underlying assets. Hasn’t this approach simply recreated the problem in the current financial system — the problem of related assets not being connected?
Let me continue with my stable coin example…
Let’s say I have $1,000 stable coin. Now I want to issue a bond of $1,000 stable coin for 1 year, and then create a $1,000 stable coin 1 year future. As discussed, before, I can create a unique token for the bond, and for the future. And now I have 3 tokens. Kind of messy.
What is the better way?
Before continuing, let me take a brief detour to talk about the Time Value of Money. Many of you here know about the Time Value of Money. A dollar in your hand today is more valuable than that dollar tomorrow. You can invest, and hopefully make a positive return over one day. $1,000 today, is worth a lot more than $1,000 in 5 years, and a lot more than $1,000 in 10 years.
By extension, if money is just a measure of an asset, then that means this stable coin must have a time value as well.
Let’s picture the value of the $1,000 stable coin over time, from today to infinity as representing the full value of the stable coin.
Before proceeding, just to take a step back, I don’t want you to focus so much on what bonds and futures are, the important point I want you to take away is they are financial instruments with different time profiles.
Now, let’s go through the same exercise as before: Create a $1,000 bond and a $1,000 future from this coin.
If I take the front-end slice of time from today to 1 year, I have created a 1 year bond.
If I take the back-end slice of time, from 1 year till infinity, I have created the 1 year future.
We could feel that the concept and solution is deceptively simple. Despite these being three different instruments, the only difference lies in the Time dimension and how the stable coin’s value is extracted in Time. By simply including Time as part of the digitization process, we can create many different instruments from one asset and still maintain the relationship to the underlying asset.
There is an even more exciting implication. These time slices of $1,000 are completely fungible AND additive, putting aside counterparty and liquidity considerations.
What do I mean by fungibility? I can swap $1,000 stable coin of front-end exposure from one instrument, with $1,000 stable coin of front-end exposure from another.
What do I mean by additive? I can add time slices together or subtract one from the other. Say I have a separate $1,000 of front-end exposure from now till 1 year. I can combine it with my $1,000 future, and I have reconstructed the full $1,000 stable coin.
This fungibility and additive nature of time slices is a powerful feature that can revolutionize not just how instruments are traded, but also how risks can be managed.
I can net my exposure from one instrument using another, just as is done in finance today, but without the need of complicated netting algorithm. The applications are endless and I look forward to discussing with you separately on how digitization with time can help your organization.
One final note before I move off the topic of time value: I used stablecoins as my example. But, stablecoins are not the only asset that has time value. Every asset has time value. The house, the piece of art, intellectual property. With the tokenization of everything enabled by the Internet of Value, every asset in the world can benefit from these time value digitization. Songs can be collateralized as debt. Future earnings can be monetized for movie rights.
It’s really powerful if we include time in digitization in the Internet of Value.
Earlier I said there are two insights I want to share for fully realizing the Internet of Value: one on digitization, and one on automation.
I shared my insight on digitization, now let me move to automation.
Ethereum’s programmable smart contracts has already proven and given us an avenue to capture complicated business logic and replace manual workflows with the digital efficiency of code.
One of the most exciting things paired with blockchain is the ability to automate complex business logic on top of digital assets and remove trust-related friction in human interactions through Smart Contracts. Tasks ranging from making a payment on a certain date to complex triggers based on cash balances and foreign exchange rates, can all be encoded into smart contracts. The power of smart contracts in the age of Internet of Value is immense, and any mistake or lapse of security could lead to catastrophic results.
The blockchain industry already recognizes this critical risk and is doing much work on validating and stress testing smart contracts.
But there is one more thing that is as important as the logic, security, and robustness of a smart contract. You have any idea what it is? It is the agreement on the information from the physical world that triggers the automation in the digital world. All the best automation will be only as good as the data that triggers it. If our input data is weak, then the entire system is compromised.
But how do blockchains get data from the physical world? It’s not as simple as we could expect. In order to make smart contacts tamperproof and useful in decentralized environments, smart contracts can only manage and react to data that is on the blockchain.
Great. We’ve brought smart contracts to the world, now we must bring the world to smart contracts. We need to provide an entity which signs claims about the state of the world. These entities already exist, and are known as Oracles. Think of them as efficient, electronic, trusted third parties.
It sounds like the problem has already been solved. No, not necessarily.
What happens if we rely only on one Oracle? The example of LIBOR scandal tells us how terrible it could be. The London Interbank Offered Rate (LIBOR) is an interbank interest rate often used to extrapolate interest rates for professional and personal mortgages, in addition to other financial products. Investigations showed that swap traders colluded to manipulate this rate for many years, resulting in fines levied by various regulatory agencies.
Okay, so I know the solution you say — Rely on multiple oracles! Let’s see what problem we will face this time.
This time, I’ll use a hypothetical example. I’m going to use us. We are in a closed room with no visibility of the world outside. Imagine I make a wager with you that there will be more than ten cabs passing in front of the restaurant in the next five minutes. If there are more, I will buy everyone steaks.
By Steaks, I mean the meat.
If there aren’t, everyone will buy me steaks. I love US steak.
To make things challenging, none of us are allowed to leave this room, because you’ll miss the riveting information I am giving you in my talk. So how can we verify my trigger condition of more than ten cabs in five minutes? I call a member of my team who is outside and tell him to go observe. Each of you can do the same. My person, gets there and sees ten cabs in five minutes. I win! But wait — your person reports they only saw nine cabs. And another person reports they saw ten cabs but in five minutes and 1 second. What is the right information? Should I buy everyone steaks or vice versa? It’s hard to say. This example shows the problem of lacking single source of truth.
Now we can see that getting a final piece of information that is agreed upon all participants in a huge network is no simple task. Luckily, work has already begun in the blockchain community on a very promising solution: decentralized oracles.
Decentralized oracles provide a framework for numerous oracles run by independent or loosely aligned counterparties such as a seller and buyer in a trade, to reach an agreement.
Going back to my steak analogy, think of this approach as everyone in this room reaching an agreement that we will average the results of just ten of us, rounding to the nearest whole number, and be bound by those results. That is a difficult enough task to coordinate just in this room — now imagine the difficulty of that across thousands of parties all over the world.
There are various approaches being explored to create decentralized oracles. My favorite approach follows what is done in finance today to generate good trades. After all, we should learn from our learnings.
Buyside portfolio managers often decide what to buy and sell based on the many, many research recommendations from research analysts. Analysts that consistently lead to good trades are followed. Over time, a pool of good analysts for a strategy is created, and before executing a trade, the portfolio manager polls the good pool of analysts to guide his decision.
A more relevant example is how high frequency traders use a real-time weighting approach to cull their data sources to generate good signals.
How is this model extended to decentralized oracles? We could introduce some form of public reputation score and rewards or penalties in the form of tokens with a marketplace of oracles.
These oracles compete with each other to provide the right answer. Oracles are randomly chosen and good actors increase reputation and acquire more responsibilities which ends up with more rewards. Bad actors are penalized and earn less responsibilities. A second layer of aggregation can then be added, which wait for enough answers from good players that all reach the same answer (that is, reach a consensus) before allowing the information as trusted.
Given everyone’s experience in generating a decision from numerous and often conflicting information, I believe with your attention and help, we will find even better ways to bring in data from physical world into blockchain, to realize the power of automation in the Internet of Value.
We are at the precipice of something truly extraordinary and we are just scratching the surface of the internet of value.
To sum up my two insights: 1) Digitization: Time value should be accounted for in digitization and 2) Automation: decentralized oracles are the missing ingredient in generating good information for automation.
Many of tomorrow’s great companies could come from someone sitting in the room here today. I’m just excited to be playing some small roles in what I believe. Again, I’m DJ Qian, founder of Fusion and I hope I’ve offered you a glimpse of what Is possible.
I am looking forward to a great day here today at the Digital Asset Summit!