• Eric Muyser

    "We invented the word luck to express the known effects of unknown causes" - Voltaire

    ShapeShift’s new platform Prism is really interesting. Check the introduction video here: https://www.youtube.com/watch?v=SrAeCfSLZPE

    Why? Well before I start, a quick introduction to index funds. I recently read The Millionaire Teacher by Andrew Hallam, and basically the TLDR is this:

    • Index funds are a managed investment broad range of companies.
    • Buy broad index funds rather than betting on single organizations. eg. 30% US stock index fund, 30% world index fund, 40% bond index fund (if you’re 40 years old).
    • Keep a % equal to your age in bonds. (eg. 40 years old = 40%)
    • Rebalance the %s at the end of the year.
    • When the stock market crashes, sell the bonds and buy the index funds.
    • When the US stock market is on a tear, you’re rebalancing to get more international and bonds.

    It’s called the coach potato portfolio and basically it will outperform 90% of financial advisor decisions. Great, because this is basically what Prism can do. Someone can setup a “cryptocurrency index fund” comprised of all cryptocurrencies. Basically it’s a bet on crytocurrency as a whole. Which is a good thing, because right now with over 700 alt coins it becomes an overwhelming thing to follow.

    And that brings us to Bitcoin. The funny thing about Bitcoin is it’s being treated as an diversified index fund right now. Betting on Bitcoin is betting on cryptocurrencies as a whole. But Bitcoin is changing, with the disputes over the blockchain size, SegWit, etc. it becomes unclear how much longer Bitcoin will be useable enough to keep its backing. It does seem like it’s being used as a proxy for supporting other “coins”.

    And that brings us to Ripple. Now here’s the interesting part to me. If we’re going to buy into a Prism fund, we’re trusting a third party to return our investment at a later date. Smart contracts are great, if the entity is trustable. They say it’s trust-less. I haven’t been accepted into the beta, but for that to be true the smart contract would have to behave in a way it’s just balancing deposits based on an external exchange rate list. Kind of like how BitBet.us works. You are betting on exchange rates, and if the one you bet on go up, you’re winning and somebody else is losing. That only works if there’s equal people betting against you OR the bets are weighted based on popularity (like BitBet, more people = less profit) OR enough surplus of deposit to cover losses when withdrawn. If that’s true, that’s interesting, but it would also make it easy to do today without them and forego the 1% monthly fee (likely built into the contract). And it’s unlikely they are doing the balancing/weighting mentioned previously. That leads me to believe this is instead based on ShapeShift’s existing assets, and your deposits are claiming a stake in their assets and driving their purchases. That sounds a whole lot like trust, not trust in the smart contract, but trust in a third party. Hey isn’t there a network entirely based on trust? Oh yah it’s Ripple. In Ripple, you can basically create your own assets, and trade them for other assets, including BTC and USD. Why do people trade for your assets? They trust you somehow, maybe it’s your reputation or business plan. For example, lets say you collect silver and have $100,000 of silver. You can create an asset on Ripple offering a stake of the profits on your silver. So, if that’s the case, what’s different about that and ShapeShift saying “we have a lot of cryptocurrencies and we’ll give you a stake in the profits”. On a basic level, that’s what Prism is doing, selling you a ticket to claim profit on their assets. A smart move, for an exchange that’s likely holding a fair bit of idle assets. Why not monetize on that?

    As far as traditional index fund standards go, the 1% monthly fee would leave you with nothing. It’s basically ShapeShift capitalizing on the hyper growth of cryptocurrencies. It’s unlikely to work in an index fund comprised of all cryptocurrencies available, as a whole the fee of 1% compounded monthly will eat profits. Hopefully as the market stabilizes, and they see a nice ROI, they adjust that accordingly.

    People will say Ethereum is centralized. And it sounds like they’re right. With the developers doing most of the mining and changing the blockchain at will, it’s interesting I trust the smart contracts, but I don’t necessarily trust Ethereum or the providers of the smart contracts. If I don’t trust either end of the network, does it matter the algorithm is trustable? The move to PoS (proof of stake) looks superficial. At this point, PoW (proof of work) is also superficial. The power of Ethereal lies in the team’s decisions, it’s programmable contracts, and the community vision for the use cases. It’s not about it being decentralized, but it gladly hides behind that veil, attracting new users.

    Why not Ripple? Ethereum makes it easy to do this, with the programmable smart contracts. It’s also attractive, with an appearance of a distributed trust-less network. Ripple is openly centralized and that makes it easy to scape goat. It would be possible to do this on Ripple and in a more efficient manner since it comes down to trust and Ripple is great at trust, and Ethereum is currently pointlessly mined. The problem is tooling. Since Ripple is open about the centralization, it doesn’t invest into allowing a marketplace, basically plugins to make this stuff much easier for third parties. If they did, it would be possible, efficient, and I’d have to trust the asset provider and the plugin code, but hey it seems like Ethereum isn’t much better in that regard, and I don’t necessarily have to trust Ripple (because assets are not held in a currency like Ether, or XRP — it is its own thing).

    What does this all mean for me? Well, it means be careful and only invest what you can afford to lose. There seems to be a lot of trust going into a “trustless asset portfolio”. I’ll have to determine when I see the code, and if it checks out, I’ll probably treat Prism as the world index fund and build up a portfolio there for now (of up 30%) and adjust as things evolve.

    Hey, maybe I’m completely off target with these thoughts. Quickest way to learn? Say something wrong and intelligent people will be quick to straight you out!

    What do you think?

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