> Interesting. This is an appeal to authority - because as a 'practitioner of finance' we should just trust you.
It is, indeed, an appeal to authority, I have no issue admitting that.
> 1) 'practitioner of finance' is a meaningless title. Are you an accountant? A financial advisor? A FP&A? A CFO?
I worked on various fields of finance, at different levels of seniority.
I spent some years working on pricing models of vanilla and light exotic instruments, which gives me a good understanding of the challenges of defining, pricing, and assessing the risk of derivatives contracts.
I worked on realtime market feeds for execution algorithms, so I have a very good idea of the challenges of market impact, order flow, and the tradeoffs of various matching engines.
I worked in quantitative R&D in a major B$ hedge fund at the partner level. I was responsible for a big part of alpha creation, portfolio construction & optimization, operational and investment risk. I later had exposure to most aspects of the fund on both cash and derivatives, listed and OTC, on NA, EMEA and APAC, from back to front office.
I have multiple regulated responsibilities to the SFC which also gives me a good understanding of the compliance and regulatory framework around investment vehicles. I had a long exposure to implementing various European directives related to cash management, settlement, clearing and risk management under mifid 2.
Recently I have been a founding partner and director of a prop trading firm.
> 2) Regardless of your title, you should be able to simply and succinctly provide an use-case for crypto.
- Ever heard that "cache coherence & invalidation is the hardest thing in computer science"? Well in finance it's called "matching & settlement", and it's pretty much the same problem. I would estimate that around 50% of the resources of a financial actor is consumed in back/middle office tasks, which is basically making sure that everything is matched and settled properly, and if not, manually and painfully unwind the later transactions that depend on it. A blockchain is settled "by design", the whole settlement problem just vanishes. It's rather complicated to explain exactly what are the ins and out of front-middle-back office in this already long comment, but we can dive into that more specifically if you wish.
- Cash management & custody is a big thing as well. There's a whole industry of custodians whose job is just to hold collateral (cash or GBs) so that brokers can create a credit line for you. Blockchain can allow self custody, staking, locking and proof of reserve which makes custodians useless (except for 3rd party risk mgmt, but then it becomes an investor decision).
- There are thousands of thousands of derivative contracts in the wild. All major companies are constantly entering bespoke/OTC swaps to hedge against various factors (currency, commodity, interest rates, etc). Dealing, pricing and risk management of these contracts is a nightmare, they all have their own specificities, oddities, wordings, pricing, etc. Each OTC desk in investment banks have tons of quants and structurers dedicated to creating and maintaining these contracts. Being able to express these as smart contracts instead of paper legalities would drastically simplify the processing, issuance, management and payment of those.
- Transparency. A lot of things in finance is based on mandatory reporting by various entities (interbank interest rate, OIS rates, locate rates, trade reporting, etc). These reporting are always made in a bespoke manner, through ad-hoc channels and softwares. It's very hard to trust, corroborate and get a timely delivery of those things (not to mention all the scandals of forged reporting we had in the past). Blockchain could provide transparency and uniformity and trust on these.
I think these are the main aspects where blockchain could bring a tremendous impact of current finance, from my experience at least.
Now I also think blockchain has a lot to bring in other fields, where I'm no expert but have an opinion.
- Securitization: the overall concept is to allow for OTC (peer to peer) exchange of ownership, without a third party to bless the transaction, while still exposing a public record of ownership. Basically that's what NFTs do. Say I buy a photograph from an artist. Usually I will receive a proof of authenticity in the form of a signed paper by the artist. Whenever I want to sell that photograph, I will have to also give my proof of authenticity to the new buyer. I think this is inefficient in many ways. First, the artist will have to pay a lawyer/notary to draft that proof of authenticity, which (friends told me) is expensive and annoying. Second, I will have myself to keep that piece of paper and not loose it. Third, the new buyer will have to get this proof of authenticity verified by the artist or law firm/notary. NFTs are basically a solution to this. The artist can emit a token representing my photograph, and have me and him sign that token. Whenever I resell the photograph, I can unilaterally cede ownership of the token to someone else whenever I please. The signature of the artist ensures the buyers that my ownership is legit, no need for third party verification. This could be done with just cryptographic signatures of course, but the blockchain here allows for the whole life cycle and transfer of these tokens to happen in a public and auditable/verifiable manner.
- Removal of middle men: I think a lot of companies nowadays are glorified databases. Their only added value is that they perform control on modification of said database. Blockchain can eliminate these commission based middlemen.
> Instead, you suggest that after hours of work, even developers (who specialize in understanding abstract and complex problems, especially in regard to computation and its applications) cannot understand what you're selling.
It's not a problem of "cannot understand", it's more an issue of 1) attention span 2) lack of knowledge.
For 1) I think the typical HN reader just skims articles on the front page, up/downvote some comments, and forget about it once it's not on the front page. There is almost zero chance that an interesting discussion or answer, that takes time to write/read, will be able to catch-up the downvotes. This very response that took me 1h to write will probably be read by very few people, while the OP answer that got downvoted to hell won't budge.
As for 2), unfortunately, I'm of the opinion that we live in a generation of armchair Wikipedia experts. A lot of people just don't know the amount of things that they don't know, so they assume they understand finance because they've seen the big short, have an interactive brokers account, and watch Cofeezilla.
I think the OP message makes a lot of sense, those are all valid points, to me, as a practitioner.
How can I not be annoyed when I see that his post is downvoted to hell, and the 2 top answers to it are:
> Speculation is not a use case.
> The examples you gave are problems created by blockchains.
Clearly, to answer something like that, you would obviously have to not understand blockchain, and have no idea how finance is actually working.