Cryptocurrencies and dApps powered by blockchain technology are proving to be quite a disruptive force to traditional finance. ICOs have already proven to be an efficient and fast-paced mechanism for entrepreneurs to raise millions of dollars in capital without having to go through the traditional routes of venture capitalists and investment banks. However, the force of blockchain is looking to way beyond that. There are protocols currently being developed that are bringing our more complicated financial products, akin to the offerings of traditional capital markets. Dharma is building tokenized debt. dydx is building tokenized options. Set is building tokenized index funds giving exposure to other underlying ERC20 tokens.
This calls for a platform that will enable crypto enthusiasts to form more complex derivatives products using the above underlying securities. This is what a traditional investment bank such as Goldman Sachs would call structured products or structured notes. These derivative products are formed using complicated financial engineering and issued to investors the bank directly deals with. However, we believe that there are four main efficiency gains to be had from decentralizing the bespoke world of structured products:
- Democratising the creation of such financial products such that talented financial engineers from all over the world are able to create and sell them to investors.
- Through the use of blockchain technology, we propose to bring more transparency to the opaque world of structured products currently operating within the "walled gardens" of capital markets participants.
- Such products are currently mostly not tradable in the secondary market. Tokenizing such products on a blockchain system such as Ethereum automatically makes them tradable in the secondary market.
- The transparency of the blockchain enables better risk management and systemic risk monitoring of these complicated derivative products. The great recession showed how mismanagement of such complicated derivatives can lead to near systematic collapse of the entire global financial system. One well-known fatality of such mismanagement was UBS misleading its customers about Lehman issued principal protected notes.
What it does
Our protocol allows anybody from any part of the world to package currently issued tokenized security offerings into a structured product and sell that to interested investors.
How we built it
Challenges we ran into
- Designing the protocol
- Doing research into how structured products work, inefficiencies in the current way of doing things, and how putting such an operation on the blockchain makes it more efficient.
Accomplishments that we're proud of
- We built a full stack end to end working prototype of our protocol that enables issuers to issue structured products and investors to buy such issued tokens.
- We spent a good amount of time on UI and UX to make our interface as user friendly as possible.
- We spent a lot of time as a team debating and discussing our protocol to decide on how to design our system in a way that it takes into account the cryptoeconomic and game theoretic aspects of decentralized blockchain systems.
What we learned
We learned that the power of blockchain technology holds the potential to make more efficient the operations of complex derivative products that are currently created and sold by conventional capital markets participants.
What's next for dQuant
To develop the protocol further to incorporate the notions of token curated registries that will rate issuers based on the quality of their created structured product. Also, enhance the UX further to create better workflows for the various participants in the life cycle of our protocol for issuing structured derivatives.