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  • Writer's pictureTodd Bertsch

The Rise Of Open Finance

By now most investors and technology enthusiasts are aware of the growth of the blockchain phenomenon over the last few years. Prominently characterized by exorbitant price appreciation and depreciation. Unfortunately, far fewer people are aware of the massive amount of innovation that has subsequently been delivered as the result of a speculative bubble. The field of open finance has benefitted the most, open finance is traditionally described as data-sharing principles to enable third party providers to access customers' data across a broader range of financial sectors and products. The blockchain community has to some degree transcended the Open Finance field to create what is known as Decentralized Finance, DeFi for short, an approach to finance where services are openly accessible to any internet user, the user interacts with a protocol rather than a company.

If we are to understand this fundamental change we first have to explore the architecture behind our current banking and other financial services industry. As of today, the industry consists of centralized service providers that merely interact through communication protocols (e.g. SWIFT network) that live on the internet and are managed by organizations (e.g. Society for Worldwide Interbank Financial Telecommunication). Protocols that allow for settling financial transactions, they guarantee that transactions will be processed, executed, and settled. Banks are responsible for interfacing with these networks on behalf of their clients — sending the right messages and responding appropriately to messages received. The internet brought us, as users of banks, closer to their messaging network and allowing for online banking and fast mobile payments all whilst hundreds of bank branches closed across the globe.

Additionally, we have seen the rise of countless FinTech companies over the past decade, including digital and neobanks. These companies built on the edges of traditional banking, naturally expanding the capabilities of the banking industry itself. Companies that have experienced considerable user growth by servicing niches that banks have historically perceived unfeasible. These innovations are built on a set of technology that greatly reduces friction and overhead costs, but fundamentally the architecture has not evolved.

The Ethereum open-source network has been the clear leader in terms of protocol development. Where FinTech has traditionally been the innovation of services by companies for their clientele, Ethereum is a platform that allows for the deployment of service protocols and transaction of assets. In a similar manner to how Amazon is built on the internet, so could one create a fully-digital bank on the Ethereum Virtual Machine, this means that not just the interaction is digital but also the actual service. Banks are obviously still crucial in our current and future systems, but they are closed walled gardens of innovation that cannot compete with open-source development.

How does the Ethereum network make this possible?

At its most basic Ethereum is an improved version of the internet, it has additional expressiveness to other networks like Bitcoin in that it can provide guarantees over basic conditional agreements. If this, then that. When this, then that. These are known as smart contracts.

Smart contracts can be used to create trust-minimised services. Where users of the service can interact peer to peer without requiring a third-party intermediary to enforce and manufacture trust, which explains the above statement on how the actual service is digital. Ethereum is essentially a vending machine for the creation, management and settlement of trust-minimised financial services that replace the need for intermediaries in financial transactions.

Smart contract based blockchains are not just making banking better, but changing the role centralized entities play in the larger global financial markets. A role that could potentially involve facilitating the interaction between user and open-source coded financial service. Another way of looking at it is that instead of employing banks to send and receive messages for you, you can now directly interact with a financial network.

There is obviously an ugly side to open innovation, the hype, volatility and speculation are often cited as reasons for its likely failure. Generalising the bad behaviour of a few whilst discrediting the rest is going to become an expensive mistake for any banks trying to remain relevant in the digital age.

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