In the realm where technology merges with finance, the profound influence of cutting-edge advancements on derivatives, the foundation of the financial market, assumes paramount importance.
Daniel Doll-Steinberg, co-founder of EdenBase – the frontier technology hub for high-growth companies – delves into the intricate relationship between derivatives and frontier technologies including AI, blockchain and quantum computing, addressing their implications, risks, and potential for further innovation.
Technology and finance have become increasingly interlinked in a somewhat complex relationship, with finance being one of the first industries to harness technology for transformation.
The current seismic shift we are seeing as frontier technologies like AI and blockchain are adopted, and in the near future, quantum computing will radically transform the way businesses operate.
Derivatives and assets directly impact – and are impacted – by frontier technologies. It’s important we get ahead and truly understand this impact on finance as technology will not (and cannot) stand still while we catch up.
The derivative dependency
The computerisation of the financial industry in the 1980s enabled derivatives to be effectively and efficiently priced and traded for the first time in history. Just forty years later, the derivative market is now considered the largest market in the world, with some top-end estimates hitting $1quadrillion.
Derivative technologies are an excellent example to learn from. They allow corporations, governments and financial institutions to manage their cash flows and reserves to provide them with invaluable stability, liquidity and dependability for their future. The modern world could not now operate without them.
Computerisation and frontier technologies have enabled derivatives to improve globalisation, and have created enormous wealth and financial stability for society – but they also contributed significantly to the 2007 to 2008 financial crisis.
From a practical point of view, institutions and corporations cannot operate without derivatives, and those that do not use them suffer a significant disadvantage compared with those that do. Any advantage in derivatives provides a competitive advantage – vast amounts of money and talent are directed at improving them.
Frontier technologies offer considerable advantages in this space and one-by-one, leaders implement them and the market follows.
Our entire financial system depends on derivatives and the ever-improving technologies that underpin them. Every day these systems improve, the market increases and our dependence on them is reinforced.
Innovative inflation measures
Historically, the inflation figure has been based on a generic basket of standard items in an attempt to group an entire country and an enormous number of people into a standard index for a one-size-fits-all monetary policy.
Inflation baskets needed to be defined like this because of the difficulty of managing more tailored baskets in a pre-technology world. However, today’s technology allows for more innovative, suitable measures. The one-size-fits-all inflation index has been necessary for central bankers, but having a generic index is counterproductive for individuals.This is because a generic basket is appropriate only for an average person.
Your inflation is your basket for the ‘future you’
For instance, for the very wealthy, the basket might include growth stocks and scarce assets like art or sports franchises, or even material ones like supercars or mansions in expensive cities. All of these are currently rapidly gaining value.
For Generation X, the basket will more likely include food and technology, gym memberships and subscriptions. Then there are those who want to be richer and need to be acquiring or creating scarce assets that are increasing in price faster than their spending inflation – their basket is again very different.
Inflation changes with productivity and this impacts each of these baskets differently. With a healthier, declining population, inflation will be impacted by decreasing natural resource needs, including food and housing, fewer kids, and with technology, cheaper educational costs.
Inflation should be a vector, not a single number – computerisation and frontier technologies, along with deep data, could deliver this for the first time. With these technologies inflation can be managed on a micro level and individuals can tailor their own inflation numbers to their lifestyles. The potential for this is enormous.
A new wave of assets
One of the problems with most assets is that they require maintenance and are expensive to hold. An asset with high ownership costs and no capital growth is a liability. Physical assets such as houses, art and cars are expensive to own, maintain and insure. They are also subject to increasing taxes and compliance costs.
Shares and other financial assets have high fees to hold and transact. On the other hand, digital assets, such as bitcoin, NFT art and in-game digital items have almost no cost of ownership, if energy efficient blockchain protocols are used.
This points to the need for new forms of decentralised, personalised monetary and asset systems, which are frontier technology-powered and led. Because of this, frontier technologies such as those that analyse and administer individual and temporal inflation rates, whilst ensuring that productivity betters the risk and hurdle rates, are an unstoppable trend.
The speed with which these frontier technologies are being developed, integrated and deployed can feel overwhelming, but there is no time to lose. It’s an exciting time for finance but also a crucial one. Right now we have the opportunity to embrace game-changing technologies. We must ensure they are designed for collective good, safeguarding, and unlock the right kind of innovation in the financial sector before it evolves again, leaving the industry behind.