Can the data be used as collateral in DeFi?

Author: Trent McConaghy

Compilation: Share Finance Neo

Summary

The question in this article is: can data be used as a financial asset? And link the token economy to the emerging data economy.

First, let's use the Beatles and David Bowie (rock singers) as examples to explore how intellectual property can be used as assets and collateral. Next, we briefly review the key roles of decentralized finance (DeFi) and collateral. It can be seen that by using data as IP, data can be used as collateral.

With these, we can explore opportunities for data as a financial asset . Specifically, we will see how to use data tokens in the DeFi ecosystem.

IP assets, IP as collateral

The Beatles: IP Assets

In 1985, Michael Jackson bought the Beatles album for $ 47.5 million. Ten years later, he sold half of the copyright to Sony. In 2017, the other half of his estate was sold, and the entire collection was worth $ 1.5 billion. However, any of us can download Beatles songs and make any number of copies. After all, it's just a little bit.

So, what exactly did this popular king buy and sell?

He bought the copyright for the song. He purchased every album in the authorized catalog (including the songs of each album, artwork for the album, etc.) to Universal Music and other companies. Universal could then in turn publish these works on tape or cd. In return, Michael will pay a percentage of the sales revenue (royalty) for each tape or CD.

Therefore, although there is no scarcity in the unit element, there is scarcity in the right. In the Beatles catalog, it is an intellectual property (IP) right, specifically the use of copyright and the signing of a contract. Michael has the right to transfer some of these rights to others through contracts with companies such as Universal Music.

In short, intellectual property is an asset that can be bought and sold.

Bowie bonds: collateralized by intellectual property

David Bowie went largely bankrupt in 1997. Despite a series of successes and considerable income, his luxurious lifestyle means spending more than income.

At the same time, Bill Pullman designed a new financial instrument: David Bowie's intellectual property future income bond. It's a security backed by 287 songs from 25 albums. Investors snapped up $ 55 million in "Bowie Bonds," which Bowie used to buy songs owned by the former broker. For 10 years, royalties have been owned by bondholders, with an average annual rate of return of 7.9%. Since then, royalties have been directly owned by Bowie.

Since then, Bill Pullman has created similar "celebrity bonds" for James Brown and more artists. Artists can get paid in advance, and in exchange, investors can get coupons at a fixed interest rate, guaranteed by the right to future royalties. Pullman's company lists the artist's application process on its website:

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This shows that the financial world not only takes intellectual property seriously as an asset, but also financializes such assets by creating intellectual property as collateral.

Use tokens as collateral

Token as collateral

Tokens can be used as collateral to create higher-level financial instruments, such as stable coins (DAI) and margin financing (Compound). These are all part of the broader decentralized financial movement (DeFi). DeFi is becoming a major use case for blockchain, especially in the Ethereum ecosystem. This is growing steadily. Here is the DeFi landscape as of November 2019:

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DeFi building blocks

Some DeFi building blocks include:

DEXs (decentralized exchanges) . Uniswap is currently one of the most active decentralized exchanges, like an automatic market maker. It has an order form. Anyone can add any trading pair they want without requiring permission.

Stablecoin / payment . The core component of the current DeFi ecosystem is DAI, and the founding team is MakerDAO. It is pegged to the US dollar. Because it is non-speculative, it reduces friction in non-speculative financial activities such as loans, wages, and other payment use cases.

Loan . The goal of MakerDAO is to create a stable coin (DAI). But it has an interesting side effect: DAI is built on ETH-secured loans (recently, other assets have also adopted multiple mortgage DAI). As a result, Ethereum's loan has reached a climax. Complementary agreements have emerged, such as Compound, which focus on loans for margin trading and margin trading.

Derivatives . Here, tokens are used to track real-world assets. For example, Synthetix derivatives hold $ 100 million in assets (November 2019).

Insurance . Nexus Mutual achieves the effect of insurance by letting its members share the risk (for example, the risk of smart contract failure).

A basket of assets . The Set Protocol and Melon protocols allow investors to purchase a single token representing a different set of tokens, similar to buying an index fund.

Financial supply chain . Centrifuges are suitable for token-based financial supply chains. Every financial / legal contract in a centrifuge is an NFT. These contracts can easily flow within and between companies.

There are more examples, and there will be more.

All of these are amazing features that appear in the DeFi ecosystem. Currently the entire DeFi system is locked at a value of $ 690 million (November 2019).

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DeFi composability

DeFi products can be combined to achieve higher levels of functionality. For example, in InstaDapp: "You can swap DAI for Ether, then add it to an existing CDP, increase its collateral, which will allow you to attract more DAI and thus create leverage". Instadapp also makes it easy to move loans between MakerDAO and Compound to optimize interest rates.

Uniswap and Compound protocols are two other good examples of composable protocols. They are all relatively lightweight and easy to understand and use. These characteristics make Uniswap grow faster than Bancor. Similarly, due to the existence of cDAI (interesting DAI), Compound v2 is easier to synthesize than v1, which causes v2 to grow faster than v1.

DeFi collateral standards

The use of ETH as collateral made DAI possible, which in turn triggered the DeFi movement. Let's ask: what constitutes a pledge?

Candidate assets as collateral have at least two characteristics:

1. The value of assets can be calculated. This is not always easy to do, so a good indicator is: In the traditional financial world, whether such assets have a guaranteed history.

2. The assets used for mortgage are tokenized. Tokenization makes it easy to interact with smart contracts, that is, it helps to make it programmable.

ETH as DeFi collateral

ETH meets the conditions as a DeFi guarantee, as follows:

The value of ETH can be calculated by entering many cryptocurrency exchanges.

ETH is a token. (Ironically, ETH is not fully ERC20 compliant, so some use cases need to encapsulate ETH to make it compliant, so ETH is used).

Data as collateral

Currently, DeFi has used data for more direct purposes: price data feeds for transactions, data for building loan or insurance risk models, and more. But can the data itself be used for financial instruments? Specifically:

Can data be used as collateral in DeFi?

To investigate, we can start with the following criteria: 1. Does the data have a value that can be calculated? For example, does the data have a guaranteed history? 2.Can we tokenize data assets?

This is discussed in the next two sections.

Data IP as collateral

We discussed music as an IP at the beginning, such as the IP of the Beatles Music Directory. We then described the intellectual property of music as a tradable asset, such as Michael Jackson's handling of Beatles albums. It follows that intellectual property is an asset.

You know, data is protected by IP, or it can be considered trade secret.

We then use Bowie bonds as an example to describe how music IP assets are mortgaged. Intellectual property assets can be mortgaged.

Security of intellectual property does not need to stop at Bowie. Data IP assets can also be mortgaged.

Data can be used as collateral in DeFi

The question in this part is: Can data be used as collateral in DeFi? The first two sections show how data is guaranteed and how we tokenize data assets. This opens the door to data as collateral for DeFi. This means we can connect data to the exploding DeFi space. Data can not only help with traditional trading and risk models, but also as a first-class financial citizen: data itself can be used as a mortgage asset. This is explored further in the next section.

Data in DeFi

Open data economy

The token economy has opened up a traditional closed currency economy.

The World Bank estimates that by 2025, 25% of world GDP will be data-based. This is the value that flows through the data economy; and the data assets in the data economy. The traditional data economy is a "shadow" data economy: closed and closed and strictly licensed by companies like Facebook. We can catalyze a new data economy that is open and permissionless (while protecting privacy).

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Leverage crypto infrastructure from wallet to DeFi

For the open data economy, we can and should use the tools of the token economy. The token itself is a key tool. Previous articles in this series have shown that we can make data tokens (irreplaceable, replaceable, and combinable). Data tokens naturally use existing cryptographic infrastructure to obtain tokens, such as wallets.

In other words: using data tokens, the DeFi ecosystem will get a whole new class of tokens. Data tokens can coexist with existing tokens (such as ETH and BTC) and thousands of other tokens, and can be used in existing and future DeFi applications (from Uniswap to Gnosis).

Application of data token in DeFi

This section explores how to use data tokens in DeFi and the corresponding benefits.

Irreplaceable data DEXes (market) . To buy and sell irreplaceable data tokens, you can use NFT markets such as opensea. Or an opensea fork with dozens of different channels, each channel dedicated to different vertical data. Think of opensea, which has many data channels.

Alternative data DEXes . For replaceable data tokens, a pair of Uniswap data tokens can be set to Ether without requesting any permission. Even better is the balancer, for a single shared liquidity pool across multiple datasets, so that even datasets with few transactions have good liquidity. Imagine that there are a million data sets in the balancer: one for the data exchange of long tail tokens. Another way to deal with liquidity is over time, such as DutchX. 1. The market does not need to save data (unmanaged); 2. Data vendors do not need to obtain market permission to sell data sets; 3. Even data sets with few transactions need liquidity.

Irreplaceable and replaceable data CEXes . Most token transactions still occur on centralized exchanges (cexes) like Binance, because centralized technology has traditionally been easier to implement and easier to manage key challenges such as running ahead of time than DEXes. We can expect that data CEXes will also play a role in the emerging data economy. As the technology matures, CEXes can always be extended to DEXes. Who will be the combination of data?

Data stablecoin / payment . Considering that these data have provided power for 15% of global GDP and are about to reach 25%, a stablecoin with data support may be very interesting. Imagine a stablecoin with 1 million pricing datasets as collateral. This can be structured as a unique deployment of multi-collateral DAI (MCD), where the collateral is all the data. The prerequisite for each dataset is to append a value, just like the song IP attached by Bowie Bonds.

Loan data . Users can borrow data and other data as collateral. Lenders can get more data as interest; borrowing data to pay interest.

Derivatives . One possibility here is a composable token that bundles (i) data tokens and (ii) synthetix style tokens that track actual assets.

Insurance . Just as nexusmutual provides (effective) insurance for compromised smart contracts, so can insurance for compromised data sets. For example, I bought some data to train a self-driving car, but what I don't know is that it has an example of a car running a red light (data is poisoned). This could lead to self-driving cars clearly running through the red light, with consequent injury and damage. Insurance on training data limits my financial losses.

Data in the basket . Access to a valuable set of data (eg, health data for all patients in a hospital) is sold as a single token. These data assets can be static or dynamic (streaming) data services.

Data index . From the thousands of possibilities, tracking the top 100 data services makes it easier for others to invest in these services as a single asset, similar to today's index funds.

Financial supply chain . As mentioned earlier, the centrifuge has a token-based financial supply chain, where every financial / legal contract in the centrifuge is NFT. This contract can easily flow within and between companies. Data tokens can also have legal contracts built into them.

In summary, in a DeFi application, data tokens can be used as a "first-class citizen" financial instrument.