Connecting The Banked & The Unbanked: OPTIMIZE 3.0
We previously introduced OPTIMIZE a new venture aimed at becoming a blockchain powered digital marketplace for fractionized NFTs representing either Micro, Small & Medium Sized private equity, or real estate. To do so, we thought to use DEFI monetization opportunities as an incentive to foster the digitalization of property and private company ownership records while using a native token “OPT” to not only create network effects on the supply and demand side but also ensure the necessary collaboration of current value chain incumbents. Having crossed the last mile by digitalizing all those records OPTIMIZE would not only be remunerated by transaction fees and token appreciation but also as an Oracle for its data collection and aggregation services.
We however have observed a lack of traction for similar ventures like CPROP as well as a generally slow adoption in the tokenization of “off chain” assets. Furthermore, while Digital Art related NFTs are making headlines, the median size of transaction value is still very low at around USD 200 (artnet.com) which supports our belief that the general understanding, usage, and trust in most blockchain applications is still very low. This makes for a very small addressable market especially considering that in our case, most homeowners already have a mortgage and companies already have debt.
A failure to generate broad adoption on both the supply and demand size will compromise our ability to generate rapid network effects which are key to generating a competitive advantage in an industry where innovation is opensource and therefore easily replicable. The same is de-facto true for our Oracle services.
Cryptocurrencies and digital art NFTs have become the most broadly used, traded, and collateralized types of assets on the blockchain firstly because they are native assets but also because they are very accessible. We feel that consumer electronics and especially smart phones represent a similar opportunity as a non-native asset to be broadly digitalized and collateralized. While mobile phone collateralized loans already exist and are quite popular in Africa (maloni.net) as a microfinance tool, loans are of small amounts only and come with very high interest rates. The same is true in the developed world with pawnbroking loans where one loses temporary custody of the collateralized assets or with cash loans which are unsecured. (pmloans.co.uk, cashconverters.com.au). The increasing value of smart phones, their traceability, and the ability to remotely disactivate them in the case nonperformance makes them a viable candidate for collateralized lending. Furthermore, they probably are the most convenient IOT to bridge the last mile between on chain and off chain identification at scale.
OPTIMIZE will therefore intend to disrupt the current pawnbroking and cash loan industry by leveraging the trust and lower verification costs of blockchain technology while using a native token to incentivize on boarding and transactions. Having solved the last mile problems of creating digital IDs, OPTIMIZE will then be able to port its business model to other market segments and higher value assets as initially intended.
Start-ups such as propy.com are offering similar solutions to that ultimately intended by OPTIMIZE but while they are successful at reducing friction and bureaucracy by registering documentation on the blockchain very few assets themselves have been tokenized. They also simply lack users.
We believe part of the problem comes on one side from the fact that it is difficult to coordinate so many incumbents for whom the adoption of such technology does not solve “existential” problems and on the other side from the fact that introducing a new service/product and a new technology at the same time proves difficult. (Andreas M.Antonopoulos). Things would be much easier if people could simply download an app and start trading part of their house or company while trusting the finality of the transaction as they would when using E Trade. People would also be more eager to try the technology if they did not have to put their “house” on the table.
We feel that tokenizing lesser value consumer electronics such as smart phones as an initial step could prove easier. People with no credit history whether because they are students, live in the developing world or are unbanked could make great use of a low interest rate loan on their mobile while continuing to use it. By creating a digital twin (James Regenor) of both the phone ́s EMEI number and the users ́ ID on the blockchain, transactions will be safe, and contracts enforceable (deactivation/real world prosecution). Blockchain technology will permit the creation of a new marketplace for consumer loans with data integrity from the ground up (Christian Catalini) and portable reputation systems. Once the link between the digital and physical ID is created a whole new range of transactions will be made available and existing ones will be more efficient.
The first and most important step for us is for us to attract a large enough number of users. By users we mean mobile phone owners who are seeking to get a relatively low interest rate loan by simply putting up their phone as a collateral. All they need to do in exchange is upload their phone EMEI number and a copy of their ID on a user-friendly web-based interface. Loans will be short term due the rapid depreciation of such goods and based on a floor value which can be based on the Apple Store trade in value, or the price offered by large scale secondhand electronics buying companies such as Cash Converters for example. All the transactions will take place on the Ethereum blockchain for both trust and transparency reasons but also to gather maximum network effects. The real-world ID and EMEI number will be encrypted to preserve privacy, but transactions will be broadcasted in a similar way as in block explorers on a high-level web interface. This should encourage more transactions while privacy is preserved by using either assigned or rotating “avatars” depending on the user ́s privacy preferences. The use of technology such as the ZKDai (Aztec Money) (medium.com) should allow the broadcasting of transactions while maintaining users’ privacy. The currency used for transaction purpose will also be a stable coin like the Dai so that volatility does not hinder transactions.
Users will also be given the opportunity to upload more real-life information such as certificates of ownership of other assets or any other information that could affect their credit rating and therefore the yields they are offered. This information will also be encrypted and only shared to lenders by using Zero Knowledge Proofs (Vitalik Buterin) or on request to minimize information leakage (Christina Catalini). Lending will be offered to yield seeking individuals as well as institutions. Our interface will not only match the demand and the supply but be able to “pool” the supply of loans to attract large lenders. At a later stage, applications could even allow the trading of CDOs type instruments.
Whether users decide to use the same avatar for all transactions or not, a portable reputation system will be computed and made public with the transactions. The same is true for lenders based on the yield they offer or other factors such as speed. While it is technically possible for the onboarding to happen without intermediaries we plan to collaborate with as many small local retailers as possible. They would not only advertise the service and provide network effects but also ensure the quality of the asset and the authenticity of the ID. This is especially true for emerging markets where not only we expect to provide a significant amount of “well priced” foreign capital in stable currencies but also compete with local governments as a trusted provider of identification and asset registry.
As the technology diffuse so will the listing, monetizing and granular trading of higher value assets as initially envisioned.
A large part of our customers will come from emerging markets where unstable currencies, unreliable identification records and high interest rates make lending difficult while the ownership of smart phones is widespread even though many are unbanked. In more developed markets, users of so called “cash loans” or “pawnbrokers” should naturally join. We however also hope that some customers could be “New Early Adopters” and help diffuse our technology (Christian Catalini & Catherine Tucker). Those could for example be tech savvy yet financially constrained users such as students, entrepreneurs, highly skilled migrants with no access to traditional finance or just “OPTMIZERs”.
On the technological side we are faced with the dilemma of being heavily reliant on network effects while having to maintain a high level of privacy. We choose to use Ethereum’s public and permissionless blockchain with a clever use of encryption and “Zero Proof Knowledge” (medium.com) to achieve a somehow customizable level of user privacy. Users real IDs and phones EMEI will be encrypted and stored on IPFS or SWARM (ethetereum.org) while smart contacts will allow for their disclosure only in the case of non- performance or upon request from lender and acceptance from user to maybe improve transaction terms.
As our goal is somehow to become a marketplace for the digital twins of pretty much any real-world assets or records our identity should be somehow close to that of Amazon. Performance, execution, control, low default rates and the best possible deals. A simple and user-friendly web based high level interface focused on efficiency as opposed to style and branding. While blockchain technology and its derived trust and networking affects are at the core of our marketplace, our identity should make abstraction of the complex technology and focus on its actual benefits: a trusted and disintermediated borderless marketplace.
As mentioned earlier, OPTIMIZE now starts with a “disruption strategy” (Joshua Gans) and initially competes directly with the providers of micro lending in the developing world as well as “pawnbrokers” or “cash loans” providers in more advanced economies. While we feel confident competing with those incumbents as they only target a quite neglected part of the population (hbr.com) we recognize the need to change strategy as we start on boarding higher value assets such as real estate or private equity. By then we will implement a value chain enhancing strategy and collaborate with incumbents as mentioned in previous papers.
Two types of tokens will be used. One will be a stable coin like the Dai (medium.com) to enable transaction on the Ethereum blockchain while maintaining price stability of debt and collateral. The other one will be our OPT native token which will be used as an incentive mechanism to crowdsource users and pull together the supply and demand size by making them early equity holders to help bootstrap our marketplace (Christina Catalini). To do so the OPTIMIZE foundation will first reward users by “minting” OPT token out of its fixed supply for the listing of their assets and subsequent transactions. Participating retailers, loan providers and the OPT foundation will also be rewarded upon successful completion of transactions. As in Bitcoin, the rewards will diminish as the network grows. Rewards will be proportional to the value of transactions. The foundation will execute “airdops” to provide liquidity and price discovery but also for the onboarding of some key stakeholders/large-scale users or to a debt fund to raise operating capital. Governance will be slowly decentralized, and staking will be required for participation. Rewards will become Dai/fee based and distributed to OPT holders once all the supply will have been minted.
Although not very glamorous we feel that this “loan for phone” approach could be an efficient way to foster the digitalization of physical property. The “high level” approach removes many of the frictions faced by the adoption of this complex technology while the use of a “connected” and widely owned IOT device as the asset dramatically eases the “tokenization” process. The existence of EMEI technology makes smart phones a “quasi- digital” asset while also allowing the enforceability of smart contracts (remote deactivation) which represents a key friction in their broad adoption. The digitalization of users’ identification also paves the way for the creation of portable reputation systems allowing us to subsequently enter other markets. Another hurdle we previously faced was that of creating network value in ecosystems where value is derived by the number of transactions. By focusing only on higher value private equity and real estate transactions OPTIMIZE was at risk of not creating enough token appreciation due to a lack of users. This would have required the use of traditional funding mechanism to ensure the funding of key resources making the use of an equity token trickier as it could take value away from traditional equity holders (Chris Burniske).
Please note that no reference has been made with regards to fund raising as we wish to scale solely on issuing our native asset to people providing utility to the network (Chris Burniske) including the OPTIMIZE foundation until all the capped supply is minted and the ecosystem large enough to rely on transaction and oracle services fees. Initial development will be financed by the founding members of the Foundation.
Finally, we wish to conclude by saying that even though some might say that “pawn brokers” customers are neglected for the simple fact that they represent a small addressable market this is not true when we take a global view. The developing world is aplenty of smart, honest, and hardworking individuals with little or no access to financial services let alone a stable currency. Moreover, many rely on disproportionally costly remittance services to move money around and cannot trust their government neither for the registry of identity nor property. By matching their desperate need for capital and the need for yield in the developed world OPTIMIZE could generate many positive externalities thus increasing network effects as well as gathering the support of regulators around the globe.