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Tracking the future of financial services.
March 25, 2019 

Hi fellow futurists -- our top 3 thoughts for this week are:
  1. CAPITAL MARKETS: Winners-take-all as CBOE Futures discontinued and 60 Crypto Exchanges shut down
     
  2. BIG TECH: YouTube, Facebook and NVIDIA powering hyper-realistic human avatars
     
  3. BIG TECH: Subscribing to Unownable Assets with Google Stadia, Apple News, and Taxes 
Analysis of these items is below, and this week’s artist is Angelique Bacia, discovered through our wonderful readers.
  1. CAPITAL MARKETS: Winners-take-all as CBOE Futures discontinued and 60 Crypto Exchanges shut down  

    CBOE has decided not to list any new Bitcoin futures, with the last contracts expiring in July. Does this mean that BTC futures are dead? Not at all -- CBOE's biggest competitor, the CME, has simply won the game. You can see in the charts at the end of this entry a competition in volume over the last year, with CME's product steadily taking the lead. Why did this happen? The short answer is product quality and network effects. The decision to use an auction price from Gemini, rather than CME's approach of building a reference rate from several constituent exchanges, was a primary cause of poor product quality. And once traders shifted away from the product, network effects at the other venue kick in, creating lock-in and returns to scale.

    More broadly, we have seen network effects around the top 10 crypto exchanges wreak havok on the rest of the industry. Of the 250-500 exchanges out there, 20% had no trade volume of any kind in the last 24 hours, and less than 1% had volumes over $1 billion. Over the last 8 years, 60 exchanges (and likely more) have been forced to exit the industry. While 75% of those exits are due to forced shut-downs by authorities, hacking, or outright scams -- 20% have exited due to a lack of liquidity. A lack of liquidity is a synonym for losing on network effects, akin to a social media app not bootstrapping enough users. Further, 5% of the exited exchanges have been acquisitions for others, like Circle and Coinbase. This again points to the winner-take-all nature of the market.

    What's the solution? In social media, the answer was a Facebook, Twitter or Google identity, which created a portable social graph across the Internet. While those companies may no longer allow the full copying of the graph, they do allow apps to quickly connect users that are already entangled. In finance, brokers are the user platforms that provide best execution across exchanges, playing an analogous role. Distributors aggregate consumers, manufacturers create product, and the two functions are integrated through FIX APIs, processing software, and various other value chain intermediaries. If we want portability across liquidity pools in crypto capital markets, and especially over decentralized exchanges, understanding the separation and empowering each function (rather than vertically bundling everything) is the key.





    Source: Trading View (XBT vx BTC), Wall Street Journal (CBOE), Messari (CBOE)

     
  2. BIG TECH: YouTube, Facebook and NVIDIA powering hyper-realistic human avatars 

    The digitization of the human animal continues unopposed, with symptoms all over. Chinese firm Megvii, maker of software Face++ that has catalyzed 5,000 arrests since 2016 by the Ministry of Public Security, is looking for an $800 million IPO. The other champion of public/private surveillance, Facebook, is working a virtual reality angle. The company is improving the technology used to model rendered avatars of human faces, which can then be displayed across virtual environments. Using multi-camera rigs and hours of facial movement footage, Facebook is building neural networks that learn how to translate realistic facial muscle movement into models. The Wired article linked below is worth exploring for the videos alone, and the uncannily realistic motion these animation possess.

    One of our recurring points is that frontier technologies -- AI, AR/VR, blockchain, and IoT -- appear disparate now, but are intricately connected. Take for example the new feature from Google called YouTube Stories. Similar to SnapChat and Instagram, video creators can apply 3D augmented reality overlays to their faces. While this technology looks like virtual reality rendering, it is primarily a machine vision (i.e., AI) problem to anchor rendered objects to a human face realistically. To do this Google provides a developer library called ARCore, not to be confused with Apple's ARkit. Human video avatars can be further extended and customized with code -- the twenty first century version of personal branding.

    Another take on the same issue comes from generative adversarial neural networks (GANs). We've discussed before how hyper-realistic images and videos can be faked by a model where one algorithm creates images and another accepts or rejects them as sufficiently realistic, with repeated evolutionary turns at this problem. Highlighted below is a recent software release from NVIDIA, where a drawing of simple shapes and lines is rendered by a GAN into what appears to be a hyper-realistic photo of a landscape. We can imagine a similar approach being applied to the output generated by Facebook's avatars, which still border on creepy, to ground the outcome in reality. Little details, like a reflection of a cloud on water, are hallucinated by GANs automatically, based on massive underlying visual data. Expect these digital worlds to become increasingly indistinguishable from reality, and to spend way more time living in them for the years to come.





    Source: SCMP (Face++), Wired (Facebook Avatars), NVIDIA (GAN drawing)

     
  3. BIG TECH: Subscribing to Unownable Assets with Google Stadia, Apple News, and Taxes 

    Microsoft, PlayStation and Nintendo split the console gaming market today, with a strong focus on devices and online services. Those companies make money either by selling a piece of proprietary hardware (i.e., the console), exclusive software (i.e., the video game around which they may have IP rights), or through a store that takes a cut of third party developer revenue. Google announced that they are entering the market with a disruptive and orthogonal strategy. The firm plans to use its massive cloud infrastructure and AI advantage to deliver streaming gaming services through a subscription model.

    What does this mean? Machines far more powerful than a local console or PC will run sophisticated 3D rendering engines on cloud servers optimized for visual graphics. AIs that optimize data center use and compression will package information transfer in ways that other video game streaming start-ups were simply unable to deliver. On sufficiently fast broadband, millisecond responses between a controller in a living room and a cloud service become possible. While such infrastructure is not ubiquitous, you can see the projected growth of 5G and LTE networks below -- suggesting that Google's vision can be meaningful across a large part of the world. Engaging with a high-end virtual world on a mass-produced cheap tablet becomes a reality. 

    Let's talk about subscription. Subscription is the solution for monetizing unownable assets. Such assets may be prohibitively expensive in the aggregate and worthless on the margin. Take for example Spotify, which manages to sell you all the music in the world for $10 per month. An individual cannot afford all the music in the world, and yet the marginal song is worth absolutely nothing. Or take the upcoming Apple News subscription service, which gets around the paywalls of sources like the WSJ for $10 per month as well. A reader can't afford the paywalls for every premier newspaper in the world, even though the value of the marginal article is a donut.

    We think similarly about citizenship -- taxes are the subscription cost to membership in a sovereign body, with its social protections, foreign policy, and monetary base. An individual cannot afford those on the margin, nor could those "products" be financed in a case-by-case manner. Or look at the developments in wealth management and roboadvisors, where Assets under Management based pricing (% of total) is beating commission based models (per transaction). AUM fees are a subscription to unlimited rebalancing across thousands of companies, packaged in free-to-trade ETFs on custodian platforms. We go down this road to highlight the right path to follow: all financial services in the aggregate are an unownable asset, but worthless at the marginal product. Price accordingly.




    Source: Polygon (Google Stadia), 9to5Mac (WSJ and Apple), NY Times (Apple News)

     
Thanks for reading!

Best,
Lex 
Featured:
 
We put this together at Autonomous NEXT, where we love Fintech, Crypto and our community. Contact us with questions and ideas.

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Further Reading:
Blockchain & Crypto 
Artificial Intelligence & Conversational Interfaces Digital Wealth, Investing & Crowdfunding Neobanks, Digital Lenders & Payments Insurtech & Internet of Things Augmented & Virtual Reality
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