3. The Challenge
The legacy financial system has traditionally revolved around a seemingly simple and intuitive goal: the pursuit of wealth. Everyone wants more money. However, as the concept of money evolves in today’s world, it becomes crucial to reassess our understanding of what money truly represents.
In the past, “fiat” has served as: the unit of account, the store of value, and the medium of exchange - our conventional notion of money. To capture the objective of maximizing wealth or value, we propose the following equation:
Max V = Σ(USD) + Σ(belief) +c
where Σ(USD) represents the sum of all income and investment categories, encompassing diverse assets such as stocks, fixed income, cash and cash equivalents, real estate, commodities, and foreign exchange. On the other hand, Σ(belief) encompasses the collective beliefs held by individuals or groups, including market confidence and asset preferences. The constant term “c” accounts for additional factors that contribute to an individual’s overall wealth or value.
This objective function “the goal” serves as the foundation for the traditional financial system. It is simple, intuitive, and easy to rationalize. It is a univariate imputation, meaning it involves a single variable, which makes it easy to understand the strategy (the inputs) and regulate behavior accordingly.
With the Digital Transformation of money, this no longer holds. “Fiat” is no longer the store of value, nor the medium of exchange (necessarily). In the ‘Digital Age’, and after more than a decade of maturity for the emergent asset class of crypto assets, we have to accept that ‘Digital Scarcity’ holds value (objectively).
Bytes are infinitely more advanced than a unitary (and often national) denomination. Removing the monopoly from our currency extends the functional constraints that bind our objective function. The “game system” in which we play is fundamentally transformed. Simply, the objective goal is no longer to earn ‘USD’.
Instead, we propose a new objective:
Success: MaxV= δ Digital Assets / δ Time
[the change in digital asset value with respect to time]
This is no longer intuitively simple. Now, solving this function is a daunting task “not proper” for the everyday user. It is a complex multivariate imputation.
Solving this computation (functional optimization) is sufficiently challenging for organizations and institutions with elite capabilities to aid in their effective decision-making. Actually solving this ‘problem’ is a full-time job: a multi-disciplinary exercise that demands advanced skills and constant focus. Specialized knowledge and expertise are required, such as portfolio construction and management, risk management, market and data analysis (both macro and micro economics), and execution ability.
Decentralized Financial Optimization is very difficult. Not losing money merely operating within this system is difficult enough, for many. One requires advanced artificial intelligence in order to aid their decision-making and make sense of the chaotic, frontier market.