The way to trustless wealth management ©

trustless wealth management
What is trustless?

Recently, many people – especially blockchain developers – have entered the controversy regarding the meaning of the word ‘trustless’ [1, 2]. Some argue that this term means ‘lack of trust in data or person’, that is, a ‘trustless weather forecast’ means ‘I don’t trust the weather forecast.’ Others believe that trustless means the absence of parties which require trust. In this case, a ‘trustless weather forecast’ means ‘There isn’t anyone who prepared the weather forecast, whom I would need to trust in order to believe the forecast.’

Historically, the first meaning existed before the second one arose; it is broader in meaning, and includes the second one. The second meaning appeared at the dawn of blockchain technology. Its creators wanted to succinctly convey the idea of the lack of necessity of a central trusted party, thus inventing a new meaning of the word ‘trustless’.

The word ‘trustless’, when describing blockchain applications, describes a quality that refers to the process and means that the process does not require a trusted party because the rules of interaction between the process participants satisfy Nash equilibrium conditions, so that it leads to a collective choice of the outcome needed by the principal [3].  

In terms of blockchain, we don’t need to trust participants if we trust the conditions that guarantee a Nash equilibrium. For instance, if bitcoin miners create a Union, which allows them to communicate and coordinate their actions, the Nash equilibrium will be violated [4]. In this event, bitcoin network participants would be able to jointly conduct an enrichment-motivated attack. Thus, we will be bound to trust the network participants again.

Why Wealth Management needs to be trustless

Individual investment management implies that a client trusts the competence and integrity of an advisor, a broker, a depository and a registrar, as well as the ability of the judiciary to protect assets. However, both сrypto- and traditional asset management markets face issues due to having a trusted party involved in the processes. They are:

Inefficiency of the judicial system in the fair protection of assets on peer-to-peer registries. Indeed, only the private key holders may have access to the assets accounted on such registries. Thereby, all on-blockchain assets held by depositories or banks are vulnerable: they will never be replaced or restored in case of theft. Therefore, a forward-looking asset owner should choose trustless processes of storage, of exchange, etc.

Conflict of interest between a wealth manager and an investor and Lack of data on the effectiveness of individual investment management. Several findings [5] show that conflicts of interest occur because of advisors’ financial distress or lust for money. Even well-known brands offer their clients assets to purchase on which they can earn more, regardless of how much their client can earn. However, trustless public metrics of a wealth manager’s competence and a prohibition on the inclusion of illiquid assets will allow a client to get feedback and change manager before it is too late.

Negative impact of the human factor. A study of the negative impact of the human factor [6] identified several types of negative human factors in the management process: skills-based errors, decision errors, errors of perception and conscious violations. These are unavoidable whenever a human is involved in the process.

It doesn’t really matter why an advisor recommends buying bad assets; what we should understand is – they may do it and often do. A client wins only if she chooses not to depend on an advisor and other designated parties, entrusting most of the processes to the trustless technology.

How to make Wealth Management trustless? 

The most widely known technology for the development of trustless applications is the Blockchain. The Blockchain is a ledger that can store data in the precise chronological sequence of its creation and is able to protect it from forgery. This is possible due to the fact that the correct version of the database is determined by a consensus of the majority of network participants.

Simply put, a client doesn’t have to trust a party which maintains the database in order to trust the whole system because the system is controlled by many participants that are incentivised to approve correct transactions, which are added to the database.

Applications that built on the blockchain are called ‘smart contracts’ and inherit the trustless feature. Smart contracts allow you to store assets, calculate the optimal investment portfolio and exchange assets within the network. Being essentially conventional programs, they do this absolutely responsibly, autonomously, automatically, securely and confidentially. Although each smart contract is supported by thousands of nodes, no one can get access to the assets without a private key. The private key is known only to the owner of the assets and reliably protects them. The process of hacking a private key consumes energy, and this is a quadrillion times more expensive than the potential benefit.

Although the blockchain allows such processes as reconciliation of a portfolio, asset storage and asset exchange to be made trustless, it fails to execute all processes efficiently. Firstly, the blockchain is a very expensive technology on which to perform the calculation of an optimal portfolio or to store large amounts of data. Secondly, the investment process cannot be considered trustless without solving the problem of avoiding the need to trust the party that inputs the data which an advisor or a robo-advisor uses to make decisions.  

To find a solution to these issues, the developer community has already initiated a number of projects. The Wealthman protocol [7] is one of them. It is focused mostly on implementing trustless wealth management, whereas others provide technologies on quite narrow tasks. The Wealthman team is engaged in the development and integration of a stack of protocols and micro-services facilitating the building of trustless wealth management services.

References:
[1] ELI5: What do we mean by ‘blockchains are trustless’?
[2] Trustless – What does it mean in laymen’s terms?
[3] Wealthman whitepaper, Glossary. 
[4] Game theory, p. 12–16.
[5] Conflicts of interest between asset managers and their customers: Identifying and mitigating the risks
[6] The Human Factors Analysis and Classification System – HFACS.
[7] Trustless Wealth Management Platform. Wealthman.io

About Wealthman

Wealthman Ltd. is a London (UK) based company developing a stack of protocols and microservices facilitating the building of trustless wealth management services. The trustless design is used to overcome fraud and to bring efficiency. The platform has existing clients and plans to exceed an AUM volume of 2 billion dollars in 2 years. The market value of its peers has grown exponentially: Melonport by 14 times in 1 year; Iconomi by 10 times in 2 years.

For additional information about Wealthman, please visit: www.Wealthman.io


About Nash

John Forbes Nash Jr. (1928–2015) was an American mathematician who contributed to game theory and differential equations. Nash’s work has provided insight into the factors that govern decision-making inside complex systems found in everyday life. His theories are widely used in economics, sociology and the planning of war operations.