Global Head of Technology and Asset Design, State Street Digital®
The advent of digital asset-related technologies, such as blockchain, data analytics and artificial intelligence (AI) aims to create a foundational framework that supports the real-time movement of assets. This increased velocity of asset movement brings issues around the veracity of data that gets generated.
It challenges every facet of the discipline that feeds into various liquidity optimization models, a risk model framework, portfolio optimization models, liquidity and treasury management structures impacted due to real-time payment systems, and the ability to detect and prevent financial crimes for a secure and resilient financial system. It is uncertain whether the current technology stack and infrastructure can support this newly envisioned financial infrastructure driven by digital assets.
They may need both vision and significant investment of capital and acumen. In this article, we focus on how quantum computing solves computationally challenging problems such as portfolio optimization, asset pricing and financial markets analysis. We also focus on how it acts as a core foundational technology for security and cryptography that has the potential to both secure and threaten the infrastructure that facilitates the mobility of financial instruments.
For instance, quantum algorithms can potentially break widely used cryptographic protocols and algorithms that rely on the computational difficulty of factoring large numbers (e.g., bitcoin mining), motivating the need for quantum-resistant cryptography that ensures financial security and sensitive data. This can be a systemic problem for blockchain and distributed ledger technology (DLT), which have embedded cryptography into the verification and validation system of transactions and provenance link ability.
The term “exponential finance” refers to leveraging exponential technologies and innovation to transform the financial industry. We explore the introduction of tokenized assets and new asset classes that are instilled due to the evolutionary emergence of Web 3.0 (or Web3, the third generation of the World Wide Web) and the ownership economic constructs it proposes. These include identity, data, healthcare records and giving every individual an opportunity to control their data, talent and identity, and subsequently monetize them.
As these new asset classes enter the financial infrastructure, driven by digital assets, and engage as crypto market infrastructure participants, they will hit the limitations of existing technologies and result in an asset movement velocity mismatch.
Our identity is represented by an avatar (or other Augmented Reality/Virtual Reality representation) and the things that we value are represented in the form of tokenized assets with valuation vehicles that prevent double spend and leverage blockchain as a transaction system. This brings the fundamental tenets of blockchain (trade, trust and ownership) to the Web3-induced markets and financial system. Our avatars that represent us may interact with various universes, and we preserve the right and ability to monetize our data, effort, talent and all the value they generate.
We must consider the commercial aspects of the metaverse and how it is monetized today, as well as the opportunity it presents to conduct business tomorrow. Additionally, we need a robust, secure and resilient infrastructure that allows us to transact, and that also supports the business avenues that come with hyper–financialization, resulting in velocity and veracity of data. We further explore the application of quantum technology in decentralized finance (DeFi).
Quantum computing key terms and concepts:
In the context of exponential finance and cryptography, the preceding properties are important considerations. Most of the financial disciplines that are employed in models include a pattern (deterministic, randomness and distribution mapping) and risk (random and predictable). These computational frameworks fall under three broad categories: optimization, risk and opportunity.
At its core, finance deals with the uncertainty of the future behavior of assets and the tug-of-war between price (what you pay) and value (what you get). Risk quantifies the probability of actual return, which depends on a distribution of return expressed in volatility. With every increasing variable – and even more with digital assets due to a velocity exponential – quantum computing models can be employed to refine the financial disciplines discussed previously.
Another important framework issue is deploying quantum-resistant cryptography to protect financial infrastructure security and sensitive data, and to deploy cryptographic algorithms that are designed to remain secure with the newfound computational power of quantum computing. This is especially critical and urgent in the context of Web 3.0-induced markets, and financial systems with wallets and private keys as avenues to claim asset and process transactions.
We have taken a financial disciplines approach to deconstruct the expansive financial system, better understand the technology limitations of today, and express a perspective on the technology innovations and advancements we need to support the new age requirements of exponential finance. This is in the context of hyper-financialization, with the introduction of tokenized assets and new asset classes that are introduced due to the evolutionary emergence of Web3, as well as the ownership-related economic and financial constructs it potentially creates.
We focus on quantum computing not only to solve computationally challenging problems such as portfolio optimization, asset pricing and financial markets analysis – in this context of exponentially greater asset volumes and velocity – but also as a core foundational technology for security and cryptography for the emerging digital asset infrastructure with embedded cryptography, in terms of the verification and validation systems of transactions and provenance.