Introducing Prism: a crypto portfolio platform built with Ethereum - How smart contracts can allow a token economy to flourish. Is it worth the fees?
Trustless applications and the digitization of value (tokens) are the defining themes for the next 10 years of blockchain. Services like ShapeShift's new trustless portfolio management platform, Prism, allow for new types of economies to exist within a token market of growing robustness.
ShapeShift believes that the markets for tokens will continue to boom; tokens and the digitized value they represent will endure the coming bubbles, crashes, and controversy with innovation and insight. ShapeShift and similar products will allow beings of all kinds to transact securely and easily in a future full of tokens
A digitization of value
As tokens and ICOs are enjoying their new-found buzz, we are starting to see how a base-layer blockchain like Ethereum can provide the trustless infrastructure for new tokenized assets or ICOs. This model will result in a plethora of cryptocurrencies tokenized assets residing on a number of blockchains with varying degrees of connection and interoperability.
ShapeShift defines their purpose:
ShapeShift’s purpose was, and remains, to enable humans and machines to move between these chains and tokens with as little energy expended, and as much risk avoided, as possible; to connect these new forms, and by extension, the people and lives attached to them, without friction.
ShapeShift envisions a polychain future where complex, trustless transactions are possible with extreme ease.
Prism - totally nothing to do with the NSA project
If the name “Prism” reminds some of the unconstitutional NSA surveillance program, good. Such Orwellian travesties should remain top of mind. The name Prism, in our context, comes from the relationship of one source of light (Ether) entering, and multiple shades of light (the portfolio components) being seen on the other side.
-ShapeShift blog
Surveillance state humor aside, Prism is an Ethereum-based system of smart contracts; ShapeShift plans to bring the project to Rootstock (RSK) on Bitcoin in the future. Prism allows users to gain exposure to unique portfolios of digital assets without the need for a trusted middleman or risk of centralised exchanges - trust in open source contract code rather than the whims of a third party. Users have quite fine-grained control over the composition, size and duration of their portfolios (termed Prisms by ShapeShift) which are funded using only Ether as collateral.
Use case example from ShapeShift's blog
An example: Sarah is bullish on privacy-centric digital assets and wants to easily and safely invest $5,000 in them.
She designs a Prism consisting of 1/3 Dash, 1/3 Monero, and 1/3 Zcash, putting up $5,000 of Ether as collateral.
Upon creation, a unique smart contract tracks the value of her three assets, and holding her collateral. It also holds an equivalent amount of collateral from another party who took the opposite position (this other party is ShapeShift, for now).
Three weeks later, the price of the three components have risen an average of 25%. Sarah chooses to close her Prism, and she receives 125% of the collateral she deposited (less fees).
Ethereum, the vehicle
The structure of Prism is such that you can gain exposure to any crypto that ShapeShift has - while only using Ether as the collateral. This is an example of the power a base layer system can bring to the blockchain space - especially when the future is going to depend on multi-chain interoperability. With a Prism portfolio, users do not need to find trustworthy wallets for each of the separate assets nor manage keys for each chain.
Importantly, with Prism you don't get the underlying assets in the portfolio; your exposure to the assets in your portfolio is only secured using the contracts and ETH collateral. You might ask, how on earth can an Ethereum contract obtain accurate information on the prices of other assets? ShapeShift is using an oracle setup more information on this topic to come.
Fees.
Something to note about Prism in its current form: fees are pretty high...
2.4% on withdraw and 1% monthly. That is 12% per year. Madoff was promising something like 12% returns annually. So... to make a profit with Prism in its current form, your portfolio must outperform Madoff's promise. These fees may be acceptable for diversification in this high-risk, high-volatility market.
The fees are high right now because there is no competition. If another service were to come along offering a service similar to Prism but allowing individuals to take either side of a Prism contract, users would have to wait until someone else wants to short exactly their portfolio. ShapeShift is going short on any portfolio you make up - you pay the premium for that in Prism's current setup. A worthy competitor would need to provide the same liquidity to mimic ShapeShift's counterparty ability. The emergence of a service like this is very possible but it is almost certain that there would be fees attached.
ShapeShift has committed on the communities feedback regarding fees:
We appreciate the feedback! We still need to figure out the optimal fees that work for everyone involved. One thing to keep in mind is that is a significant opportunity cost for anyone taking the other side of the contract (which right now is us) because it locks up their capital for an indeterminate amount of time - if there isn't a monthly fee to offset that capital then what will incentivize the seller to keep the collateral in the contract when a user may take a very long time to close the PRSIM? That is one challenge we need to get more feedback on and optimize.
-ShapeShift on fees
ShapeShift's counterparty risk
It is important to note that the fees are high in the beginning because ShapeShift is putting the coins up to take the "other side" of every Prism contract immediately. Once the market gains size and liquidity or there ends up being some competition, I expect fees to go down. The fees are only so insane because of the lack of competition; ShapeShift is uniquely situated to provide the liquidity because they have the coins to act as a counterparty in many diverse portfolios.
Conclusion
Prism, and the implementation of collateralized portfolios is an extremely interesting application of decentralized smart contracts. Using the power of base layer platforms like Ethereum, access to the complex blockchain ecosystem can be distilled into simple, web interactions. The world of polychain applications is upon us.
Stay decentralized,
Kyle
If you are interested in blockchain, Bitcoin, politics, and science check out some of my other posts below:
Bitcoin search trends indicate momentum may continue - interest still rising
What it is like riding Bitcoin bubbles: an adventure through the present cryptocurrency explosion
How is this different from Bitshares Smart Coins? Seems like Prism already has a competitor that's been doing the same thing for years.
Great question, I'm not an expert in BTS but I will do my best here. SmartCoins on BitShares are collaterized assets, trading leverage on one end for stability on the other. AFAIK, BTS does not support the same controls that Prism is offering. Only pegged assets like bitUSD and bitGold. Prisms are backed in ETH collateral but can give exposure to portfolios of many different asset combinations.
Also BTS is not Ethereum and the implementation of Prism in the form of smart contracts is much more flexible than BTS
Still sounds like Bitshares. Have you checked into User Issued Assets?
https://bitshares.org/technology/user-issued-assets/
I would say first off, no KYC or anything of the like on Ethereum or Prism. The bitshares model supports stable assets on the blockchain - this is different from prism where portfolios are not stable assets, they simply give the holder exposure to markets other than ETH.
This is very different from what BitShares is offering. Plus it is on Ethereum.
Noob here! Apologies in advance in case I misunderstood the whole thing.
How is this different from simply buying and holding desired cryptos in exchanges and selling 3 weeks later?
Well first off, you do not need to trust the solvency of any exchanges - everything is collateralized and build on smart contracts.
With this product, you gain exposure to other cryptos without the need to find a secure wallet or deal with any keys.
In the end, you are going to be better off buying the coins and keeping them in your own wallets - in the future, when the fees come to earth, this is a much easier way to gain exposure to other coins without the risks associated (exchanges, keys, wallets ...)
Will have to look a little more into this Prism thing.
I tried to create an account at launch, within minutes, and i still have not received an invite. There was few things that I didnt like about this launch. Plus it is cheaper to manage my portfolio myself. It maybe interesting for someone completely new and if the learning curve or trading is too high.
Still haven't gotten mine either.
I am all about the product, the fees are high but it is very much a reputable team making a quality product. I think services like this will be important to this multi-coin future we are headed to.
Yea for sure. ShapeShift is amazing for crypto development. They have been implemented in many products, including my favorite Exodus wallet.
Love the API they provide. Be careful with Exodus, everything seems okay as of now but their wallet is not entirely open source - a requirement in my book for a wallet.
You are probably fine - just don't keep your millions there.
I wish i had millions. Thanks for the heads up.
Great post! I did read about the concept, and I think it is a great idea! No messing around with all these different wallets anymore... But I did not know about these high fees! Wow!
I haven't ever heard about it before reading the post of yours!
Upvoted & Followed you as well.
Nicely stated... I love the world of polychain applications...
I love it! Thanks for sharing :)