The first article in the fast learner series, started with the question – What is the one big promise of blockchain technology? The answer was – it allows people to do business in a trustless world. The example which I used was the digitization of land records. But is that it? Is Web 3 only there to do things that Web 2 already does, but in a decentralized way? Well, No. To prove my point, I will center today's article around a product that can only be built on Web 3. We will understand what smart contracts are, what they can or cannot do, and how they open up new possibilities. We will be using some concepts like hash functions and asymmetric encryption which were discussed in the previous post.

Today’s product is basically about making predictions. To narrow down the scope, we will focus on predictions (read: analysis) in stock markets. There are equity research analysts who do this for a living. They usually pitch their investment idea to the fund manager of their firm, who, if convinced, takes a large position in the market on behalf of the fund, and more often than not, the firm ends up making money. They quantify each idea with a target price for a future date which is a month, a quarter, or a year away.

Now that the context has been set, let us pinpoint the problem we are trying to solve here. Fund managers will probably not accept all the ideas floated by analysts. This is why all analysts are asked to maintain a paper portfolio. The performance of this paper portfolio gives the potential profits that an analyst would have made, had all her ideas been accepted. It's a natural desire for all good analysts to share the stellar performance of their paper portfolios with everyone. (Here comes the interesting stuff) But how should they do that?

Let us try to design a Web 2 product that allows analysts to prove their greatness to the world. This product needs five crucial features. You’ll notice that as we try to meet one requirement, a new constraint comes up which leads to the next requirement.

1. Immutability: Let’s say there is an analyst who wants to launch her own fund. She must convince an investor that she has a good track record in generating returns. She cannot use the paper portfolio which she maintains at her current firm to prove her worthiness because the investor has no way to verify the legitimacy of the paper portfolio. The investor might say that she probably removed the investment ideas which didn’t end up making money and only kept the ones that did. She needs an immutable way to record her paper portfolio.

2. Anonymity: If she sends monthly snapshots of her paper portfolio to the investor for a year, then he will be sure that her paper portfolio is untampered. But here comes the law and order and you know the whole Company Clause, NDA, yada yada… The current firm will not be comfortable with the analyst giving investment ideas to other investors for free. So she needs a way to share her portfolio anonymously.

3. Identity: To achieve anonymity, our analyst creates an account on a paper trading application (like Smallcase), without using her real name. Now, she goes to the investor and tells him, “Look, I have the login credentials of this Smallcase account, and the performance of the portfolio of this account is superb.” The investor will say, “It is possible that you created hundred such accounts and you are showing me the one which has generated the best returns.” Hard luck! Only if she could prove that this is the only account she operates!

4. Time Lock: Now let’s say Smallcase adds a feature that prevents multiple account creation by linking each account with some Government ID. The analyst is now able to convince the investor that this account is the only account that she operates. Well, it turns out the investor is selfish and unethical – which most investors are (as long as it’s legal). He knows that she cannot create another account on Smallcase, therefore she will keep publishing her ideas from this account. He does not need to invest in her fund and pay her a management fee. He has the money and he has access to the ideas. He can invest directly in the publicly visible paper portfolio of her account. To mitigate this, she needs a publishing tool that ensures that her ideas cannot be accessed by anyone until the stock reaches the target price.

5. Regulated Ownership: I’m going to give this one its own non-bulleted paragraph. It’s important!

Smallcase can allow her to schedule the release of her ideas at a future date (twitter already does that for tweets). To assure the investors that the released ideas are free of any hindsight bias, Smallcase must show the time of upload for each idea. Smallcase must ensure that the ideas which are uploaded do not get revised or deleted by the time they get revealed to the investors. Therefore the analyst needs to reveal the investment idea to Smallcase. This means the Smallcase employees can access her investment idea before its release date. They can leak the ideas to the investors, or they can sell them to other analysts. They can even edit it and she will have no way to prove the unauthorized tampering. In a way, she is giving away ownership. But let us assume that these Smallcase employees are ethical and law-abiding citizens – even then there are three problems:

1. While sharing her investment ideas, the analyst has created some IP (intellectual property). Every time she posts an idea, she backs it up with good insights and rationale. If Smallcase has access to the IP of all the good analysts, they can monetize it without explicit permission which is unfair to the analysts. Therefore, every idea must be encrypted before it is uploaded on Smallcase.

2. To prove immutability to the investors, we cannot give edit or delete permissions to the analysts. Hence the ownership should be regulated by code. The investment ideas will initially be posted in an encrypted way. At the time of posting, the analysts will submit the target price and date of reveal (which can be any date in the future, but usually it will be the date when the analyst thinks the target price will be achieved by the stock). Now, once the idea is submitted, it should become publicly readable (automatically) once the release date arrives. The analyst should not be allowed to tweak the release date after having submitted the ideas.

3. Encrypted storage does not ensure fault tolerance. What if Smallcase shuts down? Our analyst will no longer be able to prove her superior track record to the investors. For true ownership, the data must be stored on a public blockchain to ensure that in the event of Smallcase shutting down, the analyst does not lose her data and can pick up from where she left off when a new Smallcase-like app is built. Big banks can always acquire companies like Smallcase and shut them down, but they will never be able to shut down a decentralized blockchain. The historical proof of posting these ideas is the identity of the analyst. This identity (read: reputation) is of utmost importance in this business.

Okay… now we know what to build! But how will we build it? Let us familiarize ourselves with the building blocks first. We will start with Ethereum.

If Bitcoin is about shared data, Ethereum is about shared computing.

Here are some important ways in which Ethereum differs from Bitcoin:

1. Bitcoin can only execute simple computer programs, but Ethereum is Turing Complete, i.e., it can execute any program. That’s why Bitcoin only supports simple applications like payments, but on Ethereum, you can deploy any application – just make sure it’s not computationally heavy.

2. Expensive computations are deterred by a “gas” fee. This fee goes to the miner as compensation for computation. In simple words, more lines of code mean a higher transaction fee which makes the app expensive to use.

3. In Bitcoin, the block size limit is set in terms of the number of transactions, but Ethereum block size limits are set in terms of total gas consumed.

4. While the Bitcoin blockchain stores a list of transactions, Ethereum stores states. For example, if A and B have $10 each in their accounts and A sends $1 to B, then Bitcoin will store “$1 is transferred from A to B”. But Ethereum will store “A’s account balance = $9; B’s account balance = $11”.

5. In Bitcoin, a new block is added every 10 minutes. But Ethereum is faster where a new block is mined every 15s.

So we learned that we can run applications on Ethereum, the question arises, how do we use those applications? – The same way we use applications on our phones – firstly, we find the app which we want to use and then we interact with that app usually by pressing some buttons or typing in some text field. Ethereum apps are called smart contracts. Just like Web 2 developers build apps and publish them on the App Store, Web 3 developers write smart contracts and deploy it on Ethereum.

Another analogy with legal contracts that’s tough to beat: Consider smart contracts to be real-world paper contracts without the need for an enforcing/arbitrating party. The smart contract is a programme with a very specific set of procedures that no one can change once it is deployed. Everything written in the smart contract will take place exactly as written, with no need for a third party to enforce some or all of the clauses even if one of the parties changes his mind. In the blockchain world, “Code is Law”.

Now the question is who can interact with these smart contracts? Any Ethereum account can interact with smart contracts. There are two types of accounts:

1. Externally Owned Accounts (EOAs): They are controlled by private keys which belong to individuals or institutions.

2. Contract Accounts: They are controlled by their smart contract code. These accounts are activated by an EOA (the person who is deploying the smart contract on Ethereum). Like EOAs, contract accounts can also own ether (the currency of Ethereum).

The next question is – How do these accounts interact with smart contracts? Smart Contracts have functions (like mobile applications have buttons) that can be called by sending a message to the smart contract. Contracts have direct control over their own ether balance. They also have their own storage to keep track of their persistent variables (aka state). While in Bitcoin every transaction represents a money transfer, in Ethereum every transaction is just a message from an externally owned account to another account. The Joker sums it up quite well:

One important detail to note here is that contracts cannot send messages on their own and every message sent between contracts is caused by a transaction originating from an EOA. But depending on their state, contracts can change their response to these messages. For example, time-locked contracts are like post-dated cheques. These contracts respond positively to messages only after a certain date.

Gas Fee

The concept of “gas” fee is the cornerstone of shared computing, which makes Ethereum the world’s best virtual computer. Let’s understand how “gas” fee works:

Cost for every executed operation is expressed in gas units. Every message specifies a gas allowance (max no of computations) and gas price (fee per computation). The price of gas is specified in terms of ether, and if the Ethereum network is receiving too many transactions, then the gas price is higher than usual and vice versa. If the gas limit is exceeded, all changes are reverted, but gas price is collected by the miner. Excess gas is reimbursed to the sender as Ether.

Now we have the basic ingredients needed to build our decentralized version of Smallcase. In Web 3, meeting the five requirements discussed earlier is easy and simple. The smart contract is composed of just two functions – one to upload and one to download – the “investment thesis” file. Here is the detailed design:

1. The analyst uses the upload function to submit two types of data in a file:

   1. Quantitative: This section has a standard format that is common to all predictions submitted by any analyst. Apart from the public key of the analyst, it has three things:

      1. The symbol identifier of stock.

      2. The target price.

      3. The reveal date (which is ideally the date on which the stock will reach the target price).

   2. Qualitative: This section is optional where the analyst can submit any kind of data. She can use this to back up her investment thesis with a textual explanation or an excel model.

2. The upload function performs the following operations on the investment thesis (basically automated at the backend):

   1. The contract computes the time difference between the target price date and the date of submission of the file. It divides this time by the average block generation time (15 seconds) to get the no. of blocks and adds it to the current block number of Ethereum to get the future block number from which the file will be publicly readable. In crypto, time is usually measured in terms of blocks instead of seconds.

   2. It computes the hash of the entire data and then it stores the data on a decentralized storage application like Arweave.

      Any computer has three components: Processor, RAM and Hard Disk. Ethereum is a decentralized computer. It can execute code like a processor and it can maintain state like RAM. But it is a bad practice to store large files on Ethereum, just like bad computer programs use too much RAM. Therefore, we use decentralized storage apps like Arweave, IPFS, Piñata, etc. They are like Google Drive except it is not controlled by a central entity like Google. Therefore, these apps are ideal for storing the image file (jpeg, png) of NFTs.

   3. Then the contract encrypts the address of the Arweave file using the contract’s private key. This key is not known to any human.

Let us verify if we have met all the five requirements or not:

1. Immutability: The investor can compute the hash of this file and see if it matches with the hash present on Ethereum to ensure the integrity of the file.

2. Anonymity: The wallet address of the analyst cannot be traced back to her real-world identity.

   The dirty secret of sell-side equity research is that there are some stocks which never get a sell rating. The promoters of that stock have so much influence, that no sell-side analyst can afford to be in their bad books. Therefore, when these stocks get a hold rating, the industry insiders know that it is actually a sell rating. Web 3 will allow sell-side analysts to fearlessly share their predictions.

3. Identity: There is always a dichotomy between anonymity and identity. In the blockchain world, your wallet is your identity. If you own the private key of that wallet then that identity belongs to you. A person can own multiple wallets and thus can own multiple identities. It is like having multiple accounts on Instagram. In our example, the analyst does not need to reveal her real-world identity to prove her track record. She will only need to reveal her identity when she is accepting non-digital assets (like fiat currency) from investors to invest in her portfolio and she can do this easily because she owns the private key of that wallet-cum-identity. If her portfolio only has crypto assets, then she doesn’t even need to reveal her real-world identity to accept funds from investors, as crypto assets live natively on the blockchain and the profits can be shared between investors and fund-manager via a smart contract.

4. Time Lock: The investment file becomes accessible to the investors only after a certain no. of blocks have been generated. The investors can verify the upload time of the file to check for hindsight bias.

5. Regulated Ownership: This has three components -

   1. There is no centralized entity like Smallcase which can decrypt the address of the Arweave file before the reveal date. They cannot sell this data to anyone without telling its creator. This achieves the true vision of the creator economy.

Smallcase is a web 2 product and it does the job too. But I started with the claim that this is one of those products that can only be built in Web 3. I still stand by my claim. Let me use a bit of Game Theory to convince you. If an analyst is really good then she will soon be managing her own fund. And if a fund manager is selling investment ideas, then it is a situation where the seller is better informed than buyers about the quality of the good for sale. Economists have a name for this situation – Lemons Market. They usually explain with the example of selling an used car. If the idea is really good, a fund manager will not share that idea with others (even for a subscription fee). If she is selling an idea, then maybe that idea is not good enough. So a good analyst will never publish her ideas on a platform like Smallcase, as she cannot afford her ideas leaking to other investors for free. In the words of the Joker –

But if you are wondering why a VC like me, is sharing a product idea publicly for free? Again I refer back to the Joker:

It’s not about money, it’s about sending a message – “Web 3 allows us to build products which were not possible in Web 2…”

At its core, today’s product was about reducing information asymmetry. Analysts cannot reveal their ideas to the public, and therefore, investors cannot judge the skills of analysts. Whenever there is an issue of trust, Blockchain comes to our rescue.

Also, in the final design, it is possible that an analyst creates a hundred accounts (wallets) and makes random predictions from those accounts. One of the accounts will surely give a good track record for the short term. But this good run cannot continue for this account in the long term. But if we want to restrict the number of accounts an analyst can create, then there are two possible solutions:

1. On-chain KYC: Government can create an oracle that links wallets to Government IDs and then our smart contract stops accepting predictions from wallets that are not KYC linked. Now, the contract can detect when two wallets (accounts) belong to the same individual.

2. Soulbound Tokens: They are non-transferable NFTs. They permanently attach themselves to wallets, much like government IDs get attached to your bank accounts. Read this blog post from Vitalik himself to understand their use cases.

Just know that neither of the above solutions exists as of today.

The first article in the fast learner series, started with the question – What is the one big promise of blockchain technology? The answer was – it allows people to do business in a trustless world. The example which I used was the digitization of land records. But is that it? Is Web 3 only there to do things that Web 2 already does, but in a decentralized way? Well, No. To prove my point, I will center today's article around a product that can only be built on Web 3. We will understand what smart contracts are, what they can or cannot do, and how they open up new possibilities. We will be using some concepts like hash functions and asymmetric encryption which were discussed in the previous post.

Today’s product is basically about making predictions. To narrow down the scope, we will focus on predictions (read: analysis) in stock markets. There are equity research analysts who do this for a living. They usually pitch their investment idea to the fund manager of their firm, who, if convinced, takes a large position in the market on behalf of the fund, and more often than not, the firm ends up making money. They quantify each idea with a target price for a future date which is a month, a quarter, or a year away.

Now that the context has been set, let us pinpoint the problem we are trying to solve here. Fund managers will probably not accept all the ideas floated by analysts. This is why all analysts are asked to maintain a paper portfolio. The performance of this paper portfolio gives the potential profits that an analyst would have made, had all her ideas been accepted. It's a natural desire for all good analysts to share the stellar performance of their paper portfolios with everyone. (Here comes the interesting stuff) But how should they do that?

Let us try to design a Web 2 product that allows analysts to prove their greatness to the world. This product needs five crucial features. You’ll notice that as we try to meet one requirement, a new constraint comes up which leads to the next requirement.

1. Immutability: Let’s say there is an analyst who wants to launch her own fund. She must convince an investor that she has a good track record in generating returns. She cannot use the paper portfolio which she maintains at her current firm to prove her worthiness because the investor has no way to verify the legitimacy of the paper portfolio. The investor might say that she probably removed the investment ideas which didn’t end up making money and only kept the ones that did. She needs an immutable way to record her paper portfolio.

2. Anonymity: If she sends monthly snapshots of her paper portfolio to the investor for a year, then he will be sure that her paper portfolio is untampered. But here comes the law and order and you know the whole Company Clause, NDA, yada yada… The current firm will not be comfortable with the analyst giving investment ideas to other investors for free. So she needs a way to share her portfolio anonymously.

3. Identity: To achieve anonymity, our analyst creates an account on a paper trading application (like Smallcase), without using her real name. Now, she goes to the investor and tells him, “Look, I have the login credentials of this Smallcase account, and the performance of the portfolio of this account is superb.” The investor will say, “It is possible that you created hundred such accounts and you are showing me the one which has generated the best returns.” Hard luck! Only if she could prove that this is the only account she operates!

4. Time Lock: Now let’s say Smallcase adds a feature that prevents multiple account creation by linking each account with some Government ID. The analyst is now able to convince the investor that this account is the only account that she operates. Well, it turns out the investor is selfish and unethical – which most investors are (as long as it’s legal). He knows that she cannot create another account on Smallcase, therefore she will keep publishing her ideas from this account. He does not need to invest in her fund and pay her a management fee. He has the money and he has access to the ideas. He can invest directly in the publicly visible paper portfolio of her account. To mitigate this, she needs a publishing tool that ensures that her ideas cannot be accessed by anyone until the stock reaches the target price.

5. Regulated Ownership: I’m going to give this one its own non-bulleted paragraph. It’s important!

Smallcase can allow her to schedule the release of her ideas at a future date (twitter already does that for tweets). To assure the investors that the released ideas are free of any hindsight bias, Smallcase must show the time of upload for each idea. Smallcase must ensure that the ideas which are uploaded do not get revised or deleted by the time they get revealed to the investors. Therefore the analyst needs to reveal the investment idea to Smallcase. This means the Smallcase employees can access her investment idea before its release date. They can leak the ideas to the investors, or they can sell them to other analysts. They can even edit it and she will have no way to prove the unauthorized tampering. In a way, she is giving away ownership. But let us assume that these Smallcase employees are ethical and law-abiding citizens – even then there are three problems:

1. While sharing her investment ideas, the analyst has created some IP (intellectual property). Every time she posts an idea, she backs it up with good insights and rationale. If Smallcase has access to the IP of all the good analysts, they can monetize it without explicit permission which is unfair to the analysts. Therefore, every idea must be encrypted before it is uploaded on Smallcase.

2. To prove immutability to the investors, we cannot give edit or delete permissions to the analysts. Hence the ownership should be regulated by code. The investment ideas will initially be posted in an encrypted way. At the time of posting, the analysts will submit the target price and date of reveal (which can be any date in the future, but usually it will be the date when the analyst thinks the target price will be achieved by the stock). Now, once the idea is submitted, it should become publicly readable (automatically) once the release date arrives. The analyst should not be allowed to tweak the release date after having submitted the ideas.

3. Encrypted storage does not ensure fault tolerance. What if Smallcase shuts down? Our analyst will no longer be able to prove her superior track record to the investors. For true ownership, the data must be stored on a public blockchain to ensure that in the event of Smallcase shutting down, the analyst does not lose her data and can pick up from where she left off when a new Smallcase-like app is built. Big banks can always acquire companies like Smallcase and shut them down, but they will never be able to shut down a decentralized blockchain. The historical proof of posting these ideas is the identity of the analyst. This identity (read: reputation) is of utmost importance in this business.

Okay… now we know what to build! But how will we build it? Let us familiarize ourselves with the building blocks first. We will start with Ethereum.

If Bitcoin is about shared data, Ethereum is about shared computing.

Here are some important ways in which Ethereum differs from Bitcoin:

1. Bitcoin can only execute simple computer programs, but Ethereum is Turing Complete, i.e., it can execute any program. That’s why Bitcoin only supports simple applications like payments, but on Ethereum, you can deploy any application – just make sure it’s not computationally heavy.

2. Expensive computations are deterred by a “gas” fee. This fee goes to the miner as compensation for computation. In simple words, more lines of code mean a higher transaction fee which makes the app expensive to use.

3. In Bitcoin, the block size limit is set in terms of the number of transactions, but Ethereum block size limits are set in terms of total gas consumed.

4. While the Bitcoin blockchain stores a list of transactions, Ethereum stores states. For example, if A and B have $10 each in their accounts and A sends $1 to B, then Bitcoin will store “$1 is transferred from A to B”. But Ethereum will store “A’s account balance = $9; B’s account balance = $11”.

5. In Bitcoin, a new block is added every 10 minutes. But Ethereum is faster where a new block is mined every 15s.

So we learned that we can run applications on Ethereum, the question arises, how do we use those applications? – The same way we use applications on our phones – firstly, we find the app which we want to use and then we interact with that app usually by pressing some buttons or typing in some text field. Ethereum apps are called smart contracts. Just like Web 2 developers build apps and publish them on the App Store, Web 3 developers write smart contracts and deploy it on Ethereum.

Another analogy with legal contracts that’s tough to beat: Consider smart contracts to be real-world paper contracts without the need for an enforcing/arbitrating party. The smart contract is a programme with a very specific set of procedures that no one can change once it is deployed. Everything written in the smart contract will take place exactly as written, with no need for a third party to enforce some or all of the clauses even if one of the parties changes his mind. In the blockchain world, “Code is Law”.

Now the question is who can interact with these smart contracts? Any Ethereum account can interact with smart contracts. There are two types of accounts:

1. Externally Owned Accounts (EOAs): They are controlled by private keys which belong to individuals or institutions.

2. Contract Accounts: They are controlled by their smart contract code. These accounts are activated by an EOA (the person who is deploying the smart contract on Ethereum). Like EOAs, contract accounts can also own ether (the currency of Ethereum).

The next question is – How do these accounts interact with smart contracts? Smart Contracts have functions (like mobile applications have buttons) that can be called by sending a message to the smart contract. Contracts have direct control over their own ether balance. They also have their own storage to keep track of their persistent variables (aka state). While in Bitcoin every transaction represents a money transfer, in Ethereum every transaction is just a message from an externally owned account to another account. The Joker sums it up quite well:

One important detail to note here is that contracts cannot send messages on their own and every message sent between contracts is caused by a transaction originating from an EOA. But depending on their state, contracts can change their response to these messages. For example, time-locked contracts are like post-dated cheques. These contracts respond positively to messages only after a certain date.

Gas Fee

The concept of “gas” fee is the cornerstone of shared computing, which makes Ethereum the world’s best virtual computer. Let’s understand how “gas” fee works:

Cost for every executed operation is expressed in gas units. Every message specifies a gas allowance (max no of computations) and gas price (fee per computation). The price of gas is specified in terms of ether, and if the Ethereum network is receiving too many transactions, then the gas price is higher than usual and vice versa. If the gas limit is exceeded, all changes are reverted, but gas price is collected by the miner. Excess gas is reimbursed to the sender as Ether.

Now we have the basic ingredients needed to build our decentralized version of Smallcase. In Web 3, meeting the five requirements discussed earlier is easy and simple. The smart contract is composed of just two functions – one to upload and one to download – the “investment thesis” file. Here is the detailed design:

1. The analyst uses the upload function to submit two types of data in a file:

   1. Quantitative: This section has a standard format that is common to all predictions submitted by any analyst. Apart from the public key of the analyst, it has three things:

      1. The symbol identifier of stock.

      2. The target price.

      3. The reveal date (which is ideally the date on which the stock will reach the target price).

   2. Qualitative: This section is optional where the analyst can submit any kind of data. She can use this to back up her investment thesis with a textual explanation or an excel model.

2. The upload function performs the following operations on the investment thesis (basically automated at the backend):

   1. The contract computes the time difference between the target price date and the date of submission of the file. It divides this time by the average block generation time (15 seconds) to get the no. of blocks and adds it to the current block number of Ethereum to get the future block number from which the file will be publicly readable. In crypto, time is usually measured in terms of blocks instead of seconds.

   2. It computes the hash of the entire data and then it stores the data on a decentralized storage application like Arweave.

      Any computer has three components: Processor, RAM and Hard Disk. Ethereum is a decentralized computer. It can execute code like a processor and it can maintain state like RAM. But it is a bad practice to store large files on Ethereum, just like bad computer programs use too much RAM. Therefore, we use decentralized storage apps like Arweave, IPFS, Piñata, etc. They are like Google Drive except it is not controlled by a central entity like Google. Therefore, these apps are ideal for storing the image file (jpeg, png) of NFTs.

   3. Then the contract encrypts the address of the Arweave file using the contract’s private key. This key is not known to any human.

Let us verify if we have met all the five requirements or not:

1. Immutability: The investor can compute the hash of this file and see if it matches with the hash present on Ethereum to ensure the integrity of the file.

2. Anonymity: The wallet address of the analyst cannot be traced back to her real-world identity.

   The dirty secret of sell-side equity research is that there are some stocks which never get a sell rating. The promoters of that stock have so much influence, that no sell-side analyst can afford to be in their bad books. Therefore, when these stocks get a hold rating, the industry insiders know that it is actually a sell rating. Web 3 will allow sell-side analysts to fearlessly share their predictions.

3. Identity: There is always a dichotomy between anonymity and identity. In the blockchain world, your wallet is your identity. If you own the private key of that wallet then that identity belongs to you. A person can own multiple wallets and thus can own multiple identities. It is like having multiple accounts on Instagram. In our example, the analyst does not need to reveal her real-world identity to prove her track record. She will only need to reveal her identity when she is accepting non-digital assets (like fiat currency) from investors to invest in her portfolio and she can do this easily because she owns the private key of that wallet-cum-identity. If her portfolio only has crypto assets, then she doesn’t even need to reveal her real-world identity to accept funds from investors, as crypto assets live natively on the blockchain and the profits can be shared between investors and fund-manager via a smart contract.

4. Time Lock: The investment file becomes accessible to the investors only after a certain no. of blocks have been generated. The investors can verify the upload time of the file to check for hindsight bias.

5. Regulated Ownership: This has three components -

   1. There is no centralized entity like Smallcase which can decrypt the address of the Arweave file before the reveal date. They cannot sell this data to anyone without telling its creator. This achieves the true vision of the creator economy.

Smallcase is a web 2 product and it does the job too. But I started with the claim that this is one of those products that can only be built in Web 3. I still stand by my claim. Let me use a bit of Game Theory to convince you. If an analyst is really good then she will soon be managing her own fund. And if a fund manager is selling investment ideas, then it is a situation where the seller is better informed than buyers about the quality of the good for sale. Economists have a name for this situation – Lemons Market. They usually explain with the example of selling an used car. If the idea is really good, a fund manager will not share that idea with others (even for a subscription fee). If she is selling an idea, then maybe that idea is not good enough. So a good analyst will never publish her ideas on a platform like Smallcase, as she cannot afford her ideas leaking to other investors for free. In the words of the Joker –

But if you are wondering why a VC like me, is sharing a product idea publicly for free? Again I refer back to the Joker:

It’s not about money, it’s about sending a message – “Web 3 allows us to build products which were not possible in Web 2…”

At its core, today’s product was about reducing information asymmetry. Analysts cannot reveal their ideas to the public, and therefore, investors cannot judge the skills of analysts. Whenever there is an issue of trust, Blockchain comes to our rescue.

Also, in the final design, it is possible that an analyst creates a hundred accounts (wallets) and makes random predictions from those accounts. One of the accounts will surely give a good track record for the short term. But this good run cannot continue for this account in the long term. But if we want to restrict the number of accounts an analyst can create, then there are two possible solutions:

1. On-chain KYC: Government can create an oracle that links wallets to Government IDs and then our smart contract stops accepting predictions from wallets that are not KYC linked. Now, the contract can detect when two wallets (accounts) belong to the same individual.

2. Soulbound Tokens: They are non-transferable NFTs. They permanently attach themselves to wallets, much like government IDs get attached to your bank accounts. Read this blog post from Vitalik himself to understand their use cases.

Just know that neither of the above solutions exists as of today.