A Bank for the gig economy

A breakdown of how I perceive banking to be evolving in the next decade

Note : This was originally written in June 2019. Much has changed for DeFi since then. Putting it out in the open because I want to see this being built.

Introduction

Faster the flow of money, across economies, better the rate of innovation and social progress. Many of India's leapfrog moments in social indicators such as health, education and even gender ratio were substantially changed due to the rise in immigration from certain pockets (Eg: Punjab, Kerala) to foreign economies. This lead to a transfer of culture, opportunities and more importantly capital to an economy that was still recovering from colonial pillage. The internet era helped bring in arbitrage to the process. Large firms like Infosys and Wipro went from being mere visions of a distant future to household names due to the incremental improvements in business operations that the internet could provide. At the crux of what is believed to be Bangalore's $15 billion services sector, is the internet. However, while the internet got our workplaces closer, our economies remain distributed due to banking systems that are heavily reliant on government regulations. Challenges in compliance, limtations in forex and the laggard approach with which multiple banks function, leave much to be desired from the financial sector. The emergence of the gig economy has decentralised the central sources of employment (formerly corporates) and distributed opportunities across a more level playing ground - one that rewards on basis of merit. But in order to truly bring our economies together, we need to be able to provide tools that allow individuals to receive, send, store, invest money alongside settling taxes with one-click intuitive solutions. The productive hours entrepreneurs and free lancers lose in settlement of taxes along with ensuring they remain compliant is too high. One needs to account not only for the cost expenditure of hiring external accountants but also the man hours lost in paper work and concerns around settling them in time.

However, things do not need to be that way. The promise of digital money brings our economies closer than ever before. Present day banking monopolies, that rely heavily on regulations give undue power to a handful of players that provide much needed financial infrastructure for inbound remittances. The toke economy stood as a highly reliant alternative for the past 8 years. As user education and exchange liquidity soared, settling payments in tokens as an alternative made sense. However, given the high requirements of compliance, wide spreads and exchange based risks, there are heavy risks involved in taking token based payments. In addition, during times of volatility, an invoice generated could settle for 10-15% less (worst case swings on Eth/btc in single day) or more. The emergence of stable tokens give freelancers and entrepreneurs a stable alternative that could be used to take payments and settle taxes in real time. These are currencies that are not just trackable (via a blockchain) but also programmable. The key challenge in on-boarding individuals in the gig economy, especially those catering to foreign nations where acquiring ethereum or Bitcoin is relatively easier is in providing liquidity in the nations they are usually sent to - ones where banking infrastructure or exchange liquidity has not evolved to a point where they can be considered as a reliable alternative. The purpose of this document is to lay structure to a bank of the future. One that will not have a centralised authority holding custody of anyone's tokens and will solely be a service enabler that provides the UX elements of bringing services together. The bank in itself will profit from taking a cut of transactions sent to different services, but will at no point in time dip into the transactions with a fee of its own. It will also function round the clock, and be completely run on-chain with peer to peer elements where elements of cash transactions are needed. Balancing the distributed ecosystem on ethereum for transactions and relying on peer to peer exchange liquidity for token to cash transactions the system will combine a blend of new age tools and new business models to give a banking experience that will seem no different to the average user.

Core product

At its crux, the business will be an invoice/ payments management solution that allows individuals to take payments in any erc-20 tokens or dai. The system will be highly similar to Hiveage (hiveage.com) or Freshbooks in attracting users. Individuals will be able to (i) sign in, (ii) generate invoices with taxes attached and (iii) generate a payments link for its settlements. This link can then be used to generate a PDF of the invoice or emailed directly to the payee. The basic assumption here is that the payee will be using ethereum or dai already. In the future, with a complex blend of peer to peer exchange mechanisms, it can be made possible for the payee to settle in any of the payment instruments available on Localethereum (gift cards,wire transfer etc). However, for the purpose of this document we will restrain the scope of the payee to eth or dai based payments. The ethereum sent by the user will settle into an account that is attached to the user's profile on the platform. This ethereum wallet, will be used as a single stop for all transactions related to the accoutn and will be needed to sign off transactions related to the business. If an erc-20 token is sent, then a dex aggregrator like totle (app.totle.com) will be used to convert it first to eth and then to dai (using oasis.direct). Once the dai is received, it is maintained in the user's account as a balance in dollar terms unless the user decides to exchange the currency to INR. In the event that the user chooses to receive money in their native currency, this will be the flow of cash

1. Payee sends money in erc20 tokens (with a slight premium for exchange rates on dex's)

2. Money gets sent to a smart contract, that then auto converts the cash to eth (dai if the user didn't want to convert to bank transfer)

3. Eth sale listing made on the platform's p2p exchange (localetheruem.org or a regional exchange)

4. Eth in smart contract released once exchange in the p2p system is confirmed (recipient to release after $ hits the bank)

As complex as the entire process may seem, the whole thing takes less than 10 minutes currently. As sell side liquidity increases in each regional market for the platform, it could begin offering taking regional currencies and offering outward remittances too. Before sending regional currency, a cut of each transaction could be allocated towards making tax payments on the platform itself. Once this is accrued over the course of the year (tied up in smart contracts that lend on compound.finance, in exchange for interest rate), it could be released around the month of tax filing and be paid directly to the tax collection website of each regional country.

The end goal would be to create a user experience that allows individuals to generate invoices, and receive INR at the back end without realising the role tokens play.

Profit model

The business will have two fold challenges at all points in time.

To remain sufficiently decentralised to not become a single point of failure. This would mean the platform itself will have to be on a new age hosting solution (eg: IPFS)

To have sufficient liquidity across P2P exchange channels to wire large amounts of capital to different users

The core value proposition the platform would offer would be access to the invoicing system and the liquidity at the back end offered by the exchange itself. The invoicing system can be initially launched as a free service and then be built up to become a paid model for value added services. The exchange system itself will take no spreads but charge users a .5% on all deposits made into the system at the time of deposits (like LBTC currently). The market will determine the exchange rates at all points in time. However, in the case of clear lack of liquidity, the platform also has the incentive to become a market-maker that arbitrages with third party infrastructure (Eg; regional bitcoin exchanges) to provide INR deposits directly to the user's wallet. In other words, the platform's key sources of profit will come from

1. Becoming an invoicing platform (SaaS model) that focuses solely on invoices settling in tokens

2. Spreads from conversion to INR / regional currencies in markets with little liquidity

3. .5% of transactions made towards conversion

An additional source of revenue for the platform as it scales would be a profit / revenue split model with third party services. In order to provide this, the platform will have to evolve to become a one-stop fintech solution. An operating system of sorts for the decentralised finance world. The key idea here is that as supply side increases with an increasing number of users choosing to use the platform to convert their tokens and settle their invoices, they will need additional services ranging from good old fixed deposits models to active trading of assets. The platform can offer a suite of services in this regard

Lending - If the user decides to take eth exposure and hold on to it, but requires immediate regional currency. This is a problem in many of the developing economies. While DAI is a good way to go about it, there's challenges in the user experience currently. One way the platform can take advantage of this situation is through offering a loan in regional currencies while taking ethereum and using it to take a CDP on makerdao. The user will have the option of repaying it in regional currency (with a spread addition), and the platform will take the obligation of converting it back to dai and settling it with Makerdao to release the ethereum over time. The advantage here is that as the platform grows, regional liquidity for INR will be provided by individuals repaying their loans and that could be added to the P2P exchange. For instance, if a user (say gabru) has an invoice inbound being settled in Eth and wants INR, another user (say Sohail) sends INR directly to gabru. The platform takes the Eth and settles the CDP debt and releases it to Sohail (as he's repaid the INR amount with a premium) and books a cut of the eth in fees for the loan. This keeps the platform's exposure only to tokens while providing other users with regional loans and wires in INR

Fixed Deposits - If the platform grows to scale and users desire to keep aside a dollar/eth/INR amount for tax repayments or long term holds over the course of years, the platform can connect with dharma (dharma.io) or Compound (compound.finance) to take large scale loans that settle in dollar/eth/dai depending on the user's preference. The advantage here is that if the interest amount settles in eth and the principle is returned in dollars, users will have the benefit of taking eth exposure (in interest) and retaining their principle amounts. The interest here will be considerably low (3-4%) but the platform will be able to retain a 1% fee (.5% fee to the platform we loan to and .5% fee to the users) for the amount being deployed. At scale, even if the platform handles say $20 million in fixed deposits, it could convert to a ~200k in profit without additional cost overheads (all tx's to the compound/dharma system can be run by an API and no additional hires)

As the De-Fi stack grows in complexity, the "bank' can evolve from being an invoice system to being the operating system for regional banks around the world. Each connecting to different services, solely through APIs. Users will be willing to pay a fee for access (flat fee) or a cut of each transaction provided they do not have to juggle multiple platforms.

Conclusion

The key challenge with decentralised finance currently is that services are scattered across systems. Much like the early days of the web itself. A single platform that can curate these services and attract large enough users with a simple enough value proposition (invoicing and tax settlement) will be able to leapfrog traditional fintech platforms that are currently riddled with challenges in regulations. In addition, most de-fi systems, while ready for scale, struggle to find the users (supply side liquidity) they need to provide their validity. While tokens are revolutionary as an alternative financial system, the volatility has long kept users away from using these products. A single product that combines the speed, efficiency and advantages of tokens, while reducing the volatility expsoure and challenges in converting the tokens to regional currencies can therefore see viral growth much like Google did in indexing the web during a time most platforms struggled with discovery