The Role of Quantum Computing in the Age of Exponential Finance Driven by Digital Assets

The Role of Quantum Computing in the Age of Exponential Finance Driven by Digital Assets

Introduction

The motivation behind this article stems from my attempt to understand the capabilities of current technologies that have been employed in building and running existing financial systems and the envisioned future financial infrastructure with digital asset instruments, including but not limited to cryptocurrencies, digital fiat, and various types of non-fungible tokens (NFTs). I have found the best way to understand a complex system is to simplify it to common building blocks and employ systems thinking to assess the strengths and weaknesses of the system. I have attempted to do the same with financial systems. As I envision the future of finance and technologies that help build and run the emerging financial infrastructure, it is not just cheaper, faster, and better but also resilient, secure, and paving the way for a much more inclusive system that fosters innovation and participation. It also is not simply based on the limitations of regulatory moats and business models that rely on collecting rent in the form of fees.

I have found that applying financial disciplines as a prescribed approach to a financial institution's technology design and subsequent modernization stems from the very constructs of financial primitives that include borrowing, lending, collateralization, and investments that are native to financial services. The idea is to invest in the digital vision's long-term architecture design imperatives while reducing the technical debt of inflexible and monolithic design. Think of financial disciplines as core building blocks that power the modern financial market structure, which is essentially a chain of interconnected market participants that aid in accumulating capital and forming investment resources. These disciplines include liquidity management, analytics and forecasting, risk and resiliency, financial crimes analysis, payment systems, and the IT infrastructure that supports the financial market. The entire set of simple and complex financial products devised relies on these disciplines.

Employing a financial discipline-based architecture design not only enables flexible and reusable data and business services assimilation, but it also?forces the critical linkages that the financial systems possess, thereby enabling a separation of concern and decoupled design while preserving the architectural independence of the systems.?These disciplines can be thought of as an abstraction layer that addresses the internals of various interconnected systems. It also adds a technology domain and provides a discipline-led lens to technology advancements. This approach allows for a meaningful way to look at disciplines and impact the much-needed changes in the financial system. Tightly coupled designs pose scalability challenges or eventually lead to shifting the problem focus onto an adjacent but linked system. This enables design malleability with disruptive and niche innovations, in the mid-term and long-term, respectively.

The advent of digital asset-related technologies, such as blockchain, data analytics, and AI, aims to address 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 and 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 our ability to detect and prevent financial crimes for a secure and resilient financial system. I am not sure that the current technology stack and infrastructure can support this newly envisioned financial infrastructure driven by digital assets and may need both vision and significant investment of capital and acumen. In this article, I focus on quantum computing not only to solve computationally challenging problems such as portfolio optimization, asset pricing, and financial markets analysis but also as a core foundational technology around security and cryptography that secures conduits of the infrastructure that facilitate the mobility of financial instruments. For instance, quantum algorithms, such as Shor’s algorithm, can potentially break widely used cryptographic protocols and algorithms that rely on the computational difficulty of factoring large numbers, motivating the need for quantum-resistant quantum 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 in the verification and validation system of transactions and provenance link ability.

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Exponential Finance

The term “exponential finance” gained prominence during an event held by Singularity University and referred to leveraging exponential technologies and innovation to transform the financial industry. Exponential finance in the context of this article regards hyper-financialization with the introduction of tokenized assets and new asset classes that are introduced due to the evolutionary emergence of Web3.0 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 or de-novo market infrastructure participants, they will hit the limitations of existing technologies and result in an asset movement velocity mismatch.

Our identity, which is certain, deterministic, and applied with non-repudiation, is represented by an avatar (or other AR/VR 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 Web3.0-induced markets and financial system. Our avatars that represent us may interact with various universes and their value systems, and we preserve the right and ability to monetize our data, effort, talent, and all the value they generate. And as our representation traverses through various modalities, let’s say our avatars from VR to in-game representation, we can use things we value and apply them to an economic and value system of our choosing. The vision and foundation of metaverse success relies upon a capability to be seamlessly interoperative and transfer value (tokenized or other such semantic web constructs) across universes supported by Layer1 and Layer2 networks, all to support the interactive modality. This is how I see Web3.0-induced financial systems or metaverse defined. So, we have a lot of work to do, and we should look at the commercial aspects of the metaverse and how it is monetized today and presents an opportunity to conduct business tomorrow. And we need a robust, secure, and resilient infrastructure that allows us to transact and supports the business avenues that come with hyper-financialization, resulting in velocity and veracity of data it creates.

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Application of Quantum Technology in Decentralized Ecosystems

I have been looking into quantum computing – the technology fundamentals and computational imperatives – to understand its transformational and disruption potential and the applicability of this new compute model. I confess it took me eight months to make a shift from physics to computing, and I still have a long way to go. With that disclaimer out of the way, let’s discuss basics to set the stage. (I will keep this simple for broader understanding and brevity.)

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A.??A qubit is a minimum amount of processable information analogous to a bit in classical computing.

B.???Two crucial properties that make quantum computing powerful and special are superposition and entanglement. These two properties lend themselves to the ability to perform parallel computation at scale and state representation.

C.???There are various types of quantum computing models – most notably digital (quantum) annealing and universal quantum computing. Massive parallel processing and ASIC development provide an alternative but fall short in both capability and economics.

D.??Classical computing is based on binary operations (such as NOT and AND). These are non-reversible, whereas in contrast quantum evolution is reversible. While this is an important distinction to achieve parallel computation at scale with various state representations, most applications will need both classical computing and quantum computing.

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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 risks (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), and 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 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 Web3.0-induced markets and financial systems with wallets and private keys as avenues to claim asset and process transactions.

The compute infrastructure needed to support the imperatives of exponential finance includes compute (quantum, GPU, TrueNorth, etc.), storage (SSD, Filestore, IPFS, etc.), and interconnect (dark fiber, InfiniBand, etc.).

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Perspectives

I 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. I define this 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 Web3.0 and the ownership economic constructs it proposes. I focus on quantum computing not only to solve computationally challenging problems such as a portfolio optimization, asset pricing, and financial markets analysis, but also as core foundational technologies around security and cryptography that secure our infrastructure conduits and the emerging digital asset infrastructure with embedded cryptography in the verification and validation system of transactions and provenance link ability.

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References:

1.????Javier Gonzalez-Conde, et al. “Simulating option price dynamics with exponential quantum speedup.” https://arxiv.org/pdf/2101.04023.pdf

2.????Román Orús. “Quantum computing for finance: Overview and prospects.” https://www.sciencedirect.com/science/article/pii/S2405428318300571

3.????Daniel J. Egger, et al. “Quantum Computing for Finance: State of the Art and Future Prospects.” https://arxiv.org/abs/2006.14510

4.????Nitin Gaur. “The crypto industry needs a crypto capital market structure.” https://cointelegraph.com/news/the-crypto-industry-needs-a-crypto-capital-market-structure

5.????Nitin Gaur. “Asset Tokenization: Systemic Shift from Digitization to Tokenization of Financial Services.” https://www.dhirubhai.net/pulse/asset-tokenization-systemic-shift-from-digitization-financial-gaur

6.????Nitin Gaur. “DAOs are the foundation of Web3, the creator economy and the future of work.” https://cointelegraph.com/news/daos-are-the-foundation-of-web3-the-creator-economy-and-the-future-of-work