How Blockchain is Evolving the Way We Understand and Deal With Market Inefficiencies

Written by Drew Mailen

On October 21, 2021

The paradigm of Moneyball transformed the 2002 Oakland A’s ability to identify under-valued assets. In other words, the A’s were able to seize an incongruence between the price of an asset and how much the market valued that asset. Billy Beane was able to gain a better understanding of player value through an improved analysis of data like on-base percentage that was, at the time, undervalued by other teams. 

Similarly in the world of finance, instances when the market value is mismatched from market price it is known as a market inefficiency. Markets stop being efficient when the market’s price no longer represents all of the information available for its value.  

Being an early adopter and innovator at identifying market inefficiencies can lead to exponential success. However, success comes down to accessing high-quality data early on, which is an issue for funds and financial institutions, but a pursuit that is worthwhile. 

Due to issues such as data quality and information asymmetry, there is significant room for improvement in the way that market inefficiencies are identified and thus taken acted upon. Some of the world’s wealthiest financial institutions are using blockchain to improve their overall data processing and the way they address inefficiencies. As communication between the real world and blockchain increases, and as off-chain logic is more efficiently fed to on-chain protocols, data quality needs to improve in both accuracy and speed. 

The integration of blockchain and market inefficiencies serves as sort of a catch-22 but really a win-win situation for financial institutions. On one hand, blockchain technology can help improve or even solve some inefficiencies within the market, however, on the other hand, the same technology can help identify those same inefficiencies so that funds can take better advantage of them. It’s not that all market inefficiencies will go away any time soon… but the way we understand those inefficiencies is evolving. 

What are Examples of Market Inefficiencies?

A market inefficiency is defined as when an asset’s price is not representative of an asset’s value. The identification of market inefficiencies is desirable to any eager analyst because market inefficiencies may be taken advantage of and money can be made. Identifying and reacting to quality data indicative of market inefficiencies is important to a fund’s success.

Some examples of market inefficiencies include:  

  • Bargain Pricing 
  • Monopolies 
  • Higher Than Normal Government Purchasing of Assets 
  • Inflation 
  • Asymmetric Information Distribution 
  • Uncertain Ownership of Products or Property 
Blockchain is Used to Improve and Detect Market Efficiencies 

Market inefficiencies are most easily identified through high-quality data. Early access to high-quality data is crucial to a fund’s success, whether that be quickly recognizing a company’s recent blunder or perceiving that investors are overreacting to a relatively inconsequential news story. 

Blockchain technology can seriously help the way that high-quality data is received, recorded, secured, and processed. As the World Economic Forum has forecasted, by 2025, up to 10% of the global GDP will be stored on the blockchain. Setting aside the roughly $2.5 trillion dollar market cap that cryptocurrency has as of the time of this publication, the amount of spending on blockchain technology is estimated to be $6.6 billion in 2021 alone, increasing year-over-year by 50% (IDC). 

It’s no surprise why some of the world’s largest financial institutions are spending billions of dollars on blockchain annually. About half of China’s 26 registered banks have adopted blockchain, meanwhile, US banks are also ramping up on spending in the industry: 

  • JP Morgan: Built an Interbank Information Network powered by blockchain in addition to developing a feature for real-time transaction information. 
  • Goldman Sachs: The bank’s CEO, David Solomon, says that Goldman will be using blockchain to lower its costs and improve client access. 
  • Bank of America: Alongside JP Morgan, has about a $10B blockchain spending budget. 

This is where the Catch-22 comes in. While these financial institutions are spending money on blockchain to understand the market inefficiencies, DeFi can improve market efficiencies (Goldman Sachs): 

  • Enhanced Liquidity Management 
  • Balance Between Privacy for Investors but Transparency Over Numbers
  • Extended Market Hours 
  • Atomic Settlement 
  • Reduction in risks (counterparty, operational, and transaction settlement)
  • Automated Corporate Actions 

Read about how blockchain can be used to solve the modern-day data demands for fund administrators. 

How Blockchain Can Improve Market Data Quality 

Accumulate improves how real-world data is integrated onto the blockchain. Hence, Accumulate can improve a fund’s ability to decide at the moment that it counts. Our protocol is built around the concept of data ownership by identity-based URLs. Since URLs already permeate the internet, this makes oracle creation easier, thus off-chain data is more effectively fed on-chain. 

Accumulate improves the quality of real-world data integration on-chain through a modern semantic framework based on the latest Web 3.0 technology. 

Conclusion

Access to data that helps identify mismatches between a price and market value is of tremendous benefit to everyone from fund managers to professional sports coaches. Any competitive advantage that you can hold over your industry can serve as a substantial return. 

Blockchain will continue to evolve the way we deal with market inefficiencies by both thwarting some inefficiencies but also improving the way we understand and deal with others. Accumulate is changing the way real-world data is integrated on-chain.  

Read about how blockchain can be used to solve the modern-day data demands for fund administrators. 

Related Articles

0 Comments

Submit a Comment

Your email address will not be published. Required fields are marked *