It seems clear that Plaid’s revenue potential is only a (minimal) part of the reasons behind the acquisition: the 2x price/valuation is probably more justified by the desire to either protect the core business or keep competitors away from the new business.
Plaid in numbers:
💵 investments to date: $353.3M
💰 revenues: $150–250M
🤓 valuation prior to acquisition: $2.65B
🥳 acquired for: $5.3B (2x the previous valuation)
🤝 provides connection for 80% of the largest US FinTech apps
👨👨👦👦 200M accounts linked (115% CAGR since 2015)
👩💻 2,600 developers
#1: Plaid is facing risks (that Visa can solve)
A crucial component of Plaid’s business is the ability to get access to users’ bank accounts and scrape the data on behalf of 3rd-party apps. Thanks to this capability, users are offered an enhanced experience that materializes in transparency, easiness, financial advice, etc.
Two problems arise: 1) banks are complaining about the poor security of this practice and 2) users lose control of their data without realizing it.
Visa can leverage more solid relationships with bank partners, which can lead to the development of a safer authentication system / data acquisition system than what Plaid has built so far.
Despite some limitations, payment networks such as Visa and Mastercard are huge data aggregators as they store data of millions of transactions per day. The biggest limitation is that they only see (parts of) the transactions that happen within their network. Plaid acquisition would potentially enable Visa to see the rest of the picture in which Plaid is currently used by all those apps that reduce the need of Visa such as Venmo or Square Cash, as well as non-Visa transactions of a bank account.
Despite this is very tempting, Visa will have to be really careful because Plaid’s clients won’t be keen to let Visa see/use their data, hence creating the case for switching to Plaid’s competitors.
In the US, Plaid’s penetration in key FinTech verticals is between 2 and 7%. This represents a win-win situation for Visa: on one hand, Visa’s relationships will help Plaid sign more clients; on the other hand, Visa will expand its product offering and its addressable market.
Visa will also push Plaid’s expansion outside the US: in fact, there are ~15x more fintech users in International markets than in the US…and Plaid’s penetration in these markets is really low.
But the most interesting use case is the potential development of online payments. Visa is a middle-man, and its value lies on the ability of creating a standard for merchants and buyers to exchange digital money. While the card is a very practical tool in the offline world, especially with the advent of faster technologies such as contactless, it’s generally a strong friction point in the online commerce. That’s why companies such as PayPal, Venmo, Amazon, Visa itself are trying to simplify the process pre-saving the card and letting users pay through a simple authentication. A PISP (Payment Initiation Service Providers) is a 3rd party which enables a payment to be authenticated and paid directly out of a persons or businesses bank account rather than a debit or credit card. A company like Plaid strongly simplifies this process as it helps the user pay through her bank simply with username and password — an easier process than PayPal as there would be no need to create another account on top of the one the user already has with her main bank. The rise of a ‘Pay with your bank account’ system would allow merchants to save on credit card fees without creating any friction for the user, while also reducing the risks of credit card frauds. Plaid’s acquisition would give Visa enough visibility of the new trends, allowing the company to anticipate competitors’ moves while protecting the business model.
Last week we sponsored the DeFi Summit in London; 300 DeFi enthusiasts, developers, fund managers, investors, and founders got together at Imperial College to discuss the status and the development of Decentralized Finance. Cambrial and Semantic did a fantastic job in coordinating ~60 sessions across 4 rooms, with speakers and participants from all over the World.
This article is a highlight of my top takeaways from the conference as well as a recap of what we announced.
We announced our Open Finance Developer Kit
Oasis Labs and the Oasis Network can help expand adoption of DeFi and Open Finance. We believe that the next generation of Open Finance dApps will be powered by Privacy, Scalability, Composability, and Identity: we announced the launch of our new toolkit that will “empower developers to write dApps that keep data confidential while simplifying the integration of Open Finance protocols, primitives, and services”.
For those who missed the event, we recently published a blog post with our view.
The need for a privacy-preserving version of Compound or Fulcrum
Lending currently accounts for roughly 85% of the volume in DeFi (source: defipulse.com) and virtually all of it runs on Ethereum. This means that wallet address, function, amount, fees are all public.
But this leaves a big gap when you compare it to how traditional financial systems run efficiently — participation of institutions or individuals in a certain financial activity is intentionally considered highly confidential and hence kept private. Why should it not be the case in Open Finance?
As an example to show the relevancy of privacy, we proposed the architecture of the two most common function of a privacy-preserving version of Compound. In the current model (left side), the method (mint or borrow) and the amount (payload) are both publicly available. In the proposed model (right side), these pieces of information are encrypted and not revealed to the market.
The integration between DApps and wallets, powered by a user-friendly UI and guaranteed by the security provided by the integration at smart contract layer, is laying the foundation for a much better user experience. In particular, we recommend checking out what Argent, with its user-friendly and secure wallet, and Gnosis, with its multi-sig custodial wallet, are doing.
Security is concern #1 for investors: if I invest my money, I want to make sure I don’t loose it because of bugs, technical issues, or fraud. Given that investors can’t verify lines of code or sources of information such as oracles and auditing firms don’t have a strong reputation yet, insurance becomes extremely important to convince liquidity providers to route their investments to Open Finance products.
An interesting model has been proposed by Nexus Mutual: they advocate for the creation of a fund that covers against smart contract failure leveraging members contribution only and using it to establish validity of claims.
User verification and KYC are ways to prevent system attacks and comply with regulations. Onfido, an identity provider, is on a mission to make identity portable and it’s piloting an on-chain deployment to store all the cryptographics info to ensure the non-tampering of credentials and the secure communication between parties.
What still remains pending is how to ensure completeness of the user’s financial history. As we anticipated in our introductory article, identity also means completeness of the user’s financial history in order to create a reputation system that enables the shift from over-collateralization to under-collateralization.
As highlighted by the UMA protocol, a decentralized oracle must work in order to build truly decentralized and scalable financial smart contracts. Bridging on-chain and off-chain sources of data becomes an imperative to create real-world alike services in Open Finance.
The Provable team is working on making oracles easy to access, blockchain agnostic, and secure.
A very interesting point of view has been brought by the DappRadar team: in their view, gamers are the most obvious audience for Open Finance. The demographics of gamers (Millennials and Gen-Z) is the main reason behind their view: people in this age range are already used to digital tokens and it’s just a matter of time before these assets will become tradable on some markets: for instance, it will be possible to take a non-fungible token from a game, wrap it into a tradable token, and then use this token to buy more non-fungible tokens.
Although the conference highlighted a lot of excitement and positivity around the next steps in Open Finance, some questions remain open and top of mind for the audience. I captured some of them here in case they serve as an inspiration for future collaboration and research.
Is it really possible to build a truly decentralized financial system if contract owners can upgrade the contracts themselves?
For organizations that rely on a voting system, there is a need to create emergency programs. However, how can we trust users to vote in favor of solving a fallacy? If that decision needs to be validated, how can wait for, ie, 2 weeks for this to happen?
What are the compliance, stability, and scalability implications of bringing Open Finance to traditional institutions?
If we compose multiple protocols in an Open Finance dApp, whose responsibility is going to be if something goes wrong (ie, a bug in one protocol)?
New to Open Finance? Some resources you may find useful
Privacy is critical to mass adoption of Open Finance
How Oasis Labs and the Oasis network can help expand adoption of DeFi and Open Finance
Open Finance applications are primed to reinvent the financial system — pushing it towards a design that relies less on status, wealth, and geography and more on a set of programmable conditions that have the benefit of removing the subjectivity and bias that cause high costs, risks, and inefficiencies.
Note: given that Decentralized Finance (DeFi) is a generic term that signals a series of products that are meant to be accessible to everyone, the term Open Finance seems to better serve the mission.
In the last year alone, we witnessed how the first generation of Open Finance has provided the market with a huge number of protocols and primitives that are meant to support specific pieces of this new financial system: the ~$500 M currently locked in Open Finance, up from $1,400 in September ’17 (source), is a material signal that Open Finance is growing in attention and adoption.
But in order to truly overtake traditional financial systems, Open Finance needs to take significant steps to improve how it addresses privacy, scalability, composability, and identity. At Oasis Labs, we believe our platform has the unique characteristics required to solve these issues.
Over the past 3 months we’ve talked to 35+ companies in the Open Finance space, and the consistent feedback we’ve received is that the need for privacy and confidentiality is imminent and there is no viable platform out there at the moment, but a solution has yet to be developed to address this need. It’s fairly easy for example to expect consumers to demand that their banking transactions will be kept private, their wealth hidden from unauthorized parties, and their identity only available for specific calculations.
Compared to the traditional system, Open Finance is based on the idea that parameters (such as interest rates) are rebalanced in real time as a function of the new data (such as supply and demand): the ability to collect inputs from multiple sources, secretly compute over them, and release the output of the computation only will soon have terrific impact in segments such as decentralized exchanges, lending, trading, payments, scoring, and collateralization.
A few examples of how the Oasis Labs privacy-preserving development platform could be useful:
In Collateralized Lending, privacy can be an enabler: the privacy-preserving version of a Collateralized Debt Position (CDP) can keep transactions private from whoever is not involved in the transaction, protecting the information around the actual participation of a company or individual in a system, and preventing manipulation such as front-running.
In Dark Pools, privacy can be a game-changer: money managers can protect their trades from the orderbook, hence preventing the competition from copying the strategy or the trade price to move as a result of the incoming signal.
For Stablecoins, privacy can solve the traceability-fungibility problem: a private stablecoin would enable businesses to protect their interests and relationships, which is key to large-scale business adoption.
Confidentiality of computation will protect developers from compliance issues: with more power moving from legal agreements to lines of code, the execution of programs within a secure and private environment will protect developers against potential compliance problems because of the guarantee that the data is exposed only to whoever is granted access to it.
Despite some attempts, the current Open Finance environment is bounded by the performance of Ethereum, which compares really poorly to the traditional financial system (Ethereum currently supports ~15 transactions per second compared to, say, the 2,000 processed by Visa).
In a space where thousands of transactions are submitted each second for the reasons mentioned above we believe that Open Finance has an opportunity to do better than the ‘pending transaction’ of some current systems. Oasis Labs’ unique architecture improves scalability from both a throughput and complexity standpoint, allowing Open Finance applications to privately (if needed) compute complex transactions in real time.
Composability is at the center of Open Finance applications: thanks to the integrations on our Open Finance development platform, developers will easily be able to create applications that combine multiple protocols that work together as pieces of a puzzle.
An example could be a decentralized version of Wealthfront (the all-in-one solution that helps you earn more interest on your cash, get advice on how to manage your savings and automate your investments) that allows users to submit USDs, convert them into crypto, earn interest through Compound and DyDx, convert back to USDs and transfer principal+interest back to the main bank account.
Another important aspect of composability is the ability of moving liquidity across multiple protocols: borrowing a collateral on one platform, use the liquidity to open an interest-generating position somewhere else, move the position to the protocol who pays the highest interest rate, managing the entire process from a user-friendly interface that allows users to perhaps deposit fiat, convert it automatically into crypto and cash out back to fiat when done.
Oasis Labs wants to make this process as easy as possible for developers: our Open Finance platform will allow full portability of Ethereum-based applications. Additionally, we are partnering with the main protocols, primitives, and services to integrate existing capabilities in our development environment.
Identity & Reputation
The lack of an identity system that ensures completeness of the user’s financial history in addition to KYC and the high volatility of the market are the reasons behind the high over-collateralization of assets required by the Collateralized Lending protocols, which creates a high barrier for mainstream adoption.
A reputation system that is immune to Sybil attack needs identity to be tie in and hence processes involved need to be run privately and securely.
Despite the fact that we agree that proof of attestation is the first necessary step, our beliefs rotates around proceeding step-by-step on a path that leads to a reputation system: in our view, the attestation should be shared across 3rd parties to then verify how good the external verification is; this will allow the production of a metascore which will then be used to form a reputation system.
Just like every other building block, Identity needs to evolve to become decentralized and programmable: decentralized, as in user’s identity is curated via multiple sources and comes together to serve the user without compromising privacy.
Programmable in the sense that both users’ and developers can interact with identity just like they do for other software services.
Once Decentralization and Programmability are achieved, we would be able to create stronger identity systems that can provide reputation for individual users, that is impossible to achieve with current systems.
Given the fundamental role of privacy in the creation of a strong identity and reputation system, we are actively researching into how to augment existing solutions or to produce our own one.
It’s with a lot of excitement that Oasis Labs is approaching the next few months. From integrating multiple protocols to working with the main Open Finance dApps, we will be working to create the best possible development environment to enable developers to bring Open Finance closer and closer to mainstream adoption.
Work with us!
We are partnering with the main Wallets, Protocols, and other services to build the most comprehensive platform for Open Finance. If you are interested in making yours available or to leverage our platform to build your DApp please reach out to Luca at firstname.lastname@example.org.
New to Open Finance? Some resources you may find useful