Blockchain is more than just cryptocurrency — it’s transforming the entire financial industry. In this episode of The Agent of Wealth Podcast, host Marc Bautis is joined by Dan Averbukh, Founder of validityBase, which uses blockchain technology to help businesses create globally verifiable, highly credible data. Dan helps listeners understand the coming revolution in digital trust and the role blockchains and modern cryptography will play in transforming how companies do business in the digital age.
In this episode, you will learn:
- A simple, clear definition of blockchain and why it’s essential for ensuring digital trust in today’s interconnected world.
- The challenges businesses and investment managers face in establishing a verifiable financial track record and how blockchain addresses these issues.
- How blockchain secures vulnerable financial data and creates more transparency and reliability in the digital economy.
- Common misconceptions about blockchain and why understanding its true potential is key to leveraging its power.
- And more!
This episode will give you a deeper understanding of how blockchain is shaping the future of finance and why digital trust will be a cornerstone of the financial world in years to come.
Resources:
validityBase | app.vbase.com | Bautis Financial: 8 Hillside Ave, Suite LL1 Montclair, New Jersey 07042 (862) 205-5000 | Schedule an Introductory Call
Disclosure: The transcript below has been edited for clarity and content. It is not a direct transcription of the full episode, which can be listened to above.
Welcome back to The Agent of Wealth. This is your host, Marc Bautis. In today’s episode, we’re diving into a topic that’s shaping the future of finance.
Blockchain technology has been making waves for years, but we’re now starting to see its true potential to revolutionize how businesses operate, how transactions are verified, and how we build trust in a world that’s increasingly virtual
To help us understand this transformation, I’m joined by Dan Averbukh, an entrepreneur with a deep background in investment finance and blockchain technology. Dan is the Founder of validityBase, a company that leverages blockchain to help businesses create globally verifiable and highly credible data.
Whether you’re a finance professional, a tech enthusiast, or simply curious about how blockchain might impact your world, this is an episode you don’t want to miss.
Dan, welcome to the show!
Hi, Marc. Thank you for having me. It’s an honor to be here. I appreciate it.
Dan, blockchain has become a buzzword in recent years, but it means different things to different people. Can you give us a clear, simple definition of blockchain and explain why it’s so important to digital trust?
Well, I can try. So I want to start by going through why blockchains are valuable in general. It’s kind of a buzz term that gets thrown around quite a bit, and I think oftentimes it gets lost even among people in the industry of what is the value that blockchains bring to the world and bring to the specific applications where people are trying to use blockchains to develop better systems. So I think from my perspective, the most important and most valuable element of a blockchain is that it’s a database that has a known set of rules for how entries get added to the database, and it is easy to see and check very quickly whether any database entry that was put in followed the rules of the database. And what’s beautiful about that is that it means that it’s a database that has no one administrator, no one entity setting the rules, and also meaning that nobody can easily change the rules or can change the rules in a way that isn’t easily detectable.
And that element drives a lot of the benefits of blockchain technology. So because it’s this highly transparent rule-based, a blockchain is very interoperable, and I’ll explain what I mean by that. It’s also a bit of a buzzword, but what I mean by that is let’s say I start a company and I, let’s call that company Facebook and I say, Hey, put your identity with me. Make an account with me Facebook, and then you can use your Facebook account all over the internet to establish who you are and your reputation and where you came from and what you like to talk about and think about, et cetera. Well, that that’s great. Kind of works. And that’s the system that we have today. As long as you’re willing to play by Facebook’s rules. So if Facebook says, Hey, I’d like to change a little bit about how my API works, I want to change the specifications a little bit, you need to build your applications like this instead of like that.
Or if Facebook says, from now on, if you want to use your identity in this particular way or that particular way, we’re going to actually charge you $5 or $10 per click. There’s not that much that you can do about it because at the end of the day, it’s Facebook’s database and Facebook decides how your information that their database gets used and how other people are able to interoperate with that database. So a blockchain is a way of creating a database that’s useful in a lot of the same ways as that Facebook database is, but without a centralized entity being able to make arbitrary decisions around changing the rules or controlling access to your own data, which means that it’s very easy for developers to build applications on top of a blockchain relative to a centralized system because the rules of the road for building an application are predictable.
You’re not getting constantly changing specifications, and it also means that there’s no bureaucracy, there’s no complexity around onboarding. You set up with a digital wallet and off you go, you’re able to access a lot of the applications that are available on blockchain. So that’s kind of one important component. The second important component, and I’ve already kind of started going down this road, is there’s no single administrator that can change the rules, which means there’s no single point of failure, there’s no one computer system or one entity going bankrupt that stops you from having access to your data, from being able to use a particular application. Your tokens as recorded in a blockchain database are yours. They’re not Facebook’s to tell you what to do with they wish, and that also means that there’s no toll collector, there’s no company out there whose shareholders say to the CEO, if you don’t extract the maximum possible value from these users, we’re going to you and find somebody who will, because there is no central CEO, there’s no one entity that controls that database. So that’s kind of the overall picture of why a blockchain is valuable and why it enables some useful applications and some useful properties of applications that really aren’t possible using only centralized systems.
Can you then I guess go down, let’s take another step down and maybe go through an example of how blockchain is being used using some of the terms that you used, rules, tokens, applications, things like that. And we can kind of go down from, I guess, abstract to go into a little bit more specifics and maybe it’ll help us understand how it’s actually utilized.
Yeah, yeah, of course. Yeah, I was maybe at 20,000 feet there. So one example is something that my company’s working on. So my company is validity based. We started about two years ago, and the motivating problem for my company is I was running an investment fund. I was doing systematic trading in cryptocurrencies and blockchain based products, and as the fund grew and as the assets of the fund grew, I had people coming to me and saying, Hey, I have this trading strategy that’s been really successful, that’s been making a lot of money. Would you like to seed me with some of your funds assets or would you like to hire me effectively as a portfolio manager within your fund? Here’s a spreadsheet that shows you all the different trades I’ve done and how profitable they’ve been. And the problem I kept running into facing that discussion is, well, on this spreadsheet, it does look like a very profitable strategy you’ve presented to me, but how do I know that all of those trades on the spreadsheet actually happened?
When you say they did, and how do I know that the best trade, sorry, the worst trade’s not missing for some reason, or maybe that you started the spreadsheet at a particularly opportune time and just before you started the spreadsheet, there were some trades out there that weren’t particularly profitable. And so I started thinking about, well, how would you figure out that the data that somebody presents to you that they created somewhere else is actually the data that they created at that point in time that they claimed they did? And I realized, I mean, I was in the blockchain space, so for me, this was kind of already close, but I realized that hey, a blockchain is actually the perfect vehicle for communicating this source of data for when data was created and who created it. And so what we went into business to do is to say, well, if you’re generating a financial track record and you want people to believe that the track record that you have is really the track record that you would’ve had, that you would’ve given to them had you been managing their money or had they been following you all along, there’s no really good way to do that today without very expensive audits and third parties.
And a blockchain is a way to do that in a highly automated fashion where you can post a fingerprint of your data to a blockchain. That information gets timestamped in this decentralized, no third party, no centralized administrator kind of way. And then years later, anybody can use that single source of truth to see that, yeah, hey, I made these exact trades or I put on these exact positions at the time when I did, and there’s no way for me to have falsified when these decisions took place.
Kind of further that example, let’s say I’m that fund manager and I do I want to put my data on there so that it can be verified or utilized? What kind of controls do I have of it once it goes onto the blockchain? Can I say that this person can see it but no one else can? Or is it out there for everyone to see?
Yeah, so what’s kind of cool about how we set things up, and this is a general principle behind a lot of the people building on blockchains, is we don’t actually put the data itself in a public place on a blockchain for multiple reasons. One is that sensitive information, you don’t want that sitting publicly. And second is because blockchains are actually, because they’re these distributed ledgers with lots and lots of copies sitting externally to the system, it’s a very expensive place to put data. So we don’t put the data itself there. We put a fingerprint of the data. So imagine a 256 bit code that uniquely represents any particular portfolio that you have or any particular data that you have that goes on a blockchain, and that code can’t be used to reproduce the original data. So really all you’re doing is you’re putting a fingerprint of your information on chain, and then later on when you want to show someone, Hey, I had this portfolio three months ago and I can’t possibly make that up or falsify that, you can point to that fingerprint and by showing the original data to let’s say a capital allocator or a verifier, you can show this is the information whose fingerprint I put on chain at this particular time.
Who is the main target? I mean, do the big financial institutions, are they moving towards using blockchain for this type, same type or whoever’s doing tons of transactions, or is it more for a smaller institution that it might be applicable to?
Yeah, so in our case, the person to whom we add the most value and is the person who has the least credibility. So if you are a Chinese genius who generates an amazing trading strategy in your garage and you want to go out and try to raise money for your strategy, you’re going to have a very difficult time getting people to believe that the strategy and the trades that you’re presenting them are really the trades that you did. People are going to be highly suspicious of the data that you put in front of them. Our technology allows you to prove in a cryptographic mathematical sense that the trades you had and the trading strategy you put together is really the trading strategy you had. And so that’s to whom we add the most value. So that’s kind of a stylized example. I would say anybody who is thinking about starting a financial business, who’s thinking about launching a financial product and wants to create a track record for that product is a target for what we’re doing because the alternatives are really expensive.
It’s kind of getting audits which cost somewhere around the order of $20,000 plus per strategy per year, or building financial indices which have a similar order of magnitude of cost. So if you’re looking to create a credible track record for yourself without spending tens or hundreds of thousands of dollars, we’re a great solution for you. For more established companies, let’s say you have an audit for what you’re doing for your track record. I mean your listeners are financial, so I think they’ll kind of appreciate chunks of this, that an audit really only verifies the income statement and the balance sheet of a fund. So it verifies whether a fund made money, but if you’re making a decision about whether to invest in a fund, one of the most important things you want to do is figure out how a fund made money and whether it’s going to be able to continue to make money in the future based on its methodology and based on the reproducibility of what the fund does. And for that, you need to know more than just the income statement of the balance sheet. You need to know, well, what kind of risks was the fund taking? How did those risk exposures change over time? Was there a lot of concentration, the risks, et cetera, et cetera. And so our technology allows that to be communicated again in this kind of cryptographically verified, mathematically verified way from the fund manager to the capital allocator. So that’s kind of what the larger funds would want to use us for.
Is that something that the fund has to set up once they start working with you, some of those additional things than just the income statement and the balance sheet? Or does that happen automatically or come out of the box from your product?
Yeah, it kind of happens automatically. So a fund basically stamps its positions, and what I mean by that is it creates a cryptographic fingerprint of what those positions were to particular point in time and then uses our technology to publish that fingerprint. And then using the accumulated set of those fingerprints over time, we are able to reconstruct the fund’s track record and then also calculate all the associated portfolio metrics, risk analytics, et cetera, about the funds trading and positions.
Not even sure what the requirements are, but regulatory requirements for a fund in terms of being able to promote its performance. And like you mentioned the audits, and I don’t even know if that satisfies and allows them to do that, but how does validity base come into play with respect to appeasing the SEC or any other regulatory body that’s involved?
So that’s a very complicated question, which depends a lot on the nature of the vehicle and who it’s being marketed to, but in general, in general, the SEC’s, the SEC’s approach is reasonably practical saying you need to create a record of what you did that is true to the underlying economic substance and verifiable in the future. And our technology is a shining example of that. So it’s much better than what’s available for many people today, including for people that have audited track records in a lot of cases. But the specifics may vary depending on is it a publicly traded product like an ETF, is it a hedge fund, meaning your marketing only accredited investors? So it’s a little bit up to the fund sponsor or the product sponsor to know how those rules apply directly to them.
And what about the type of fund? Is there a special or different type that makes more sense to put their transactions in the blockchain versus others versus if one fund is just trading listed products versus one that’s trading digital currencies or cryptocurrencies, does one make more sense to utilize what based than others?
Yeah, so the ones that make the most sense, the ones that work best are those that have publicly available price data. So cryptocurrencies work well, equities work well, options work well, bonds work, but not quite as well because that data is a little bit harder to come by and a little bit more scattered and kind of fragmented things that are illiquid and don’t have publicly available prices like private equity and venture capital. It really doesn’t work because at the end of the day you need a third party source of price information for those kind of portfolios representations to actually mean something to somebody in the future.
I guess going back to the structure of how this works on blockchain, let’s say I’m making a trade, how does that data then get onto the blockchain? Am I pushing it there? Are you hooked into, is validity base hooked into wherever that transaction happened at or what’s kind of the structure of the transaction?
So it very much depends on the environment that somebody’s trading in. So some folks are pushing their portfolio to us on a hourly basis, on a daily basis. So it’s basically ticker away, ticker away ticker weight on an hourly basis or a daily basis. We also are integrated with alpaca the brokerage and are in the process of integrating with interactive brokers. Somebody who’s using interactive brokers to trade can just put in their API key into the validity base interface, and then interactive brokers will push their trades and their positions to us. We create that fingerprint information that I mentioned to you and then publish that fingerprint and then store the portfolio positions and make all of that accessible to an allocator or a potential investor down the road.
What are some of the, I guess there’s skeptics and everything, but I’m sure you hear skeptics on utilizing blockchain. What are some of the misconceptions that you hear people push back on implementing it or utilizing it?
So one is what you mentioned around not wanting their information to live publicly, to be publicly available, and I see that as a misconception because all of the internet traffic that people do these days and with your bank, et cetera, it’s all based on these same cryptographic signatures where you put in your bank account information and your login and password, you hash it or you encrypt it and then you send it in open form that fingerprint information over the internet. So it’s just that information that ends up living on chain and not the actual portfolio information or the sensitive private information itself. Another kind of piece of misconception, so one of our big marketing points is that we are, because we use a blockchain to store this information, we are able to make it fully verifiable for a potential investor or for somebody who’s looking to allocate capital to funds, what was the strategy that somebody ran?
What was the performance of that strategy, as well as how many strategies did that person or company run? Because if you’re seeing the best strategy out of a thousand, you be a little bit more skeptical about what you’re seeing than if you’re seeing the best strategy out of one or out of two. And actually there’s a bit of a saying among capital allocators that you’ve never seen a bad back test, and every SMA you see the results for is the best SMA that that manager was managing. So we actually solved that problem because thanks to the transparency and auditability of blockchain records, you can see all the strategies that a particular person or a particular company stamped using our technology, and so you can actually see was this the best out of two or the best out of a thousand? A lot of people think, oh, you can still game this system because you can make a thousand different accounts and put one strategy in each, but that would actually be immediately visible and transparent using thanks to the nature of blockchain technology and how transparent and audible it is in how we tie identity to your blockchain identity.
You started off by talking about a spreadsheet and kind of how there’s really no credibility in the spreadsheet, but could the same instance happen with blockchain where as the fund manager, I make sure that just my good trades make it up to the blockchain and my bad ones don’t make it up there?
That’s a great question. The reason why that can’t happen using our technology in particular and blockchain, the blockchain, what blockchain technology adds to this and to make it tamper proof is a timestamp that cannot be altered after the fact and cannot be faked. So when I put a set of positions or trades into kind of stamp ’em with valid validity base or stamp ’em on blockchain, the time at which those positions existed and took place is this kind of decentralized, tamper-proof, auditable timestamp for the information, and that means that you can’t really put a better version of the information then you have at that point in time, if that makes sense to you. So if at 2:00 PM you own Google, put that you own Google, that’s your best bet, you don’t know what’s going to happen at two 30, and so you can’t use the information from the future to inform what you put and what you stamp on blockchain in the past.
What are some of the trends you see coming up in terms of utilizing how companies or how financial institutions are going to utilize blockchain in the future?
So I’ve been kind of going deep on what we’re working on, and this is in the area of digital trust. So we see a lot of other applications within digital trust because if you think about, for example, experimental results, if I run a medical experiment and then I want to raise money based on the results of that experiment, it has a lot of the same properties whereby it’s really important for the people publishing your paper or the people funding your research to know, did you drop the worst result or did you show every observation that came out from your digital imaging machine? So that’s kind one example.
Sensor data kind of works the same way. There’s a broader set of applications for blockchain technology as well, and I want to make sure I get to those as well. So within financial settlement, you’ve probably seen a lot of exchanges and some of the major asset managers talking about blockchains as having a major role within how financial settlement takes place. And you can think of these as instantiations of the same problem. So when I trade a stock on NASDAQ or na e, it actually takes to take two days. Now it takes one day to settle, but why should it, I mean, these are automated systems where it’s just bits and bytes hitting computer systems almost instantaneously. Why does it take a full day for these stocks to clear and for the money to exchange for the stocks in my account? Well, the issue is that it’s not one system.
There’s a lot of systems and all these different systems have to talk to each other, and when these systems talk to each other, someone has to oversee to make sure that the synchronization of the data between these systems is correct and being correctly propagated to each system. And each system has an administrator and that administrator can put incorrect information in either by accident or maliciously. And so a blockchain could play a big role in accelerating the pace of financial settlement and moving it from t plus one to instantaneous by creating a single source of truth that all of these different systems can rely on and creating a known set of rules that all of the different actors in the financial system can trust for when an entry around a particular stock or around a particular transaction enters into one of these stock ledgers or databases and cryptocurrencies are just one particular example of that. It’s a cryptocurrency or a stable coin or a token that moves from point A to point B and gets recorded in a single source of truth on a blockchain that a bunch of different applications then rely on to say, yep, this is what happened. I know that this happened because this is a fully transparent auditable database with a known set of rules and with a fully predictable set of rules
To get to that point. Use the example of settlement going from t plus one to instantaneous. Who has to get on board? Is it every financial institution? Is it the government that has to, and is that something that, is there any movement towards that or is it kind of plotting along?
I would say both. There’s a lot of movement towards it and it’s blotting along. The fundamental issue with financial settlement is that the financial system is so complex and it’s so important and there’s so many different stakeholders, and frankly, there’s so many different rules and rule bodies that need to buy in to any major changes that while it seems clear to me that 20, 30, 40 years from now financial settlement will happen on blockchains and you’re even getting the big regulators talking about it, you’re getting BlackRock building a lot of their backend starting to build a lot of their backend systems on it. Vanguard has been experimenting with it, so you’re getting some of the very biggest players in the industry starting to work with these systems and starting to transition towards them to make a wholesale change in the financial settlement infrastructure in something that frankly works. I mean, t plus one is annoying, but it’s only one day that you have to wait, so you really don’t want to throw out the baby with the bath water and break it in the interest of making a instantaneous settlement. So I think it’s going to be a highly gradual process where everybody has to get comfortable, regulators have to get comfortable, and a lot of these deeply entrenched processes will change, but they’re not going to change very quickly.
I guess one area where if you talk about trust and credibility, where this could probably help is with voting and getting our elections through blockchain. I know, but that’s probably another, I don’t, probably not as big as the financial entire financial world getting on it, but that’s definitely some area that sounds like it would be able to benefit from it.
And a lot of people are voting working on these voting applications. I’m less familiar with them, so I don’t want to go kind of too far off piece, but one of the big areas that’s kind of an area of development within blockchain and also an area of strength within blockchain is developing the idea of digital identity. So how do I know that who is behind a particular blockchain wallet or who is behind a particular digital transaction? Who is the person that represents those transactions? Tying that to some sort of offline identity or some sort of social identity is a big area of development and a big area that a lot of venture capital is going to fund because to unlock some of the applications like voting, you kind of need to tie the person to the online and to the on chain action that takes place.
Yeah, makes sense. Alright, Dan, that’s all the questions I have for you today. I want to thank you for sharing your insights on blockchain and digital trust. It’s clear that it’s not just a buzzword and that it will definitely have a big impact on businesses, financial institutions, and the future of how we build trust in the digital world. Before we go, how best can our listeners learn more about your work at Validity Base and get in touch with you?
Our website is vbase.com. We have a contact page there, and your listeners can also play around with our blockchain application with just an email and password at app.vbase.com.
Great. We’ll include those in the resources section of the show notes. Thanks again, Dan. And thank you to everyone who tuned into today’s episode. Don’t forget to follow The Agent of Wealth on the platform you listen from and leave us a review of the show. We are currently accepting new clients, if you’d like to schedule a 1-on-1 consultation with our advisors, please do so below.
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