In an investing context, Proof of Performance is a simple concept - can you prove to others, what your investing performance is. Can you back up your claim to your (no doubt) market beating returns?
Most people can't.
The world is a noisy place, full of people making grand claims. Some are genuine and some are not. So how does someone differentiate themselves and how does the world find those who can really deliver. It's not as simple as it first seems.
Our focus for Proof is for the 99%; those firms, funds or individuals who are outside the 1% - the 1% already face significant scrutiny such that their performance isn't really in question. There is little doubt over Berkshire Hathaway's performance, but there is plenty of doubt over almost everyone else outside that upper echelon.
We propose a simple framework of what constitutes proof of performance and how it applies to existing methods of performance verification.
To prove investment strategy performance, we propose the following framework with four attributes that must always be met.
| Immutable | Once provided, the proof can not be edited or deleted in any way. |
| Independently and publicly verifiable | The proof can be verified by anyone using publicly accessible data. No contact with the party providing the proof, nor any related party (such as an auditor) is required. |
| Real time | Financial markets work in real time. Proof must also be in real time. |
| Sequence of events over time | An investment strategy must consist of more than one event; a single trade or signal as an isolated event, whilst can be proven, does not prove performance over time, as part of a strategy. A sequence of related events, allows for proven aggregated performance. |
Let's take a look at a number of common ways in which strategy creators currently attempt to prove their strategies.
Using auditors is perhaps the most common way for firms to verify their results, however the analog nature of auditing is a very weak representation of performance and verification value is often based entirely on the auditor's name and reputation.
| Immutable | Data and reports provided by an auditor are not immutable. | Fail |
| Independently and publicly verifiable | Verification is provided by the auditor who must be trusted. Data can not be independently verified. | Fail |
| Real time | There is typically a lengthy delay (weeks or months) between the trades/signals and verification | Fail |
| Sequence of events over time | Performance is recorded as a series of trades over time | Pass |
| Immutable | Tweets can be edited or deleted by the author; they are not immutable. | Fail |
| Independently and publicly verifiable | As a centralized service, Twitter owns any data you send to it and is able to restrict your or anyone else's access to it at any point. The data contained in the tweet can not be precisely verified, nor is there any consistency across tweets to provide a common data structure that could provide a way to verify strategy performance: | Fail |
| Real time | Tweets can be posted in near real time | Pass |
| Sequence of events over time | Tweets are largely independent events. It is possible of course to create a chain of tweets by replying to a previous tweet but there is no enforcement of this sequence nor immutability, therefore the sequence can be easily broken at any point. | Fail |
| Immutable | While practically it is difficult for an author to modify data, the data is held by centralized parties and is therefore not immutable and requires trust in those parties not to modify the data and to represent it as it was intended. Those parties may restrict your or anyone else's access to it at any point. | Fail |
| Independently and publicly verifiable | Data is not publicly verifiable and requires the consent of centralized parties to grant access. | Fail |
| Real time | Trades or signals can be created in real time. | Pass |
| Sequence of events over time | Strategies can be created as a sequence of trades or ideas | Pass |
In summary, we challenge anyone to find an existing service or method of verifying investing performance that doesn't rely on a centralized party, which comes with the obvious risk of trusting that party.
Trust in analog systems such as people, companies, laws, compliance and regulation is simply not as good as decentralized and digital systems where the trust is not in people but in . This is the opportunity that Web3 provides.
Over time, there will be a variety of services offering different functionality, including our own of course, but Web3 services all have the potential to meet our Framework for Proof of investing performance.
| Immutable | The inherent design of blockchains provides the highest transparency with immutable data | Pass |
| Independently and publicly verifiable | The data, stored on public blockchains, is available to anyone to independently verify the details and to therefore be able to agree or contest the results. | Pass |
| Real time | Data submitted on-chain in near real time; time lag mitigated by signing data prior to submission | Pass |
| Sequence of events over time | Trades/ideas are chained together over time to provide a strategy meaningful data. | Pass |