Last week ShapeShift announced Prism: “The world’s first trustless asset portfolio platform”. This new product is very interesting for those of us who are interested in investment products in the crypto-currency investment space.

Prism allows for users to create a “fund” of different crypto assets and be able to profit off the increase in price, similar to how a portfolio of the underlying asset prices increase. The funds are held in a smart contract using Ether as the collateral.

How does it work?

Prism uses a type of smart contract called a “Contract for Difference” or CFD. This allows a two users to create a “bet” on a future price of an asset. Both users lock in an equal amount of ETH as collateral, and when the Prism is closed, each user can withdraw an amount of ETH depending on which side of the bet they took.

CFD Example

In Prism’s use case the future price is determined by the underlying assets referenced in the contract. If the asset prices went up, then the user who created the Prism can withdraw more than they initially put in, in correlation to how much the asset prices increased. If the prices went down, the user who created the Prism can only withdraw less than they put in, letting ShapeShift keep the rest.

With Prism, the prices of the underlying assets are determined by an “Oracle” that publishes the prices to the Ethereum blockchain. From the documentation on the website, it looks as if the prices are published approximately every 30 minutes.

Prism Price Oracle

For now, ShapeShift is taking the opposite side of the bets with users in the CFD and charging fees to offset the lock up of capital. They mention that they are hedging the prices of the underlying assets out of band, so theoretically they will not lose money, no matter how the prices fluctuate.

The Negatives

The main negative about the platform looks like it is the fees. They charge a 1% maintenance fee per month for each Prism. This is equivalent to an APR of approximately 11% (thanks George Reith for pointing this out). This is quite high, and you could probably get a lower rate on a credit card and buy the underlying assets yourself. Also, there is a closing fee of 2.4% when you want to sell your Prism and get your money back, as well as a re-balancing fee of .5%.

If you wanted to create a Prism with $1,000 USD, re-balance it on a monthly basis, and close it out at the end of one year, it will eat up approx $160 of your initial investment.

Another negative may be the centralization aspect of needing to trust the price feed oracle coming from ShapeShift. If they wanted to steal money from users, they could send incorrectly low price feeds from the oracle and prevent users from withdrawing the ETH that they are entitled to. As of now, ShapeShift is a respectable company with a good reputation, so this is not too much of a worry, but it is not a 0% risk.

A final negative may be the cap at which the CFD allows you to profit. If ShapeShift puts in collateral on the opposite side of the bet of equal weight to how much you put in, then it limits your upside to a 2X return (minus fees). If only 10 ETH are put on each side of the bet, then the total any party can gain is 20 ETH. Crypto assets have been known to shoot up 10 times or more in a short amount of time, so this could potentially limit your upside compared to how much you could have gained if you bought the cypto assets outright. It wasn’t immediately apparent how much they are weighting the opposite side of the CFDs in the documentation, so this may be something they are trying to determine and could potentially make the upside higher than just 2X.

The Positives

This is a great new piece of technology that allows investors to get exposure to crypto assets without requiring them to individually buy assets and keep them safe. If a user wanted to mimic this exposure themselves, they would have to buy digital assets on exchanges and either hold the assets on the exchanges (with fiduciary risk) or hold it offline themselves in wallets (with risk of losing keys or getting hacked).

Also, even though the platform is being run on the Ethereum network, they are not limited to Asset Tokens running on top of Ethereum itself. Users can get exposure to assets running on other blockchains, such as Bitcoin or Litecoin, which has not been available before today.

Finally, Prism allows the locked up Ethereum to live in a Smart Contract, and not be exposed to risk of the collateral being stolen outright by hacking or theft of an exchange or service provider. Assuming that the CFD smart contract doesn’t have any exploitable bugs, there is no risk that someone can steal the ETH from you.

Overall View

ShapeShift Prism is a really interesting product. It is currently in a closed Beta and limited to a max of 10 ETH held in Prisms. The UI and marketing material look like they are going to make it very easy to use and gain exposure to crypto assets without requiring users to jump through traditional hoops of buying and securing assets outright. Other than the fees being charged and the centralized aspect of the price feed oracle, it is a big step in the right direction for crypto investment products .

About DA.Capital: We are building a decentralized autonomous digital asset platform for index funds. Completely self-governed and operated on the Ethereum blockchain.