Graphic done by Chelsea Saunders
On the forefront of a revolution
By Thom Ryan
A few weeks ago, I had the privilege of sitting down with Robbie Mitchnick, COMM ’13 and current Stanford MBA candidate. After Queen’s, Robbie spent 3 years at CPP Investment Board, during which he also co-founded the Naughty Otter beer brand. But most recently, Robbie spent time at Ripple — a blockchain based financial technology firm based out of San Francisco, California.
Robbie Mitchnick cuts an impressive profile. During his time at Queen’s, he served as CEO of the Queen’s University Investment Counsel, and received the Medal in Commerce for the Class of 2013. He is currently an MBA Candidate at the Stanford Graduate School of Business where he has represented the Queen’s brand well, achieving Top 1% standing after first year.
As Silicon Valley has become synonymous with technology & innovation, it makes sense that a link has formed between the region & Stanford, the world-renowned institution located just 15 minutes to the north. The entrepreneurial and innovative mindset that characterized the Valley have certainly seeped into the lecture halls of the Northern California based school, the most difficult to gain admission to globally.
Both the pedigree and cutting-edge nature of the program drew Mitchnick, who is currently enrolled in his second and final year at Stanford. This past summer, he completed a product marketing internship at Ripple, which has rapidly emerged as the center of the commercial blockchain universe, gaining international notoriety as the creator of XRP, the world’s #3 cryptocurrency behind Bitcoin and Ethereum . Ripple’s vision is to create the internet of value — transforming the international banking system from the current slow, costly, highly inefficient process into a seamless process that enables the transfer of value inexpensively within seconds. In effect, this means harnessing the power of blockchain to create “digital gold” that can be teleported anywhere in the world instantaneously.
Blockchain is a distributed, decentralized ledger that tracks all transactions completed on its network. In contrast to a centralized system where all the information is stored on a central server (such as cloud computing), blockchain relies on nodes to store information — implying the network can survive even if an individual node fails. Transactions are verified on the chain cryptographically, meaning that nodes confirm transactions by solving complex mathematical problems.
Out of the advent of blockchain technology came cryptocurrencies. Exploding interest in this new asset class has fueled Bitcoin to 500%+ returns in 2017, while Ethereum and Ripple (#2 and #3 by market cap, respectively) have each risen more than 3,000% this year. XRP is the cryptocurrency native to the Ripple blockchain, and was built to optimize for the cross-border payments use case. In the most optimistic scenario for Ripple, XRP becomes the defacto global standard for cross-border payments and thus its value is tied to the magnitude of volumes over the Ripple network.
There are a couple of key considerations when examining XRP. First off, the token derives its fundamental value through its usage by participants in the Ripple network to process transactions, meaning growth in the Ripple network will be key to further appreciation in the currency. It is also a deflationary currency, meaning that XRP is not paid to network validators but are destroyed instead with each transaction; consequently, the supply of XRP gets infinitesimally smaller with each passing transaction. In addition, XRP has a national use case to point to a proof of concept works, as it currently supports both international and domestic payments for 61 Japanese banks , representing 80% of all Japanese banking assets. The implementation was largely successful as SBI (the Japanese consortium of banks) was able to cut down its remittance costs by 37% and drew increased membership from the original 15 institutions involved.
Lastly, Ripple has cryptographically locked into place the supply of remaining XRP held on its own balance sheet (~$15bn in USD). The amount of XRP released on a monthly basis by Ripple will be capped by this cryptographic seal. This was likely done in an effort to signal to both clients and investors that Ripple was committed to the success of their endeavour as well as assure investors that there was no risk of the company liquidating its XRP in large quantities which would have put downward pressure on the price.
Price volatility is a key matter for the success of XRP. With the hope of becoming an eventual bridge currency (in a similar vein to the US dollar currently being the global reserve currency), critics have questioned how realistic it is to expect banks to hold large reserves of XRP on their balances sheets. The price volatility of XRP makes it difficult for banks to both forecast with and costly to hedge against. A white paper produced by Ripple also estimates the cost of storing XRP to be 5x the current price compared up against a liquid intermediary such as EUR or USD.
The hope is that providing liquidity, clearing up a network of regulatory issues (there are multiple governing bodies interested in the crypto asset space) and the emergence of hedging measures such as derivative products will all come to quell the drastic price swings the currency currently faces. Currently, there is no robust product for hedging exposure to holding any crypto asset, whether that be XRP, ETH or BTC. Additionally, added notoriety around XRP should help liquidity measures significantly as market players become more comfortable with the asset.
When I questioned Mitchnick around the restriction of supply regarding XRP (how will there be enough XRP to match increased demand/utilization of the network pending an uptick in users) he pointed out a key caveat in the crypto-technology. Fundamentally, the token is detached from any unit of value. Unlike the USD, XRP is not tied down to any underlying economy, therefore the notion of it being overvalued the same way currencies can be fundamentally undervalued is fallacious. As Mitchnick describes, “XRP’s valuation at a fundamental level will be based on the total dollar value of demand — the combination of transaction and storage demand”. As a result, XRP’s valuation will adjust to its growth in its usage for transactions and attractiveness as a storage/investment asset.
Valuation methodology is a key next step for the crypto asset class. The ability to properly value the currencies will aid in widespread understanding and adoption, reducing volatility and enable proper hedging, as aforementioned. Large institutional entrants will likely look to enter the space with financial behemoths such as Goldman Sachs contemplating opening a trading desk to service the crypto asset class. The institutional financial community remains largely divided about the validity and existential nature of cryptocurrencies with industry titans such as JP Morgan’s Jamie Dimon having openly compared the recent crypto bull market to the Dutch Tulipmania of the 1500’s.
For his part, Mitchnick is currently working to resolve some of the murkiness around how cryptocurrencies are valued by investors, and is working on a whitepaper that will propose a fundamental valuation framework for the asset class. His work drew the attention of a prominent Stanford professor, who is now collaborating with him on the project.
The reality is that there is still much opaqueness and misunderstanding surrounding crypto assets and blockchain in general. There will be regulatory obstacles for companies such as Ripple to overcome and mainstream adoption will be key for the success of these cryptocurrencies. As with any emerging revolutionary technology, great talent follows great innovation. Based on Mitchnick’s choice of summer internship and previous track record, it lends favour to the future of Ripple as a significant aspect of the global financial infrastructure.
As for Mitchnick himself, the future remains ripe with possibilities, ranging from native Toronto to San Francisco to New York. He views blockchain as a revolutionary technology impacting an array of industries from trading to insurance to energy to major segments of the sharing economy such as ride hailing. He cites good fortune in stumbling into the industry this past summer, “ it was really a lot of luck that led me into my time at Ripple, but I’m excited about what’s to come in this space .” If the past is any indicator of what is to come, the future is bright for one of Queen’s’ most exciting recent graduates.