What Prism Is:
For those who don’t know, “the Prism platform is the easiest and most secure way for investors to manage baskets of digital assets without having to trust a third-party with their funds.” Essentially you create a “Prism” on the Ethereum network which is a fund that tracks the prices of several cryptocurrencies of your choosing. The fund’s value is measured in Ether, and that is what you use to create it, and that is what you will receive your profits in. Shapeshift claims that another party (currently Shapeshift) will take the opposite side of your investments and consequently there will be no counterparty risk for the investor.
How Prism Works:
For the end user Prism is deceptively simple. You create a “Prism” on the Ethereum network (say 100% bitcoin), then you fund it with Ether. This gets locked up in a “smart contract” and if bitcoin goes up 25% you can close the Prism and withdraw 125% your original investment less fees.
In the words of Shapeshift CEO, this is what happens on the back end;
"The simplest explanation is you make a prism of 1 bitcoin, that's the whole prism. It's worth 1 bitcoin. Shapeshift takes the other side of that, so that means Shapeshift is short 1 bitcoin. Shapeshift just buys a bitcoin from someone, then if bitcoin goes up it lost $10 on the prism, but gained $10 on bitcoin, so it's a wash," ~ Erik Voorhees
What this boils down to is when you create a “Prism” of 1BTC, you end up paying Shapeshift to hold 1BTC for you – and that’s where the fees come in…
Prism’s Atrocious Fees:
Acording to Coinbase, investors will be charged a 2.4% fee to close out a prism, a 0.05ETH charge (about $9.61 at the time of writing) to cover the gas cost of creating the smart contract as well as a 1% monthly fee “to cover the cost of capital.” I am not sure about the specifics of these fees – whether the 1% monthly fee is charged at the beginning, end or highest/lowest point of value for the fund, but going back to our 1BTC example, an investor would be charged 0.024 BTC to create the fund and then 1% of the balance which would be 0.01BTC the first month. Doesn’t sound so bad? Prism is essentially a fund that can be easily liquidated so let’s compare this with the most similar conventional financial product – the ETF (Exchange Traded Fund).
Vanguard ETF’s have an average expense ratio (annual fees) of about 0.12%. They are very proud of this as it is lower than the industry average of 0.53%. To figure out Prism’s possible expense ratio I am using an example with $100 principle, assuming 10% ROI per month:
| Month | Balance without Prism | Balance with Prism | 1% Fee |
|---|---|---|---|
| 1 | $100.00 | $100.00 | $1.00 |
| 2 | $110.00 | $108.90 | $1.09 |
| 3 | $121.00 | $118.59 | $1.19 |
| 4 | $133.10 | $129.15 | $1.29 |
| 5 | $146.41 | $140.64 | $1.41 |
| 6 | $161.05 | $153.16 | $1.53 |
| 7 | $177.16 | $166.79 | $1.67 |
| 8 | $194.87 | $181.63 | $1.82 |
| 9 | $214.36 | $197.80 | $1.98 |
| 10 | $235.79 | $215.40 | $2.15 |
| 11 | $259.37 | $234.57 | $2.35 |
| 12 | $285.31 | $255.45 | $2.55 |
| Total fee: | $20.02 |
This amounts to an expense ratio of 11.69% per year. Shapeshift is charging almost One Hundred Times more than Vanguard to manage your money in effectively the same sort of financial asset, yet without all the protections a SEC regulated security requires.
Lack of audit reports:
On the official Prism website on their blog we are told that Piper Merriam (a respected Ethereum/Solidity security consultant) conducted a security audit of the Prism code earlier in the year. I have not seen anything on Piper’s blog that indicates this is in fact true. Shapeshift states that two more audits will be conducted while Prism is in Beta, but I will remain skeptical until I have seen something concrete.
Shapeshift’s deceptive marketing.
This is the only section where I take offense, and It is the main reason why I chose to write this article. The cryptosphere is unregulated and full of scam artists. One way we try to make sound investment choices is by finding industry professionals we can trust, and I think that we have a duty to expose influential people who are out to make money by deceiving their customers.
From the horse's mouth himself, Shapeshift’s CEO:
“Prism is a platform upon which humans and machines can acquire exposure to portfolios of digital assets without trusting a counterparty.”
– This is a blatant lie. The trusted counterparty is Shapeshift as they take the opposite side of the trade by buying and holding your coins for you.
“The Prism portfolios are fully-collateralized by both parties, so there is no risk of non-performance.”
– This might be true, however, there is no way of knowing. Shapeshift is framing this as “your funds are held in a smart contract” when in fact only the collateral you originally deposited is. You can’t hold Monero or Bitcoin in an Ethereum smart contract so shapeshift, presumably, will hold those coins for you. By cleverly obscuring the simple mechanism that drives Prism, Shapeshift has nobody calling for or expecting audits to verify their holdings reflect their Prism obligations.
“Risk is herein minimized: with trust placed in objective open-source code”
– Trust is not placed in the objective code, it is placed in shapeshift, as I have outlined above.
“While Prism is, in a sense, an exchange platform, to our knowledge nothing like it has ever existed in a live, production capacity. No bank or traditional financial institution, with their billions in capital and polished claims of consumer protection, has ever brought something like this to market.”
– this is a lie. Prism is a fund, like any other, except funds outside of the cryptosphere come with heavy regulation, consumer protection, and insurance. Prism does not.
Conclusion
The target market for this product is undoubtedly new money- people who are entering this turbulent and risky financial world and are bombarded with a steep learning curve of hashes and mining and lightning networks. The only thing they really understand is “altcoin x got me 1000% profit!” and Shapeshift is stepping in, telling them “everything is going to be ok as long as they hand us your money… don’t worry! There is no counterparty risk, we will take care of you for a small fee.”
Deceptive marketing has branded this product as an innovative, safe, "trustless" way to invest your money. I contend that the above evidence clearly shows that it actually requires a lot of trust! In my opinion It is another short-sighted reapplication of current technologies on the blockchain, however, in this case, its unnesecery, expensive and very very risky (you don't know whether Shapeshift is actually holding 1BTC for the 1BTC in your Prism).
I liked Shapeshift, but I won’t be using them anymore. In my opinion, Changely is a good alternative.
This is my first serious article on Steemit! I am open to any critisizms of my arguments, please let me know in the comments!
Sources
Shapeshift Prism Blog
Coindesk article
Vanguard fees
Piper Mirriam's Blog
