Interview with the Lykke Team – Richard Olsen
Lykke team consists of people across the world, with a large number of us working remotely. Recently, we had a team meetup and decided to take the opportunity to interview some of our team members. We’re kicking this off with Lykke founder and CEO, Richard Olsen.
Learn more about the vision behind Lykke, how Lykke finally went from being an idea to a company as well as the philosophy behind how Lykke is run. The interview also goes beyond just Lykke, and we have a peek at what Richard thinks about the current markets as well as Richard’s daily ritual. Below is the video of the interview and an excerpt of the key questions asked.
Question: What is Lykke?
Richard: Lykke is an organization which builds a global marketplace similar to the internet itself, that is the idea. And the genius of the internet is that we can access any content from anywhere around the world, and we can publish any content from anywhere around the world.
Now let's imagine we have a marketplace where you can buy any asset from anywhere, and if you have any asset to sell, you can sell it into a global marketplace. And Lykke builds this software environment, the regulatory environment and, what's even more important, builds the liquidity, so that when you sell there is a buyer, and when you want to buy there is a seller.
Question: What is the philosophy of Lykke and what is wrong with the financial system today?
Richard: So, the market itself, as it operates today… few people understand that everything has grown historically. Many years ago, in the 60s and 70s, the first analysts came in to say, "How can we streamline the process?"
So, computer processes were established for individual links, but the actual steps of processing have remained the same, even though we have modern computer technology. So, the result what we today have is a completely batch-based system, and in the batch-based system you have huge inefficiencies, which cannot make a smoothly operating market work. If you have a mobile phone and, for some reason, the battery doesn't work, the whole mobile phone doesn't work.
And now few people understand that the same is true for the market as a whole – that if there is a small thing which doesn't work accurately, then the whole market doesn't work. In my career, I've spent a lot of time looking at tick-by-tick market data to try to make sense out of the core mechanics of markets, and today’s market mechanics are really broken, so that means that as opposed to having market prices which reflect the fundamentals, market prices are anywhere, but definitely not at the level of an equal marketplace. The goal of Lykke is to build an exchange that has sophisticated engineering which ensures that market prices reflect the fundamentals.
Question: How will Lykke do this?
Richard: So, the question is we have the marketplace, which we think works well, which gets price discovery at the right place. How can that new marketplace succeed? This is very easy. What market participants look for is liquidity and low market volatility, and the Lykke exchange will excel in terms of having narrow spreads, high liquidity, and much lower volatility than in other marketplaces, so that the buyers can buy the goods at a better price and sell them at a better price than in the existing markets.
Question: How is Lykke’s technology platform disrupting the old system?
Richard: First of all, I think there are lots of people who are building interesting companies. They see one point they want to disrupt in the marketplace. They have a specific idea. What's quite unique about Lykke is that we embrace a very comprehensive vision, that is how we build the company from bottom up. How it's structured is very novel. In the same way, is novel the technology that we use, from a software point of view, but also financial engineering. So, it's the broadness of the vision and the multi-level approach which we take, which I think makes it very unique.
Question: How is Lykke working to decentralize the market?
Richard: Today, you have the high-end hedge funds, which have one universe, where they can trade, and then there are the rest. And a key thing is to give the man in the street the access to the same high-end, retail performing product, as if it was the most professional hedge fund. So, it's really to democratize the market.
Question: How is Lykke’s platform democratizing?
Richard: I mean, it starts off very simple. Today, you have to go to a bank, you go through a very tedious procedure opening, whenever you want to send money around it's very costly, you don't have free access. But already now with our wallet, you just somehow send money into the wallet, but afterwards, when you have the wallet, you'll be able to use your credit card directly paid from that. It's ease of use, low cost, and accessibility around the world.
Question: What are the disadvantages of banking and trading today?
Richard: The banking system has grown historically in a step-by-step mode. It started off everything being paper, and then computerized. Today, if you go into a bank, one of the large banks, and go to the IT manager, he will tell you that he has 1,300 processes to provide the value of his product. But the 1,300 processes mean that costs are huge. That for the end customer means that whenever he does a transaction it's high fees, and, what's even worse he can only do very large tickets, so it's only if you're a big investor then you can afford it.
The second thing, which is more abstract, but also present, is that spreads, transactions costs, are very, very high. In this new environment, transaction costs are close to zero, and, therefore, you can process micro transactions of one dollar, two dollars, five dollars the same way as today in the professional market you can process million-dollar transactions.
Question: What is the biggest challenge for Lykke today?
Richard: The biggest challenge is the following: if you make a mind map of all the steps of which were required to build Lykke, you have a long list. There are no show-stoppers in the sense there's not that one thing without which it's not feasible. But when you start to drill down in each area there are so many challenges. Because there are so many challenges, there's such a lot of uncertainty, and the big issue is that individuals who work in an area freak out because they say, "I don't know that," or "I don't know that." So, managing this uncertainty, is the biggest challenge.
Question: How is Lykke organized structurally and how has it grown so fast?
Richard: To succeed with this project, there is only one way – meteoric rise. And it has to be incredibly fast and stupendous in its speed. This is why it's so important how we build. And the mechanics involved and this is the reason why I'm heavily focusing on creating a cell-based, self-directed company. I don't want it being hierarchically guided.
I'm very much inspired by nature and how nature operates, and nature doesn't have a CEO who dictates how a new habitat is being invaded. It's actually swarms of small entities which spread out, and it's the same thing is with Lykke. If you have one guy at the top who coordinates, it doesn't work, because he doesn't see enough. If you empower the individual at the lowest level, he sees everything. So, please, give him all the resources to execute.
Question: How did you know this was the moment that Lykke had to come into being?
Richard: It was very simple. I've been thinking about the project and it has evolved over literally more than 30 years. I knew that I was always too early, because I would try to explain to people what I was doing, and it would go in one ear and go out the other. Then roughly 3 years ago, it was suddenly – I was at a party – that someone started to say, "Bitcoin, blockchain, what is it?" And then I said, "Now has the time come," and it's there when I suddenly succeeded in getting the first round of funding.
Question: You have been working on this idea for over 30 years. What is the story?
Richard: I clearly remember in school, I was so horrified of what I had heard about European history, and my goal in life was – is – how to contribute such that a similar event doesn't happen again. Because, if you look at the society, I mean after the Second World War people said we understood, but we haven't done a commensurate change in how we run society. So, I started a search to understand how society works, and how we can create a society where individuals or groups of individuals can do the craziest thing, and they cannot derail society.
So that was my objective – to find a framework where we don't have to go to individuals and say, "Please do the right thing," but actually people can do as they think, and the whole social system works smoothly. I then had my first important breakthrough in 1974, there was the first oil shock, and the government made redundancy program in the following sense – they went to large corporations and said, "Look, we'll give you $500,000,000 if you then keep these 10,000 jobs, and I asked myself, why didn't they say the government bought 10,000 jobs at $50,000 each?
I then investigated this idea and turns out that if employment contracts are recognized as having an intrinsic value, and we allow those contracts to be bought and sold, you can address unemployment, and you can change the deadlock between managers. This idea was not described in the literature, but it was a major breakthrough, because I suddenly realized we could get rid of the unemployment problem if we would look at it in a different way. I knew that ownership of land had evolved that way – that it was originally an employment contract, which became long-term and, therefore, became a financial instrument, and ultimately land became a tradable asset.
So, the idea was to do the same thing with jobs. Then, studying at Oxford, doing economics, I had another very basic idea, and that was that democracy is actually a corollary to free markets, that in a free market you'll have different products which compete, and people vote by buying one or the other products. In democracy, you have the political parties which kind of compete for their program. Then, after that I tried to find a broader framework, which would combine these big ideas and then spent a long time developing the so-called system theory, which today in the Alpha Engine is kind of the core inspiration.
Later, I went to a bank, because I always was interested in how to combine theory or research with the actual, the real world and ideally to earn money in the financial industry or by creating products and then recycling them into research. After a few years I realized “oops!” In a bank it's impossible just to buy one, at the time, PC – you have to go to top management. And then I started my first venture called Olsen Associates, and the first objective of Olsen Associates was to build a real-time information system for financial industry. Just imagine the weather forecast at the end of the news. Wouldn't it be great to have a weather forecast for the whole financial industry? I wanted to have database in big moulds.
I did not know what would be involved, so we hired very good people from Stanford. They came to Zurich, and we built a real-time information system. Obviously, I made all the mistakes you can imagine, but eventually we had 60 customers of the big- and mid-sized banks in Europe who used our service, and then in 1995 we organized the conference on high-frequency finance. Two hundred of the best economists came to Zurich, and it was a key instrument to launch market microstructure as in literature, but I realized I was in the wrong business and then wanted to move away from just providing an information service to creating financial product.
This gave rise to launching Oanda, and we first released the currency converter, which was an instant success, and then in 2001 launched the first trading platform which had three innovations: straight-through processing, as opposed to all these separate steps – you have one computer which does it all. Secondly, you could, as a user, buy for one dollar at the same prices as if you were doing a million-dollar transaction. And the third was second-by-second interest rate. Oanda was a shooting star. Then, in 2007, we raised capital to turn Oanda into the Google of market-making. That failed, because I lost my power base and Oanda became much more conservative. Over the years, the idea of how to build a company like Lykke today gelled, and then luckily I was able to start.
Question: How do you see the future in general, or even, the next twenty years?
Richard: For the economic system at large, I'm very skeptical, because I don't see a way out of mess which has been created, because central banks cannot just hike interest rates and rein in the free float of assets – just impossible, I don't see how they want to do it. The rise of the cryptocurrencies, which we have seen from an evaluation of slightly north of 10 billion to over 100 billion is the first sign that the traditional system is breaking. But after the pain of transition, I'm very positive we'll have the most fantastic future you can just imagine, because in this new world, people who have their own dreams – the energy of their dreams can be incorporated into their coins, which they issue, and you can literally create any project. It will be a fantastic world.
Question: Do you have a daily ritual?
Richard: What I'm trying to do, like the whiteboard, I'm trying to, every morning,
come up with a clean whiteboard and really not be premeditated, but take it as a flow out of the moment, not this artificial thinking and just see what happens. I see it very much like good sports. Think of the sportsman who would think of driving down a downhill at 140 kilometers per hour. It's living in the moment. And the same thing is here – live in the moment.
Question: How does Lykke make money?
Richard: Lykke is building a marketplace, but the marketplace is a place where you can sell any asset at any time, but when you sell the asset, what's key is that you have a very good person or at a high level who buys your asset from you. So, what Lykke does is, we are market makers, that is whatever asset is on our platform, we make a market and offer a price to buy or sell a product. And now we earn money out of this buying and selling, because as the prices go down when people sell and up when people buy we can earn out of these small micro price movements, and as opposed to forcing anyone who wants to buy and sell pay a ticket fee, we actually enhance the value of the marketplace by offering liquidity, and this is where we earn money, and this is actually also done with algorithms, so that they can run 24 hours, 7 days a week.
These algorithms, which offer liquidity to the market, earn money, and this is the prime revenue for Lykke. But what we do with these algorithms, we create investment products which any retail investors can invest in, so if you have $100 you can allocate these $100 to an investment coin, where this money is being used to provide liquidity, and you then earn a profit based on the amount of liquidity you provide. So, the challenge of and the opportunity of Lykke is that end users get a wallet and with this wallet you can buy and sell, invest, trade, pay, so all the banking services, plus insurance services are all on your mobile phone.
What's important is you don't have a bank which is the gateway, but you have a notary service where all your assets are. So you have full control. And now, if you set up a company, isn't it great? You can start to sell shares from day one, because you issue your shares and they're being bought and sold on the marketplace. And this is also the key advantage of Lykke, that is, today we have 4,000 shareholders, as if we were really a big-sized company. But why do we have 4,000 shareholders? Because individual shareholders can buy Lykke coins for $1, $2, or $50,000, or $500,000. So it's the enfranchising of everyone around the world, that they can create their own currency for their own venture and be able to raise capital.
We hope you enjoyed hearing Richard’s thoughts as much as we did doing the interview. We have a few more interviews that were done with members of the Lykke team, and these will be posted in the coming weeks.
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