Hi,
This is Maciej Zielinski from Nextrope’s Insights. In today’s newsletter, I took a look at the direction the industry will take this year. Check what will be on top in 2020.🔥
More specifically, we’ll discuss:
🌟 Gold and Silver tokenization metals tokenization
🏠 Real-estate tokenization
💰 STO as an alternative to VC
Gold and Silver tokenization - an asset for the 21st century?
Both gold and silver have been popular investments for thousands of years. Currently, precious metals are finding more and more industrial and investment applications, while the scale of their extraction still remains relatively limited. As their value increases, so does the degree and dynamics of Blockchain technology development. There are many indications that tokenization of precious metals may become one of its most significant applications.
Tokenization of precious metals - why does it make sense?
Greater liquidity
Security
Lower risk of fraud
Certainty of origin
Precious metal-backed tokens can be traded continuously and globally, making them far more liquid than virtually any other form of precious metal ownership. They are also easier to store securely and do not carry the risk of theft associated with physical storage of the metal by the purchaser.
Because tokens are created using blockchain technology they are traded in a decentralised manner. This means that no person or institution can influence the process of buying and selling them if it does not comply with the established rules. Furthermore, the nature of decentralised markets forces the entity issuing the tokens to follow best practices, such as transparent auditing and safekeeping of the assets backing the tokens. The buyer of tokens therefore has virtually direct access to the assets held without the need for physical storage.
Tokenization of precious metals = security
It is security that is the greatest asset of this decentralisation. At present, the precious metals market is not free of scams and uncertainties. The recent case of JP Morgan, which is under criminal investigation for manipulating silver prices, is a clear illustration of this. The decentralisation of the precious metals market is capable of providing a new level of transparency in transactions. Yet it is the lack of this that is responsible for most of the theft, fraud and manipulation associated with traditional markets.
Certainty of origin
The origin of precious metals can be made fully transparent by using decentralised certification technologies such as IDWorksand securing all relevant information through a private blockchain (e.g. Corda's R3 network).
In short, blockchain technology allows for the unalterable recording and independent verification of data relating to each stage of the supply chain of a specific raw material. As a result, it becomes possible to precisely trace its path and detect any attempts at manipulation or fraud.
Silver tokenization - case study
Silver Cryptocoin is a Danish company that wanted to allow investors a more convenient way to buy and store silver. To this end, it relied on tokenization. Instead of buying physical silver, an investor can buy its digital equivalent on the Ethereum blockchain. The resulting ERC20 token is fully backed by bullion safely stored by the company. The investor can conveniently sell their tokens on cryptocurrency exchanges or directly on a peer-to-peer basis.
It was Nextrope that created a dedicated token purchasing platform for the company, which it integrated with the Ethereum blockchain. If you want to know more about the whole project, check out our portfolio.
Property tokenization
My analysis shows that when talking about tokenization of high-value resources, we can’t forget about real estate. In the three years from 2016 to 2019, the value of the real estate market increased from $7.6 trillion to $9.6 trillion. Its importance is inalienable, not only because of its high value, but also because of the key role that real estate plays in everyone's life. At the same time, I observed that it is one of the most complex markets, full of ambiguities. So why would we want to introduce tokenisation to it?
Real estate tokenisation is the process of creating digital assets that represent a single property or their entire portfolio. Tokens are created and issued with the help of systems based on blockchain technology. Securities digitised in this way can solve a number of problems present in the traditional real estate investment model, such as a high barrier to entry or low liquidity.
Benefits of tokenization of real estate
Diversification of the investor group
Increase in liquidity
Easier price determination
New level of security
Diversification of the investor group:
Property tokenisation allows property values to be divided into smaller parts using a system based on Blockchain technology. This allows owners and developers to offer assets with a much smaller denomination than in the traditional investment model. Thus, they extend their distribution to a much larger and more diverse group of investors.
Allowing such miniature investments in large projects could seem highly unprofitable due to the need to involve intermediaries, each time securing the interests of both sides of the transaction. Thanks to smart contracts present in the blockchain, which are executed automatically, the involvement of intermediaries is not necessary, which significantly reduces costs.
Increase in liquidity
Real estate is a highly illiquid asset, which has so far increased the advantage of institutional investors over individuals. Tokens can be freely traded on dedicated platforms, where their price fluctuates depending on supply and demand. Liquidating an investment in a token worth a few dozen dollars is therefore much easier than selling a property worth several million. This is particularly important in the context of discounts for illiquid assets and liquidity premiums.
Easier price determination
Once tokenized, the value of a particular property on the secondary market is updated in real time based on order records. The paper-based systems currently used for this are much slower and full of asymmetries between the information provided by the parties involved.
New level of security
Blockchain provides the highest level of security among all digital solutions! Since tokens representing assets are protected by cryptographic encryption, in order to access them it is necessary to use private keys. And these are possessed only by token owners.
Future of property tokenization
By placing traditional assets inside an easily tradable token, digitised securities offer a range of entirely new benefits such as widening access to investment, lowering the barrier to entry and increasing the liquidity and transparency of transactions. These are improvements whose positive impact is immediately felt. Furthermore, implementing tokenization does not require turning the entire property market upside down. It is merely a significant improvement of the mechanisms already present there. Therefore, I believe that real estate tokenisation is one of the most promising uses of blockchain technology.
How can STOs improve the traditional venture capital model?
Cost and time-consuming
VC’s problem: The process of organising VS funding is relatively complex and involves many, often costly, intermediaries. In addition, it is extremely time-consuming. The first stages alone usually take between 12 and 18 months. This would not be such a big problem if it were not for the necessity to participate in numerous travelling marketing actions and negotiations with potential investors, which often distract owners from the development of their companies for several months.
STO’s solution: A well executed tokenization in some cases can result in funding being raised in as little as a few weeks. There are also no payment delays involved, as all funds go to the company as soon as tokenisation is completed. The process itself is also much simpler and involves far fewer intermediaries (READ HOW IT WORKS STEP BY STEP HERE).
Entry barriers
VC’s problem: Usually, in order to join an investment round, investors need to have relatively large capital at their disposal. Therefore, most of them are institutions or wealthy private individuals. It is the high entry barrier that significantly narrows the group of potential investors.
STO’s solution: STO allows the minimum investment amount to be set quite freely. This significantly broadens the group of investors - there can be thousands of them, they just need to be accredited
Liquidity
VC’s problem: Added to this is the issue of high illiquidity. If someone is considering investing their money in venture capital, they must be prepared to freeze it for a very long time - about 7-12 years. Because of this lack of liquidity, investment in venture capital often scares off even those with sufficient capital.
STO’s solution: The tokens issued represent traditional ownership and revenue rights, while providing investors with the ability to freely trade them on secondary markets. As a result, they are able to liquidate their investment at essentially any time.
STOs and Venture Capital - what's next?
The growing popularity of STOs is just one manifestation of the digitalisation trend that is gaining momentum in financial markets and may soon lead to the emergence of completely new capital management mechanisms. Blockchain-based smart contracts and distributed ledgers will significantly speed up the process of not only raising and circulating capital, but also, for example, preparing an audit.
Hungry for more? Simply check our blog! 🚀