Editor's Note: This article comes fromEight-dimensional blockchainEditor's Note: This article comes from
Eight-dimensional blockchain
"(ID: eightdecimal), author: Wei Ran, released with authorization."
Most companies can only see the next two or three years. If they can see the next seven years, they can beat most of their competitors. You see what I'm doing now, not what I'm doing now, but what I'm doing years ago. And what I do now, you won't see until years later...
— Jeff Bezos, founder and CEO of Amazon
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1. Long-term vision and industrial layout
Looking at our position from a point of view, the current digital asset industry may be in a trough. However, the growth curve of an enterprise and industry needs to be viewed over a long period of time, such as half a year, one year, or three years, before we can see the real trend of the fluctuation curve and the core force driving each round of trends.
When a new technology collides with a certain financial carrier, a certain paradigm will be born, and this paradigm will lead a new round of trends. Take the pan-Internet field as an example, Google in search engines, Alibaba in e-commerce, Meituan in O2O, Didi in the sharing economy, BTC and ETH in digital currencies, they all start from a single point product, combined with capital The power of the rapid expansion, evolved into a larger ecology. And these names have also become a concept. Around this concept, many industries in the upstream and downstream of the industry and surrounding areas have been supported, such as BTC and its forked coins, mining machines and mining pools, and pan-financial service providers (throughout a Crypto Fund (VC/PE/M&A Refinancing Broker) in the secondary market, buyer-seller research, wallets, lending platforms, exchanges, media, communities, etc.
At the beginning of each phased wave, there will be a paradigm
Blockchain is not only technological innovation, but also institutional innovation, including financing model, business model and benefit distribution model
We believe that industries, capital, and related service providers in the real world will be mapped to the digital world, and this digital world is parallel to reality, and must have the characteristics of cross-border and internationalization. Therefore, on the track of blockchain technology, such as public chain, privacy, storage, and smart contracts, we invest in top players who have opened up a generation of technological paradigms around the world; at the same time, we also deeply deploy financial infrastructure, such as transaction Exchanges, stable coins, Security Token, payment, lending platforms, etc.; in addition, building an industry ecosystem is a necessary part of high-quality post-investment services. We have formed strategic alliances with many exchanges, media, consulting, and developer communities. Provide industry resource assistance for our investment portfolio.
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2. Ebb and flow, grasp the inflection point
Looking back on the past, the trendsetters of the blockchain have experienced several waves and passed through several bulls and bears of digital assets.
The first wave started with payment transfers. Bitcoin and digital currency, as a payment tool, subverted the model that had to rely on traditional financial institutions to pay for transfers. On January 3, 2009, Satoshi Nakamoto left an unchangeable sentence in the Bitcoin creation block: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks (January 3, 2009, The chancellor is on the brink of a second bank bailout)" was the front-page article in The Times that day title. It can be seen that Bitcoin, which was born after the economic crisis in 2008, echoed people's dissatisfaction with the traditional financial system, and a wave of "decentralization" thoughts emerged.
The second wave started with equity financing. Ethereum, ERC20 Tokens and ICO based on it are essentially a new financing method. At the same time, in the "bull market" market, it provides venture capital institutions with an exit method with extremely high returns and liquidity. In 2017, the project can raise funds by writing a white paper, and it can be listed on the exchange based on expectations. Unidentified investors from various countries can invest in tokens that have not yet been applied to regulatory regulations. When supervision is lagging and absent, a small number of projects can conduct equity crowdfunding without threshold for global investors. At that time, the supply of projects is far less than the investment demand, and the return rate of hundreds of times and thousands of times is also reasonable. This is the so-called " The origin of the bubble". It was not until the second half of 2017 that the U.S. SEC issued relevant regulations on ICO and security tokens. On September 4, China adopted a policy of shutting down domestic exchanges and banning ICO. At this time, through this The financing completed in the form has reached tens of billions of dollars.
A few years ago, when Internet finance was born, Huang Xisheng pointed out, "In this world, there is no Internet finance, but seeing the financial world, all kinds of bureaucratic habits, structural imbalances, and separate operations, with many licenses. Just in time, Only an Internet that pursues efficiency and equality can be deeply rooted in the hearts of the people.” Feng Shui turns around, and now, China is in the down cycle of the real economy, debts have surged, the central bank has shrunk its balance sheet, and it is strictly controlling financial risks internally, while facing foreign exchange controls and trade wars externally.
In addition to China, the global macro economy and digital currency prices are also forming an increasingly close transmission mechanism. According to BlockVC's strategic research, since Venezuela issued the petro currency, digital currency has begun to bear the expectation of some emerging market countries to ease the currency crisis, the US dollar debt crisis or avoid economic sanctions. With the global withdrawal of cross-border capital investment, the local currencies of Turkey, Brazil, Argentina, South Africa and other countries depreciated sharply, asset bubbles burst, hyperinflation appeared and spread to other countries through financial channels.
Under strict supervision, in order to have a little room for maneuver, people have enough impulse to bypass the shackles of the financial control system through "technical innovation". Looking back at history, "factoring, small loans, trusts, and guarantees have all been placed with high hopes by people, but they are all in the same place. Except for a small number of shadow banks, the rest are either surrendered to power and rent-seeking, or they are classified as financial crimes. prison."
Slightly different from the traditional capital market, the blockchain is born an international industry, facing the global capital market and tens of thousands of exchanges. With different attitudes, collusion cannot be formed, which makes cross-border policy arbitrage possible. Projects can obtain legal and compliance documents from policy-friendly countries such as Singapore, obtain financing from venture funds registered in Switzerland and Cayman, and be listed on exchanges registered in Malta. In response to this phenomenon of global policy arbitrage, Tim Draper, a well-known American venture capitalist, said that the most exciting thing about Bitcoin for him is that it is a global currency. Therefore, in the future, governments of various countries will become one after another. Public government providers that engage in open competition, rather than being a monopoly within a given country. Virtual Citizens (Digital Citizens) and entrepreneurs can vote with their feet. If you don’t like it, you can leave and turn to other government service providers that are more friendly in the region. Because of this characteristic of the industry, countries, especially small countries, will have a FOMO (Fear of missing out, phobia of missing opportunities) and a mentality of wanting to take advantage of this corner to overtake, so they choose to be friendly to the blockchain.
Although we can earn excess profits by making time difference (innovation ahead, regulation lagging behind) and space difference (country games, cross-border arbitrage), but with the influx of projects one after another, the supply of entry funds is insufficient. When the supply of projects exceeds the investment demand , according to normal market rules, the price of a large number of tokens will inevitably collapse. Another point is that although there are "bubbles" in the logic of traditional equity financing (such as the profit of 50 years after the advance), there is at least a "price-earnings ratio" as the support for the stock price, but the current mainstream strategy to maintain the stable rise of token value is only "deflation Model", "currency value management" and "community expectation management" that rely on the media, this model is still too rudimentary.
Early adopters of a certain paradigm can profit, but those who come in when the paradigm has become a well-known norm, especially poor imitators of the paradigm, often face greater losses. This point can also be confirmed by the development history of shared bicycles.
In order to survive, to stop losses, or just because it was too easy to obtain, the project side sold the low-cost ETH obtained from financing. ETH could not withstand the selling pressure and then fell, and the price of ETH and its associated token entered a vicious circle. We are in a cycle of such a vicious cycle, as long as bad coins are not cleaned up and new funds do not enter the market, the so-called trough state will continue.
Referring to the evolution track of the traditional financial market, from the first wave of transfer payment to the second wave of equity financing, wallets (like third-party payment) and secondary market platforms (exchanges) have emerged along with the payment. In financing, there are VC/PE-like investment banks (providing a package of services such as proxy investment, underwriting, market making, refinancing, etc.), ratings, research and other complete financial service industry chains.
In the previous article reviewing the 10th anniversary of the financial crisis, we mentioned the world’s problems facing the global macro economy in 2018. If there is a new model that can inject new vitality into the traditional economy and allow high-quality assets to obtain higher liquidity and premiums, It may help us open the door to the stock market.
It is foreseeable that in the future, there will be a high probability that debt financing/equity-debt hybrid financing methods will be born.
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3. The third wave - Security Token (ST)
Most of the conflicts and misunderstandings in the world are disputes of concepts.
In China, Yuan Dao and others proposed the concept of "token" in March this year. In "Token is the key to the next-generation Internet digital economy", Token can be circulated through the pass. The certificate is the certificate of equity, which is defined as a certificate of encrypted digital equity that can be circulated. According to the original description of the pass, "the pass inspires and encourages everyone to take out various proofs of rights and interests, such as tickets, points, contracts, certificates, point cards, securities, permissions, qualifications, etc. Put it on the blockchain, put it on the market for transactions, let the market automatically discover its price, and at the same time, it can be consumed in real economic life.”
Traditional bankers who believe in Buffett's value investment theory are not interested in utility tokens with only use value, and are still waiting to see the lack of supervision and unclear definition of tokens. And ST is equivalent to the transformation based on traditional assets, which is in line with their preferred value investment theory.
In 2017, the scale of global equity assets is about 70 trillion US dollars, the debt is about 100 trillion US dollars, and the scale of the real estate market is 230 trillion US dollars. If these real capital jaws start to enter the market, the potential space will exceed our imagination.
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STO (Security Token Offering) Financing Guide
What exactly is Security Token (ST)? What are its strengths and weaknesses? In the future, will ST really open up virtual and real assets, new money and old money, and lead a new wave?
Previously, we often heard Security Token, but at that time it often appeared together with Utility Token (functional pass). In order to avoid supervision, some projects often define themselves as Utility Token (functional token), which only has use value but no investment value, not Security (securities). But in practice, when applying the standard, the court will adopt the principle of "substance over form".
The identification of securities in the US federal securities laws mainly includes two forms:
1. Stocks, notes, bonds, other forms of equity and debt instruments
2. Any form of investment contract (via the Howey Test)
Regarding the latter—the definition of an investment contract comes from the Howey Test in 1946. If four specific conditions are met, it will be classified as a security. At the Atlanta group meeting of the U.S. Securities and Exchange Commission (SEC), someone proposed: "If the token can meet the Howey Test of the investment contract, it will be identified as a security token. If a token is only available on the platform after pre-sale If used, but not traded in the secondary market, it will be declared as a functional token”.
It can be seen that if ST has the general attributes of traditional securities, it is essentially a new type of securities. According to "The Five Dimensions of Security Tokens - The Third Wave of a New Financial Internet", from a legal perspective, security tokens are divided into two types:
The first generation ST is a regulated Token product. An "exemption" applies to the US Securities and Exchange Commission (SEC), meaning that Reg D (US) and Reg S financings do not need to be registered with the SEC. It is generally aimed at accredited investors and wealthy individuals. Reg D, Reg S, and Reg A+ are the main regulatory regulations of the SEC. D is the main private equity financing regulation, S is the regulation that regulates American companies facing overseas investors, and A+ is equivalent to a small IPO, which requires 2 years of audited financial information.
The second-generation ST is a new generation of ST that simplifies the identification of qualified investors. Simplifying identity authentication is to automate the two mechanisms of KYC (Know Your Customer) and AML (Anti-Money Laundering) through smart contracts. The regulatory rules of different countries will be codified into smart contracts, and cross-border transactions will become simpler and easier.
In the article "Your Official Guide to the Security Token Space", ST is analyzed from the perspective of nature:
a) A Security Token (ST) is a digital asset regulated by federal securities regulations. In layman's terms, it is in the intersection of digital assets and traditional financial products.
b) Programmable ownership. If Bitcoin is called "programmable currency", then ST can be regarded as "programmable ownership". Any asset with ownership can and will be tokenized.
Based on the above articles, there are two driving forces behind the concept of ST.
The second is that global assets seek higher liquidity, rate of return or alpha. ST is expected to reduce the circulation cost of assets and obtain a potential liquidity premium. Eight-dimensional analyst Kadeem pointed out, “The rising trend of investing in emerging markets is supporting the trend of capital globalization, thus Security Tokens can be very useful since they support cross-border transactions easily.” (Millennials are global citizens, The trend of increasing investment in emerging markets has promoted the process of capital globalization, and ST can make cross-border transactions very simple).
According to institutions such as LedgerZ Capital and Harbor, after Chinese Internet companies are listed on the US stock market, if they want to return to A-share, Hong Kong stock exchanges and other regional exchanges, they need to go through the process of privatization and delisting, dismantling the VIE structure, and then entering the IPO queue or backdoor process , very complicated; traditional real estate transactions or settlement of cross-border securities transactions also need to go through complicated processes such as notary companies, custody companies, and liquidation companies; most private assets lack liquidity and transaction costs are high, such as venture capital Private assets, such as LP interests in private equity funds or private equity funds, often carry significant discounts on exiting positions before the fund is liquidated. However, if ST can be used to atomically divide assets, custody on the chain, liquidation after transactions, and compliance with codes, T+0 asset circulation can be realized. From a purely technical point of view, it will improve the efficiency of resource allocation.
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From the Harbor white paper
To sum up, the changes brought by ST (not necessarily advantages) are:
1. Intrinsic Value: ST must have real assets or income as value support, such as company shares, profits, and real estate.
2. Programmable & Automated Compliance and Rapid Settlement (Programmable & Automated Compliance and Rapid Settlement): ST needs to obtain approval and permission from regulatory agencies to automate the KYC/AML mechanism and achieve instant settlement.
3. Fractional Ownership: Accelerate the fragmentation of asset ownership and lower the entry barrier for high-risk investment products, such as real estate and high-end art.
4. The democratization of venture capital (Democratize Risk Investment): expand the way of raising funds, and Polymath, Harbor, and Templum exchanges are making attempts in this regard.
5. Asset Interoperability: The Internet is essentially a bunch of protocols that enable many different types of software to exchange and utilize information (TCP/IP, SMTP, FTP, SSH, HTTP). The formulation of a standardized agreement for assets will facilitate the interoperability between different assets and different fiat currencies.
6. Increase liquidity and market depth (Increase liquidity and market depth): You can invest in assets with poor liquidity through ST, without worrying about redemption, and market depth will also increase through the following channels: 1) The rise in digital asset prices Billions of dollars of incremental wealth are created, which will be thrown into the market. (2) Programmatic market makers like Bancor have improved the liquidity of long-tail ST. (3) The asset interoperability agreement will promote cross-border asset circulation.
However, technology is by no means omnipotent. The free flow of global trade and capital depends not only on technical factors, but also on international politics, financial policies and institutional arrangements. On the other hand, securitization is not a new proposition for finance. For financial innovation, controlling risks is more important than improving efficiency, such as:
Excessive asset liquidity can bring about huge price fluctuations
For example, for a start-up company, it is a relatively long process to achieve an IPO, and it will take some time for its equity to become liquid. But STO may allow a start-up company to directly become a public listed company with many ST holders. Due to the many uncertain factors and ups and downs faced by startups, these uncertain signals may cause Token prices to fluctuate violently. For example, after Tesla went public, a Twitter tweet from Elon Musk may have caused the stock price to plummet. This kind of volatility made Tesla want to re-privatize the company.
Financial Innovation May Just Pile Risks to the Tail
According to Mikko's point of view, Everything that adds to liquidity in good times pushes risk into the tail (all means of increasing liquidity in a bull market are pushing risk into the tail), financial institutions/markets as financial intermediaries, the core function is to configure each The entity's risk structure. For example, during the financial crisis in 2008, in the value chain of real estate (underlying assets), many shadow intermediaries seemed to have diluted it through complicated financial instruments, but actually covered up liquidity risk, maturity risk and credit risk, making risk pricing change. ambiguous, and eventually stimulated the irrational rise in asset prices.
The definition of security tokens is reminiscent of asset securitization in traditional finance. Asset securitization refers to the packaging and combination of assets that have or will generate cash flow in the future into an asset pool, structural design of the cash flow generated by the asset pool, and conversion of low-liquidity assets into high-liquidity asset-backed securities (Asset Backed Securities, ABS).
References:
What is the difference between security token and traditional asset securitization, and what is the connection between STO and small IPO? If we use blockchain technology to improve the efficiency of the entire process and value chain of debt and equity financing, and use technology to replace or improve the functions of certain entities, to what extent can we achieve it?
References:
The TOKENization of traditional assets will change the traditional financial structureBy Bitlaw
Compliance and Future of Token Economy | Series One By Tokenin
Is the tokenization of all things the future of the digital economy or a daydream? By Xu Zhe
STO Financing Guide
Research report on asset securitization and project asset backing plan By China Insurance Asset Management Association
STO Financing Guide
CAS dry goods｜Application of blockchain in ABS By Structured Finance Research
The Five Dimensions of Security Tokens - The Third Wave of a New Financial Internet. By Security Token Academy
Your Official Guide to the Security Token Ecosystem. By Tatiana Koffman
A different way to think about Security Tokens: Programmable Regulation By Jesus Rodriguez
