I do not know how it is for you, but I constantly keep on thinking about ideas and business models that the blockchain could be used for. Ideally these ideas would be doable on the Steem blockchain.
Unfortunately, there is far too little time to work on all of them and some are also clearly beyond my technical capabilities. I can code, most of the things I would like to do I manage to get done, but often it takes a very long time because I have no computer science background but come from the finance side.
So what to do with these ideas? Just put them in the drawer and do nothing? That would be a shame and it would help nobody. So I decided to post some of these ideas - maybe they inspire somebody else and help to increase the overall acceptance of the blockchain and Steem in particular.
Virtual Crypto Shares
As mentioned above, I have a finance background and thus a strong 8also professional) interest in the stock market. Shares that are tradable as tokens on cryptocurrency exchanges would be a great feature, as it would allow people around the world to invest in shares without having to leave the cryptocurrency environment. This would for example allow automated savings plans for an investment in shares paying in cryptocurrencies such as ether. However, before an investor would buy a virtual crypto share he would have to be certain that the token moves in value in line with the underlying shares.
One possibility would be to engage a trustee, which issues virtual crypto shares with the promise to refund the current market value of the shares at any time against fiat or crypto currency. The big problem with such a solution is however a significant regulatory and counterparty risk. If the government, in which the trustee is situated, should at any time in the future forbid the business of the trustee, money invested in the crypto shares might be lost.
The problem could be solved with a smart contract based solution, which combines long and short bets on shares and indices.
Functionality
For the investor interested in buying shares, “long tokens” will be issued in relation to the value (e.g. in Ether) he invests. The money will however stay in the smart contract (without any crypto shares being issued) in the smart contract, until another investor is willing to bet on declining share prices. This short investor will also need to pay a margin into the account. Once the two amounts match short and long crypto shares will be issued to the long and the short investor. With the shares moving up or down the total amount won or lost will be a zero sum game. If the margin payment of the short seller is used however, the coin’s functionality ends. Long investors can exchange their crypto shares back into the net asset value, while the money of the short seller is lost. Long and short investors can pay cryptocurrency into the smart contract. Once per day after market closing the two sides will be matched and coins will be issued accordingly. If money from one side remains unmatched this will remain in the smart contract and will be matched according to the order it was paid in later. It can however also be redeemed at any time.
Investors can at any time claim repayment on their crypto shares. They therefore have to call the repayment function of the smart contract. If there is a waiting list for new investment the coins will be paid back the same day. If there is already too little supply on that side, investors will have to enter a waiting list, until further demand for their side arises.
Schematic overview of the virtual crypto shares
Problems
Investors are not able to invest or redeem their holdings at any given time. However, given that coins are tradable, this should not result in significant problems. If an investor for example starts to sell his coins on an exchange as there is no liquidity to return the money in the smart contract, this would result in falling prices for the coins on the exchange. This would however open up arbitrage opportunity as arbitrageurs could buy the short coin cheaply and hedge this position in the real world market by buying the shares (and hedging them into cryptocurrency).
Business model
With every transaction a fee of e.g. 0.3% could be charged and automatically transferred to the account of the person or business who created the smart contract.
I would be very interested in your view of the idea? Any critical points? Ideas for improvement? Seen this before already in business? Let me know.
Oh yes, and if you decide to be inspired by the idea and become a billionaire with it.... think about me ;-)
All the best to you,
rondras
I do the same as you , always thinking of new ways to apply blockchain and tokenization. I feel like something like what you are talking about already exists , maybe not though , isn't "polymath" a similar concept?
Regardless , I really understand what you are proposing !
Perhaps we can brainstorm on this and dig a little deeper , figure out if it is being done yet and If not how to practically execute this idea???
Hi daxillix, I think that Polymath is doing something similar, but they are more offering a platform for companies to offer shares based on tokens. The idea I have would work 100% independent of all companies - you could do it for everything - also for the value of a USD against another crypto currency. Sure we can brainstorm, I would love to...
BlockChain has just entered our life. many uses of the field are increasing. this could be a revolution for the business world.
You are right - even though it might not fit for every model, it will fit for a lot of applications.
If the exchange bittrex falls - the shareholders will pay all the money. The exchange is insured. Just do not know how much. Today there was information in the news.
Hi irinal, I would not give a recommendation for a specific exchange. It is also not relevant in this case.
are these shares actual company stock converted into a crypto share? if yes, are you saying that all publicly traded shares of a company can also exist as crypto shares? Or is it just a portion that is specifically allotted to a crypto exchange? there are problems with either approach
Is a publicly traded share a tokenizable asset? Because its value itself is speculative, does it make sense to have wildly fluctuating values for each token. of course the smart contract will handle it but can a share be securitized since it does not have a tangible physical value unless it is sold
Hi adarshh, no this is a derivative of a share. The companies do not actually have to do anything - anybody could set up the smart contract. The beauty of the idea is, that the tokens would not fluctuate so much, they would most likely move in line with the shares - which is what the investor wants. As it is backed by Ether as a security which increases with a rising share price, an arbitrage opportunity would come up if the price moved differently.
hi @rondras, certainly an interesting idea. thanks for explaining. Arbitrage opportunities definitely exist but if the tokens are HODLed then the value of a token cannot be changed once allotted right? Does this make better sense when cryptocurrencies are less volatile? there are possibilities when the cryptocurrency value (say ether) has fallen significantly and more tokens need to be allotted for a transaction that has already happened. Or the other way around when ether is much higher and number of tokens need to be reduced.
if arbitrage payouts into ether is the only exit then it works beautifully. but if the speculator wants to increase his net asset value by not selling then we have the token fluctuation problem
makes sense?
You have to see it like this: there is always two parties, which bet on the opposite event - one bets that it goes up and the other one bets that the value of an asset goes down. What the one side wins is lost by the other side. You can do this with every asset - also the value of a crypto currency. As the number of new tokens is only linked by new money inflows, you can alsways sell the token at the market if it is overvalued and than send money to the smart contract to get a new one. This should keep things in balance.
best way would be for the trusted issuer to back the derivative tokens. issuer can be company or the hedge fund. otherwise use some kind of escrow mechanism so that people dont renege. i am sure that this can be done with ethereum easily
If you had 100% trust that the issuer will pay you what is in the escrow account, then this would be the easiest version. However, you could never be sure that the regulator shuts them down or that the initiators might not be as trustworthy as you thought.
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I also think not every single application should be made on blockchain just because we can.
I think you are right, but I this case it it is needed to create trust that nobody takes the security money and runs away.
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awesome concept sir.. thanks for share your inportant concept..