In this Make Blockchain Work series, I discuss how blockchain technology could be best applied to financing and investment in nine chapters. It is from these reflections that we devised the world’s first marketplace for tokenized real-world assets, IdeaFeX. I prefer not to touch on ideological or debatable subjects, because a strong business model must be built on resources, including technologies, available now while thriving on agility to adapt to future developments. In this series, I will insert some of the posters that we have published on our social media platforms.
Matching & resource allocation
Beyond price discovery and agility, the third major contribuent to efficiency in financing and investment powered by blockchain is matching and resource allocation. In a similar theme that I have covered previously, this has long been a source of inefficiency in traditional markets.
Due to the lack of flexibility, markets other than the stock market tend to be fragmented, each supporting a limited range of assets and serving a small clientele. This fragmentation and subsequent lack of UI-consistency hinders explorative search. As a result, investors in one market tend not to look beyond it for opportunities that they can appreciate and evaluate and that may yield better returns; fundraisers are limited in a similar fashion.
Even in the stock market where the range of listed companies are considerably broader, the deficiency in navigability is usually salient. Investors frequently purchase additional software and/or subscriptions in order to access information in a timely fashion. There is also a breakdown of communication between fundraisers and investors. While this may serve mega corporations better, the result for small and medium-sized companies is that they cannot effectively leverage the knowledge and wisdom of their investors.
As we examine the interactivity between two sides of financing and investment, the fundraisers and investors, deeper, it becomes clear that the lack of access further deteriorates the quality of communications. For fundraisers, they tend to be limited to the same type(s) of investors who share similar views and represent a small segment of the target market, if at all. Consequently, corporations tend to suffer from group biases that severely undermine decision-making. When the executives actively strive to meet the demands of their investors, the ill effects of these biases are exacerbated. Investors, meanwhile, become accustomed to seeking confirmations. The quality of financing and investment, therefore, decreases in general.
In and by itself, blockchain technology does not provide a clear solution to these issues. Nevertheless, we see that there is an increasing demand within the community for more transparency. While this call aligns more directly with our next topic, we believe a key in achieving transparency — communication — to be an integral component of better matching and resource allocation.
IdeaFeX is designed to leverage its advantages in openness and navigable features to improve resource allocation for all users.
We support broader range of real-world assets for broader groups of investors. With a consistent user interface that also serves as the official channel of communication, investors can enjoy greater ease in identifying assets that interest them. The same applies to fundraisers. The first direct advantage is optimized investor–fundraiser matching.
A couple of ancillary advantages ensue: Improved matching process means the time it takes for explorative search can be reduced. Fundraisers need to spend less time looking for funds. More can therefore be done in creating value, which serves the interests of everyone. Moreover, investors can contribute more actively, if needed and appropriate. Better engagement means we are not only integrating financing and investment into the company’s business model — we are essentially transforming investors from overwhelmingly passive stakeholders into active stakeholders.
Combined with advantages in price discovery and agility, the second direct advantage is more efficient resource allocation. Viewed as a whole, all the benefits in efficiency for each financing project are unique and complementary. There is no foreseeable tradeoff where the sum of more efficient projects somehow results in lower efficiency overall. This point is easy to see whether we examine financing or investment (because they are two sides of the same coin):
In financing, our solution allows the best projects to receive financing to the amount that the market deems sufficient. While the market may be wrong, this mechanism that incorporates the wisdom of the broadest subset of the market is less likely to be wrong in a market economy. It certainly cannot, on the whole, be more wrong than a more restrictive mechanism. In investment, our solution allows investors freely choose the projects that they appreciate the most and invest at prices that they collective deem fair (some investors may consider prices low, since opinions differ naturally in a market environment).
Overall, these advantages together make a compelling case for our solution in using blockchain technology for financing and investment.