Blockchain in Sports: Fractionalized Fan Ownership and Athlete Crowdfunding
Part 2: How can blockchain improve funding for teams, athletes, and stadiums.
This is the second post of a three-part series about how blockchain technology will improve the sports industry. Each part discusses new and exciting trends at the cutting edge of blockchain technology and sports.
- Part 1: Tech’s Impact on Sports and How Blockchain Improves Collectibles and Memorabilia
- Part 2: Fractionalized Fan Ownership, Athlete Crowdfunding, and Smart Contracts for the Sports World
- Part 3: Protecting Private Data and Creating Blockchain-Based Identities
Ball and Chain: Tokenized Licenses
What is a token? A token is an entirely programmable digital asset that can represent anything, including shares in a bond, ownership of a piece of real estate, or participation in an investment fund. Tokenization refers to the process of transforming real assets into tradeable digital contracts that live on a blockchain.
Blockchain technology can empower individuals to tokenize their intellectual property licenses (e.g. team logo and player likeness), which can then be represented as cryptographically secured tokens and managed via a blockchain. Tokenized licenses save money since licensors have better transparency and control over how their licenses operate, significantly reducing any risk of human error or fraud.
Standard intellectual property licensing agreements can be generated to automatically transfer ownership rights through a token, where the licensed IP use can be monitored and tracked in real time — opening the doors for an intellectual property (IP) token marketplace. Sounds out of this world, but this can already be achieved today. A ConsenSys company, OpenLaw, is building a technology stack to streamline commercial relationships in a legally compliant way, which can be used to create licensing agreements, royalty payments, generate and transfer these tokenized licenses.
More specifically, standard licensing agreements can be created using OpenLaw which enable ownership and rights to be transferred automatically while auditing in real time.
Show me the Tokens: Athlete Crowdfunding
Fan bases are passionate, global networks that are stuck with legacy tools and a limited localized reach. Blockchain tokens enable a secure, efficient method for global fandoms to contribute to crowdfunded sponsorships. This enables fans to invest in lesser known athletes who aren’t initially drafted or highly recruited. Imagine being able to invest in a player that is attempting to enter the NBA, NFL or MLB and that player goes on to achieve success from salary and sponsorships. In return for the initial funding, successful athletes could pay fans interest on their investments, potentially in the form of a dividend or income service agreement. Funding and sponsorship of athletes already occur through GoFundMe’s, family members, and other grassroots campaigns, but tokenization enables fans to get rewarded for their faith and capital provided to athletes. But do athletes really need funding?
There is still a significant earnings gap between the average athlete and the few well-established, contracted ones. While salary minimums of the NFL, NBA, or MLB far exceed what anyone would call “struggling to make ends meet” other sports leagues such as the WNBA, MLS, or the new PLL (Premiere Lacrosse League) pay athletes more modestly. Olympic athletes (not named Usain Bolt or Michael Phelps), who we rightfully revere for their incredible feats, are often even less supported and need to take up full or part-time jobs to support their Olympic dreams. Imagine working part or full-time while running marathons weekly.
Tokens could be created through a digital generation event where they are created, programmed, and purchase by anyone who wishes to participate. Tokens can be programmed with specific guidelines drafted by the athlete, in conjunction with sponsors, or factor in other stakeholders. Player tokens could potentially provide dividends or act as a bond in which athletes eventually purchase their tokens back with interest. Athletes could offer other prizes or limited-edition memorabilia to fans who hold their player tokens or support their Olympic aspirations. This would additionally benefit developing leagues by incentivizing community support from fans, financially support underpaid athletes, and increase traction for league expansion.
Node-ably New: Fractionalized, Fan Ownership of Teams
One of the most exciting potentials for tokenization involves fractionalizing a major or minor league sports team. There are millions of fans who jump at the opportunity to be partial owners in a sports franchise. This isn’t a new concept, the Green Bay Packers have a publicly traded stock. Generally speaking, fan ownership does not provide real benefits to the fan, other than bragging rights. Green Bay Packers stock provides no dividends or earnings, isn’t tradeable, and offers no securities regulation protection. Tokenization presents an opportunity to further incentivize fan ownership and create new business models. Not all of the incentives need to be financial. Fans would also be enticed by non-monetary benefits to fractional team ownership, such as governance rights, facetime with owners and players, or access to special events for fan owners. While the Green Bay Packers have benefited from fan ownership, tokenization offers a more robust path for other major sports organizations to follow suit.
Blockchain provides the potential to enhance existing ownership models through the inclusion of fan-driven ownership benefits both large and small. This can be achieved by tokenizing the funding journey.
Different issuances of tokens could determine voting rights, dividend rights, or add loyalty features such as season tickets to a Dallas Mavericks token. Voting rights could be distributed to all shares or limited to certain types of token holders, similar to preferred vs common stock shares. Holding ownership tokens could provide other benefits, like digital collectibles, private insights from sports analysts, or discounts from partner promotions. All of these could be possible through an individual’s blockchain-enabled fan wallet, accessible through a mobile app.
Liquidity is a term that refers to the ability to turn an asset (real estate, stock, etc.) into cash, the most liquid asset. Certain types of assets, which take a long time to find a buyer, or require a long lock-up of capital are referred to as illiquid assets. Therefore, these assets usually have a liquidity premium making them more costly and challenging to sell. Sports team ownership is incredibly illiquid, as it’s all but reserved for a small portion of accredited investors. Fractionalization of team ownership would enable everyday sports fans to buy, sell, or trade Dallas Mavericks ownership tokens. The free market would then enable these tokens to be sold to more people and converted to cash more easily, increasing the liquidity and yielding more money for sports organizations.
Notably, the tokenization of newer sports teams or leagues like the BIG3, Premier Lacrosse League, NWSL, Major League Rugby and others would allow core fans and believers to take a stake in the development and growth of these newer enterprises.
Bit by Bit: Building a New Stadium and Tokenized Permanent Seat Licenses
Beyond fractionalized team ownership, fans could help fund new sports arenas or other facilities and in return receive compensation as a percentage of ticket sales for perpetuity or a set period of time. Sports organizations have previously explored alternative funding mechanisms to construct new stadiums and arenas in the form of permanent seat licenses (PSLs) and stadium seat licenses (SSL).
Permanent seat licenses give holders the right to buy a particular set of seats for as long as the team plays in that venue. The funds from the PSLs are used to help pay for the construction of the stadium and PSL’s can be sold to other fans. Obtaining funding through cities or municipal bonds is a difficult process that requires jumping through a lot of hurdles. The new Rams/Chargers stadium under development in Los Angeles is attempting a new financing method, stadium seat licensing, where the original SSL’s purchase value is returned after 50 years. That’s essentially a 50-year interest-free loan. Tokenization of these SSLs or use of a smart contract could create an easy repayment process for the original owners once the 50-year date arrives. Tokenization of SSLs opens up the potential for greater loyalty rewards, fan governance (voting rights), future earnings, or a range of other potential advantages. It’s uncertain if the SSL model will be successful. Of course, it’s also worth mentioning that the creation of any token acting as a security would require approval from the U.S Securities and Exchange Commission to ensure regulatory compliance and consumer protection. Once tokens gain regulatory approval it’s reasonable to expect the development of robust secondary markets for these various tokenized offerings.
Proof of Collaboration: Sponsorships & Vendors
Sponsorships have become so ubiquitous in the world of sports that most half-hearted sports fans can name at least five Nike sponsored athletes. Perhaps, you can name the sponsor for the Super Bowl halftime show, or for the more knowledgeable fans out there, you may even know which watch brand sponsors the incredible Roger Federer. Hint: there’s a crown for every achievement.
Vendor sponsorship agreements are complex and involve several disparate parties, each with individual interests and large scope of contract terms — including non-compete, financials, and renewal rights (to just name a few). Suffice it to say, vendor sponsorship agreements are time-consuming, labor-intensive, and subsequently extremely costly to negotiate and execute.
Smart contracts represent an opportunity for process simplification and automation: payments, verifying e-signatures, and securely tracking provisions of partnership agreements, such as renewals or contract terminations. This is game-changing for sponsors and vendors.
Next at Bat: A look into the very near future of sports
This is the second post of a three-part series about how blockchain technology will improve the sports industry. Each part discusses new and exciting trends at the cutting edge of blockchain technology and sports.
The beauty of sports is that we can always get better. Athletes get faster. Records are broken. New legends and fans are born. Sports businesses and organizations need to follow suit. Processes can be improved. Fan engagement needs to get better. Organizations need to adopt not only new technologies … but also new mindsets!
If you think that leagues, teams, and players should show the same love that a fan shows them, let’s get together and make it a reality…now.
Twitter: @bradfein
A special thank you to Mason Nystrom, Dr. Andreas Freud, Constantin Kostenko, Howard Handler, and the many other talented ConsenSys team members who shaped this article.
Disclaimer: The views expressed by the author above do not necessarily represent the views of Consensys AG. ConsenSys is a decentralized community with ConsenSys Media being a platform for members to freely express their diverse ideas and perspectives. To learn more about ConsenSys and Ethereum, please visit our website.
