How to boost the liquidity of your intellectual creations
Intangible assets such as intellectual creations have become more valuable over the centuries. We’re now at the point where intangible value represents 70% of the global economy. However, when creators try to sell their work, they are constrained by the current market architecture. Publishers decide how much they are ready to pay for the intellectual creations and then profit by extracting the real market value from the asset.
The world needs a rethink
But what if there were a way to skip the middleman and extract greater value from your work?
With the advent of decentralized technologies, there’s now a way to bypass centralized publishers to maximize the gains from the fruits of your labor. Not only this, but you can collateralize your work at market value to receive a loan without having to find a buyer.
To do so, Collective Intelligence Labs has created the Dynamic Liquidity Protocol for intangible assets.
Let’s explain how it works.
Introducing the Dynamic Liquidity Protocol
The protocol is a set of rules for decentralized computing running on the DEIP Network. The Dynamic Liquidity Protocol provides a mechanism to turn intellectual creations (intangible assets) into funding without using a centralized publishing platform.
Protocol: a system of rules that allows entities in a system to transmit data via any kind of variation of a physical quantity.
The protocol allows you to borrow stablecoins from the network in exchange for tokenizing your intangible assets and locking them up with the network as collateral.
How it works
An organization makes research which leads to the creation of a patent: intellectual property and an intangible asset. To sell the patent in a Web 2.0 environment, the organization will need to find a buyer and they may choose to do so through an online marketplace or broker. The commission on sales can run into the tens of percent and some brokers require upfront payment in the thousands of dollars to find you a buyer.
The Dynamic Liquidity Protocol is a Web 3.0 innovation that uses decentralized technology and doesn’t operate to make a profit from creators, unlike brokers and centralized marketplaces.
The Dynamic Liquidity Protocol operates as an optional plugin on top of the Creator Economy Protocol which is able to issue a digital twin of the asset on a distributed ledger: a non-fungible token (NFT). The Creator Economy Protocol is able to increase the liquidity of intangible assets by fractionalizing the asset, or breaking it up into shares of a complete whole. Think of it like shares in a company: if you have control of all of the shares, you own the company in its entirety; but you may own a fraction of the company if you have one share.
The Dynamic Liquidity Protocol manages collateral by observing asset prices on the secondary market.
This protocol is dynamic because it adapts to market conditions and price fluctuations. Where a collateralized asset falls in value the protocol will sell fractions of the asset to the market to recover the loan value. If the value appreciates, the asset owner repays in accordance with the original no terms and doesn’t repay more because of the appreciation.
Risk offset
However, creators cannot collateralize 100% of the asset for 100% of the market value. In order to offset and balance the risks of collateralizing assets for loan issuance, the Dynamic Liquidity Protocol applies a collateralization ratio. The riskier the asset, the higher the ratio applied meaning more of the asset will need to be collateralized for higher loans.
The default collateralization ratio is 1:3, meaning $300,000 worth of assets would need to be collateralized in order to borrow $100,000.
For example, if the asset is considered high risk, a collateralization of 1:4 may be applied, meaning the maximum loan value that the creator can receive from placing their asset under the control of the protocol cannot exceed ¼ (25%) of the market value.
Moreover, when a creator makes a request to appraise an asset, the protocol considers the asset type and has three ways of making an appraisal, depending on the type of asset.
Standard intangible asset
A standard intangible asset can be considered as a patent or piece of research as specified in the example above.
For this type of asset, the protocol creates a digital twin of the creation in the form of a non-fungible token (NFT) and then fractionalizes this NFT into different parts. The creator can then collateralize part of their asset, depending on the value of it and the amount of funding (loan) that they would like to receive.
For example, if the asset is worth $100,000, the protocol assess the risk at a ratio of 2:1, and the creator needs $10,000 for their next work, they would collateralize 20% of the asset and retain 80% ownership of the NFT.
Specific intangible asset
The Dynamic Liquidity Protocol employs a custom model for specific asset classes. The protocol performs an automatic check of the asset value based on transactions that are usually applicable to it. For example, the asset has been licensed out for usage and in this case, the protocol will check the license volume and value to give its appraisal.
The protocol considers similar assets in the same category to make an appraisal. For example, if the protocol needs to appraise a patent for AI technology that hasn’t been previously licensed, the Dynamic Liquidity Protocol will consider similar patents with similar applications, and also look at the monthly transaction volume.
Batched intangible asset
If the asset is issued as a batch, such as with income share agreements, the protocol will consider the historic market value of the asset. If there are batches of assets and there is some stability of a total price of the batch, the protocol takes the minimal batch value and uses it to appraise the new batch. In this situation, the whole batch of assets must be tokenized to keep the price valuation accurate.
Liquidizing creativity
The Dynamic Liquidity Protocol allows organizations in the creator economy that have a large amount of intellectual property, but find it hard to sell (like universities) to borrow money to fund future research. The protocol can be used by any individual to collateralize their intangible assets and the loan provided can be used for any purposes whatsoever.
DEIP’s Dynamic Liquidity Protocol will be the tool to provide an influx of liquidity to high-value intangible assets. This will serve as a massive boost for the creator economy and help price the tokenized assets fairly and more transparently through fractionalization.
