Fractional Ownership, RWA DAOs, and the Holy Grail
Mattereum has recently announced a partnership with Swarm, a German exchange, and, you may ask, why is this one so important? Well, while we’ve made crucial partnerships with companies like NeoSwap and Crypto Real Estate this year, connecting to Swarm is the link that can really make things happen and act as a force multiplier for all these other partnerships, and for others we’ll make in the future. The combination of Mattereum’s legaltech innovation and Swarm’s ability to create fractional ownership tokens has enabled what is literally the Holy Grail of the blockchain - creating legally enforceable fractional ownership of real world assets with tokens that can be traded on-chain - and that has the potential to change everything. Let’s look at why.
Creating legally enforceable fractional ownership of real world assets with tokens that can be traded on-chain has the potential to change everything
Swarm is a really, really well-established company in the crypto space, going back as far as 2014, and they are German. In Germany, they just put the same criteria around crypto as you would for any other class of financial instruments that were issued in the normal way, the old-fashioned way, the TradFi [traditional finance] way. So Swarm got their licences, and now they are just like real-world finance in Germany, but they have a license that lets them do things with crypto, and they’ve got the attitude, they’ve got the experience, they’ve got the institutional knowledge... So, they’re not really TradFi, and they’re not really DeFi; they’re just Fi. They don’t have the whizzy kind of craziness of DeFi, they also don’t have the dullness of traditional finance; they use the blockchain to get things done, and they’re exactly the kind of institution that we thought mainstream banks were going to turn into in the 2016 era. This means that what they do is backed by all kinds of regulatory oversight and legal compliances; they are not going to take anyone’s money and do something crazy and unexpected with it. This meshes perfectly with the Mattereum approach, where our Mattereum Asset Passport (MAP) provides evidence that the owner of the token issued by Swarm has full legal ownership of the underlying physical asset, or their fraction of it, and this works in 172 jurisdictions worldwide. With Swarm as Mattereum’s fractionization partner you have full legal protection at every stage of the process.
With Swarm as our fractionization partner you have full legal protection at every stage
Swarm is the first really serious way of joining together TradFi and DeFi, and then Mattereum comes in and says, “Okay, so you want to do something like take a thousand acres of rainforest, you want to take an industrial facility, you want to take a collection of fine art that’s been accumulated over a few centuries... You want to take these things, and you want to split them into shares and allow people to buy them, you want to split them into tokens and allow people to buy them, you want to take revenue streams and allow people to buy those, you want to do governance...” For all of these things, you have to know for certain that the assets are real and that there’s no fraud in the assets, you need insurance, you need underwriting, you need machine-readable definitions of those assets so that you can do things like automated investment portfolio management.
You have to know for certain that the assets are real and that there’s no fraud in the assets
You need specialised entities external to regular financial organisations that put together those kinds of deals, and Mattereum is one of the those entities. In the real world, Mattereum might be seen as something a bit like KPMG or one of the other big-four accounting firms. It could have some overlap with the kind of stuff that some of the more entrepreneurial merchant functions that are out there. What we’re seeing here is the buildout of real-world finance, neither TradFi nor DeFi, but real-world finance with many of the same kind of business models that you get in the real world, but all implemented on the new technological backbone of the blockchain. This is really what we always thought Ethereum was going to be, this is back to the original vision – we can now implement through Mattereum all of the stuff that we talked about at Ethereum nearly 10 years ago.
You need external entities that put together the deals, and Mattereum is one of the audit-like entities that helps put together the deals
If Ethereum was a Jedi, Swarm is the lightsaber, because it’s going to cut right through the separation between the Ethereum community and the real world. Once we can get through that door, you can buy-and-sell 20% of a house as Ethereum tokens in a way that is government-approved, and at the end the lawyer who is involved in the deal can read the paperwork and go “Sure, that’s fine, that’s just a transaction”. There’s been a frothy, very delicate kind of enthusiasm with tokens, where the enthusiasm goes away and then suddenly all the money goes away. How different would it be, if all of the enthusiasm around NFTs a couple of years ago had been for instruments that had durable value, like real estate or gold or fine art? You wouldn’t have a situation where there was this sudden dramatic popping of a bubble. Real estate bubbles pop, but when a real estate bubble pops, people lose 20% of their value; when a token bubble pops, people lose 99.9% of their value, and then sue a celebrity.
If Ethereum was a Jedi, Swarm is the lightsaber
With real-world stuff when you buy something it doesn’t have this kind of inherent volatility. This is because what you’re not buying is “Does this asset class really exist or not?” which is where we are with NFTs, it’s where we are with DeFi, it’s where we are with ICO tokens, You’re not making a bet on whether the asset class turns into something; you’re taking an asset class that, in some instances, is tens of thousands of years old and you’re making a bet on an individual thing inside of that asset class. It’s a completely different kind of risk, it’s a much lower risk in most cases, it’s certainly a much more easy-to-understand risk, and it doesn’t have the same kind of correlation, because even if one piece of real estate turns out to be a bad deal, somewhere in the world all the rest of the real estate is much the same as it ever was.
You’re not buying “Does this asset class really exist or not?”
Right now, the only way to buy things if you cannot afford them yourself is credit. You want something, the thing is expensive, you need something, the thing is expensive... The only way that you’re going to get that thing is if you can borrow money from one or more people, and then you take all of that money, you buy the thing outright, and now there’s your thing. That as an approach involves paying interest: 2-3% for a long time, when interest rates were super low, now interest rates are high, high, high and they’re probably going to go higher, and you start thinking like 30% APR [annual percentage rate] on credit cards, and even higher instances in some instances... But even the core borrowing from bank base rates, the interest rate numbers are going up and up and up – it’s getting more and more difficult and dangerous to use debt to finance things.
Right now the only way to buy things if you cannot afford them yourself is credit
The other way of doing this thing is that you get people together to buy things collectively. Equity, not debt. “Hey, I want to buy this thing; I can’t afford it. How about I take two-thirds of it, and you take one-third of it? How would that be? – Oh yeah, that’s fine. Sure, absolutely.” Now, if that’s something like a riding lawn mower, then you sort of divide this up in terms of who’s going to use it when, and you’re sort of dividing these things up in time. That is a very, very small set of use cases. Most of the time, what people do is they divide things up in terms of value: here’s an enormous building, four different companies, each put money into that building, and one of them owns 5%, one of them owns 10%, one of them owns 25%, the other owns the rest of the building with rules, governance, for how the entities that all own parts of the thing interact. If you get to the really big-scale things, like publicly-traded companies, you could have tens of thousands or hundreds of thousands of shareholders. At the end of that you can do transactions at really huge scale and the thing that they own collectively together, is something like a power grid or an airline. These mechanisms are really alternatives to debt.
The other way of doing this is that you get people together to buy things collectively.
What tokenisation does is it takes the transactional costs of doing those kinds of deals down 10, 100, 1,000 times in time. Rather than getting a lot of different partners together and it costing $350,000 in legal paperwork you get something like that, but it’s a set of operations done on DeFi, and it costs you, maybe $18 worth of gas because you did it on one of the L2s [layer two platforms]. It’s going to take us a few years before we can get those prices down to those kinds of levels because it needs an established ecosystem, templated legals and so on, but when you can offer these kinds of things as services all kinds of new things become possible. Imagine you want to buy a house. Your grandparents and your parents and your cousins are going to put up 30% of the money for the house in exchange for so many shares to the house, that’s what you’re going to do, instead of taking this enormous loan from the bank; you could get a smaller loan at a much better interest rate, and you could put together these kind of combined debt-and-equity packages for the day-to-day business of staying alive as an ordinary person that works for a living. It takes these super powerful tools from high finance, and it brings them down as a way of replacing massive mortgages and credit card debt. It gets us out of a debt paradigm and into a debt and equity paradigm, or even a pure equity paradigm. That really changes our relationships with each other, because not everything is then mediated by an adversarial relationship of who owes who money; these things then become mediated by a collaborative relationship, which is that we own this thing together. That changes the whole tone of your society, debt society is hostile; co-ownership society is much, much more benign, much friendlier.
Debt society is hostile; co-ownership society is much friendlier.
Democratising access to fractional ownership of assets is going to revolutionise the world much more than the credit card itself did. The credit card was a huge deal, because before that people only really had cash economies. So the first transformation was that ordinary people got access to debt: you got mortgages, then you got credit cards, and that fuelled this enormous burst of people making long-term plans. “I am going to buy this thing on credit, I’m going to take out a loan, or I’m going to put it on my credit cards,” and so people’s lives speeded up enormously, because they could bring money from the future into the present.
Democratising fractional ownership of assets is going to revolutionise the world much more than the credit card did
Now you say, “Well, what happens if we start replacing this debt-based society and debt based economy that we have now with a debt-and-equity-based economy?” There are $42 trillion of transactions a year on
credit cards – the numbers are staggering! Imagine a similar transformation, where we give people access to equity as an instrument. It’s a percentage of the entire mortgage market, it’s a percentage of every car purchase, it might be a percentage for every time somebody buys resalable consumer electronics like laptops. There are just staggering things that can happen once you’ve got equity on the table, and the level of social transformation I expect to be even larger than the social transformation caused by credit cards and the debt revolution.
There are just staggering things that can happen once you’ve got equity on the table,
DAOs [decentralised autonomous organisation] can be created based on this, reshaping collective ownership and governance of physical assets. DAOs have massive potential as a way of managing and governing collective ownership of real world assets, but so far, without that as a purpose to shape them, they’ve struggled to find a niche in the real world. But to me DAOs are the best example of an Ethereum technology which is poised to take over the world, and it just needs that extra step — connecting them to real world assets — and then suddenly they’re going to be everywhere. I know a lot of people in the DAO community had very high hopes for them as an instrument that would change everything and then, a bit like Ethereum itself, they’ve had this phenomenon where you just keep stamping on the accelerator and the wheels don’t move. It’s the gearbox problem – DAOs also need a gearbox; what we’re providing is the gearbox.
DAOs need a gearbox; what Mattereum is providing is the gearbox.
The approximate real-world equivalent of the DAO is the publicly-traded company: you buy a share of stock, you now have some economic rights. The board cannot just screw you over and disenfranchise you, because you have legal protections, and they have to consider your wishes when they make decisions. They can do things like get together and elect board members. If you think of the CEO of the company as kind of like the president, the board are kind of like the supreme court, they sit over the president, they enforce law. The shareholders pick the board, the board then picks the CEO. It’s kind of slightly democratic, but in practice it doesn’t seem very democratic because the people that run large companies have gotten very good at fighting shareholder democracy. But in principle, shareholder democracy can work, maybe one fine day.
People that run large companies have gotten very good at fighting shareholder democracy
The DAOs have the ability to automate this governance: you own some tokens in a project, you have some rights, there is some protection for your interests as a result of those economic rights, there is some contract law, there might be even some statute law, but these things all together create a situation where we are collectively governing an asset that we co-own together. “Here is a thousand acres of rainforest. 50,000 people own some of that rainforest. They collectively have voted that they’re going to preserve that rainforest for the next 25 years, and they will not even consider selling land to any entity that isn’t a better rainforest protector than the one they are currently themselves.” Those rules can be written into the process, and then no future set of owners can change those rules because this stuff is immutable. All of that stuff, if you try to do it with lawyers, the time and the cost and the expense is massive, if you try to get the voting done and people have to turn up at shareholders’ meetings and they have to fill in proxy forms... It’s hard. That’s one of the reasons why shareholder democracy is not so effective in large companies, but if all of that stuff was brought online and it was all managed through DAOs with properly set-up legals and contract law and all the rest of this, proper voting rights, proper economic protection for minority token holders, the rest of these necessary steps, then what you get is an economic democracy revolution. All of the technology that’s been worked out by the DAOs is suddenly applied to collective ownership of the world’s assets. The DAOs suddenly have an enormous amount of work to do in the real world, the software will get better and better and easier and easier, and in ten years you could see hundreds of millions of people participating in DAOs, in the same way that hundreds of millions of people participate in social media today.
What you get is an economic democracy revolution.
We never really thought that individuals were going to go out there and become one-person movie studios, and now that's a huge sector of the economy. In the same way, you don’t think that individuals are going to become governance geeks and they’re going to wind up managing investment portfolios and they’re going to wind up as sort of stewards of planetary resources. I think that that transformation is necessary and inevitable, because we know that we cannot run the global economy in the way that we’re doing it today. It’s a disaster zone, and we can only fix that by re-democratising the world. That doesn’t just mean going to
a ballot box and voting once every four years; it also means direct engagement and direct ownership of the world’s productive assets, from the rainforests to the airlines so that these things are well-stewarded by the people that are affected by how they are run, rather than just being controlled by a very small corporate elite that does everything possible to make sure that shareholders have no actual power.
The global economy today is a disaster zone, and we can only fix that by re-democratising the world
With the combination of Mattereum and Swarm, all this becomes possible, and ultimately easy. Any real world asset can be tokenized, people can use the tokens to share equity for their own purposes, they can form DAOs to manage larger assets and they can re-democratise things at a level that doesn’t need governments to be involved, beyond providing the legal framework in which these things operate. This is something we are doing now, not something that we are hoping to make possible in the future; the Mattereum system is live and working, and has been for two years. Swarm are up and running and have been for even longer. It’s two mature and effective players coming together to create a synergy that can change the world from day one, putting real world assets securely on-chain and giving people the tools to manage them; we’re not some new hopefuls promising vapourware for some indeterminate, distant date.
The future is here, now, and ready for use.
Contact us if you have assets you would like to fractionalize using the Mattereum system
