Neufund Report: The Pioneer of a Decentralized STO?
Part (2/3)
Part 2: Smart Contracts and Platform Implementation
Overview
This three-part report aims at conducting an in-depth analysis of the Neufund platform and its marketplace. We have given a complete overview of the platform in Part 1:
In Part 3 of the report, we will present an overview of the STO ecosystem and compare Neufund with Polymath and other STO issuers:
In this Part, we discuss the technical aspects of smart contracts and some issues regarding the platform.
Smart Contracts
ERC20 vs ERC223
Both NEU and the Equity Tokens issued through Neufund platform use the ERC223 Interface, an advancement of the ERC20 token Standard. In practice, this means that any ERC20 compatible smart contract deployed to the Ethereum main-net (currently about 128000) also works with the ERC223 interface.
Furthermore, transactions with the ERC223 standard are more similar to Ether transactions, which are safer, solving the critical problem of accidental token losses. This is achieved by ERC223 standard’s new transfer method. To illustrate this point, we shall use an example. If one sends 50 ETH to a contract that is not intended to work with Ether, then the transaction will be rejected, preventing the tokens from getting stuck at the contracts balance and eventually getting lost forever, which often occurs for the ERC20 protocol.
Contract mechanism
On the Neufund platform, both off-chain and on-chain solutions are used in order to protect the interests of investors and ETO issuers. The on-chain solutions are smart contracts, while the traditional off-chain legal solutions are legal agreements which encapsulate the same legal terms but are written in English.
Agreement Contracts are the legally binding smart contracts of the platform. They are approved by the signature of the Platform Operator Representative and the related party (investors or companies) before they can be stored in the Immutable Storage (IPFS) as legal contracts. Among the various smart contracts for the ETO, the ETOCommitment and ETOTerms are two of the most important Contracts during the Equity Token Offering.
ETOCommitment is a legally binding agreement contract and represents the token offering organized by a company. This contract is an agreement that can be deployed by anyone and is signed once investors send a payment to the contract. The commitment requires all the payments by investors to be conducted only with ERC223 compatible payment tokens. The ETOTerms contract encapsulates the base terms of Equity Token Offering and is set by the company doing the ETO. It reflects pricing and discounts among other important investment terms (see Term Sheet Ninja).
Neufund tokens represent more complicated rights than simple token transfer rights, since NEU entitles its owner to revenue, voting and other rights. These rights depend on the amount of tokens stored in the wallet at a certain point in time. Therefore, it is natural to attach these rights to token holders’ balance at a particular point in time. For this purpose, Neumark is a Snapshot Token, which means that all the wallet balances are saved at a certain point in time. More specifically, in case of the NEU token, balances are being stored on a daily basis, and Neufund also provides snapshot storage via the Snapshot contract.
A slight deviation from the Whitepaper?
It is interesting to observe how the platform actually operates in comparison with the original mechanism outlined in the Whitepaper. Here, we analysed three aspects where the Platform’s implementation seems to have deviated from the initial goal outlined in the Whitepaper.
Ether round ICBM
As a matter of fact, it was initially planned in the Whitepaper that commitments in the ICBM can be done using both EUR-T and Ether. Later on, however, it was announced that only ETH will be accepted as a commitment currency and that there is no public EUR-T ICBM for the platform. However, as we came to discover while exploring on-chain transactions, there have been actual EUR-T commitments during the ICBM phase.
In fact, the top two NEU owners other than Neufund obtain their share of NEU with EUR-T commitment instead of ETH. Moreover, there are in total about 100 EUR-T commitments throughout the whole ICBM period. This amounts to about 10% of the total ICBM transactions.
The readers are reminded that investing with the less volatile EUR-T in ICBM should be more preferred, as these invested funds are subjected to an 18-month liquidity risk before the investors may use them again.
Neufund Tokenized themselves with NEU?
We mentioned in Part 1 that Security Tokens are structured as “investments” under the German Regulation. So how about NEU tokens? Is NEU the security token of the Neufund platform, or something else?
The properties of NEU tokens are in fact very similar to securities. In the Whitepaper NEU is described as representing a share of the ecosystem and a token representing network value. Additionally, it has dividend-like features, with NEU holders getting a fee for every successful ETO (see Part 1). In fact, Neufund even described NEU as being their own “stock”.
The legal framework of NEU is described in the Neumark holder agreement. However, no specific legal structure on NEU is detailed. Given the emphasis of Neufund on legal compliance, the regulatory ambiguity of NEU is inconsistent with Neufund’s legislative expertise.
NEU burning and NEU reward
It is stated in the Neumark holder agreement that NEU can be burned. A possible reason for allowing NEU owners to burn their NEU is to allow for the use of the escape hatch, a mechanism that allows investors to take back their funds committed in the ICBM (ETH or EUR-T) immediately with a cost (10%).
However, burning NEU resets the NEU reward to a higher value. As explained in Part 1, NEU reward depends on the total NEU supply. Burning NEU reduces the total NEU supply, thereby reverting the NEU reward back to an earlier (and higher) rate.
A highlighted incentive for early investors of Neufund is the high NEU-reward rate. However, through burning a substantial amount of NEU, Neufund may reset the NEU reward curve to attract future investors. Thus, the fact that NEU can be burned compromises the promise of early investor incentives.
Summary
- Neufund’s Equity tokens are ERC223 token, an advancement to ERC20 in terms of token transfer.
- The ETO smart contracts are paired with off-chain legal contracts, ensuring legal compliance in the off-chain world.
- EUR-T was used in ICBM even though Neufund only allows ETH investment from the public.
- It is unclear whether the NEU token is a equity token or just another type of instrument.
- NEU reward can be altered by burning NEU.
Editor’s Note
With this Kintaro report we want to shed light on the mechanism, challenges and limitations of the Neufund Platform. Our goal is to enable investors and those interested in equity fundraising on blockchain to have a better understanding of STOs performed through the Neufund platform.
What is Kintaro Capital?
Kintaro Capital is a collective investment scheme soon to be established under the laws of Malta as an investment company with variable share capital. At Kintaro we are true believers in the long-term value of blockchain protocols and crypto-assets. Our goal is to offer an alternative to fiat based financial instruments, leveraging our crypto-economic experience, our research and data analytics expertise to yield higher returns, while reducing and managing the inherent firm-specific and market risk.
Co-Authors: Lau Ka Wai, Biayna Grigoryan, Manuel Wedler, Ganeshdip Dumbare, Ivan Ripamonti, Mervyn G. Maistry, Galen Evans
