If you are trading traditional assets in today’s market that means you are probably dealing in well-known assets such as equity, real estate, cash or bonds. You are probably doing so because you assume these investments will appreciate, and that you will benefit from it in the long run. You are also probably doing so because there is a somewhat straightforward system for dealing in the traditional marketplace.
You may also know about the alternatives market.
The alternatives market is valued at $7.7T (according to 2017 Preqin report), and it includes different assets such as private equity, hedge funds, mutual funds, ETFs, etc. It can be somewhat of an ambiguous category and includes assets such as art, antiques, collectibles, financial derivatives and even (recently) cryptocurrency.
The point is that almost any asset which can derive its value from an interested market can be considered an alternative investment. If there is enough demand for an asset, a market is created. However, for some time now, there have been considerable drawbacks for participating in the market. If one wanted to trade alternatives in today’s market, the costs to do so (both financially and in terms of time) may be outright prohibitive to a large sector of potentially interested parties.
In plain and simple terms, the marketplace for these assets is a legacy system. That’s a nice way of saying it’s old and slow.
Consequently, the assets sold on it have been classically, while wrongly, considered illiquid.
Why is the marketplace so slow?
There is a complex answer to that, but the short one is basically that any trade in the alternatives market has to go through a series of steps that take longer than their equivalents in the traditional market. These steps include Issuance, Trading, Clearing, and Settling and they are somewhat fragmented and disjointed from one another. Antiquated processes such as paper, approvals, paper ledgers, old databases, fees, etc. This is a process a lot of investors want to avoid, and so, even if they have assets that could generate a sizable return, the burdensome selling market is a repellent.
This sector is ripe for technological innovations. What has been absent in the alternatives market is an “all-in-one” ecosystem that can handle all the steps necessary in the securities lifecycle as seamlessly as possible without sacrificing any compliance. The OpenFinance Network (OFN) is building a protocol that brings this much needed innovation to the alternatives market.
In short, what these innovations brings to the market is speed and efficiency by allowing investors to operate in a single environment. Transacting over OFN allows those participating to skip the time consuming process of dealing with multiple, outdated infrastructures, and to transact using a single, powerful, and modern protocol.
How does it work?
OFN has been working in the alternatives market since 2014 and knows what the existing process looks like for investors. We have distilled the necessary steps in the transaction lifecycle and brought automation, abstraction, and standardization to the process.
- Issuance: Issuing (or listing) a new security on the market typically involves a lengthy legal and regulatory process. OFN connects you straight to a Validator who is qualified to register the asset on OFN. This meets compliance standards and does it quickly and painlessly. We can also tokenize assets on our platform, making them easier to trade.
- Trading: Trading typically involves ‘off-chain’ book keeping to record ownership of traded assets. OFN uses a distributed blockchain ledger to record trades that is more efficient as well as accountable. In addition, operations that are more time-sensitive, such as transaction matching, are done off-chain. This structure results in a hybrid chain model which leverages quick block times, and data privacy of a side chain, combined with the immutability and visibility of the Ethereum main net. Our proof of authority model allows block times to be set (currently at 10 seconds) giving us a full clearing and settlement time of about a minute if implemented with a digital signature guarantee.
- Clearing: This is typically handled by entities such as Central Counterparty Clearinghouse and Central Securities Deposit to provide coordination related to transferring assets and generally keeps buyers and sellers protected. However, scaling these systems for modern markets has proven difficult.
While it has indeed scaled it has done so at the expense of smaller players having access to this marketplace. Since there are large bodies handling the clearing process and it is a long and cumbersome process, it costs something. And this cost is often more than the smaller investor can pay. The inefficiencies related to this process are estimated at $80B annually.
OFN is using blockchain technology that essentially eliminates the ‘man-hour’ costs related to record keeping and brings you straight to settlement. It will also do so with lower fees and more accessible entry points.
4. Settling: Traditionally, settlement times have been delayed by the length of time that the clearing process has taken. However, distributed ledger technology not only make the clearing process faster, but it brings security to the system, reduces risk, and also greatly speeds up the time to settlement.
By simply taking advantage of modern innovations in blockchain and other technologies, OFN has created an end-to-end ecosystem where you can transact painlessly without sacrificing legal compliance.
The alternatives market has long been in need of these advances which will allow for not only a reformed valuation of alternative securities but will also make entry more accessible for smaller parties to get involved in the marketplace. This is a market full of unlocked potential that simply needs a “next generation” protocol over which to transact, and that is what OFN brings to the table.
For more information on the OFN, see our website www.openfinance.io or stay updated with our OpenFinance Network communications:
Telegram — t.me/openfinancenetwork
Twitter — twitter.com/OpenFinanceIO
Medium — medium.com/@openfinance
Juan M. Hernandez is the Founder and CEO of OpenFinance Network, the trading platform for security tokens and other alternative assets. Juan is a serial entrepreneur, technologist, and polymath experienced in financial markets, exchanges, and blockchain technology. He holds a CS degree from Northwestern University and an MBA from the Kellogg Graduate School of Management.
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