And Now, It Is.
Blockchain proponents have talked a big game to almost every established paradigm you can think of. Government? Supply Chain? Healthcare? Art?
Blockchain is coming, and will make everything transparent, secure, uncheatable, safe, and efficient! Blockchain will disintermediate and decentralize, thereby speeding things up and lowering costs!
Perhaps no existing industry, however, has been the recipient of as many such promises/threats as the traditional finance and investment space.
It doesn’t take much digging to see why. Many of the most glaring inefficiencies of investing as it has traditionally worked are directly addressable by raising funds and settling transactions on the blockchain instead, and allowing investors to purchase blockchain-powered pieces of assets. Launching a fund today requires navigating layers of gatekeepers, each of whom command fees that quickly add up to a hefty premium. After that, traditional private equity is rife with more frictions, inefficiencies, and expenses attributable to manual processes and lack of liquidity, many of which are well and truly mitigated or eliminated by the adoption of blockchain technology. Given the immediate and inarguable benefits of blockchain-enhanced investments, such as lowered barriers to entry, greater liquidity, vast untapped capital from new investors, and so on, it’s no wonder that 2018 gave rise to numerous projects billing themselves as the platform to fulfill the prophecy.
Thanks to any of the various digital security issuance platforms that launched in 2018, fund managers and companies are now able to raise capital on the blockchain. The successful establishment of these platforms and the recognized demand for the services they provide is a major step forward for fintech. But how big a step is it toward the larger goal of disrupting the traditional financial services space? Realistically, the total raised in the handful of successful STOs that have been accomplished as of this writing (by Securitize, Neufund, and Swarm) are hardly a rounding error compared to the existing trillion dollar market for private equity. And yet, there is a chorus of voices in the (albeit nascent) blockchain space heralding 2019 as the Year of the Security Token. Where do we even begin aligning the hopeful hype with the reality? What will it take to entice a critical mass to adopt the new technology and realize the promise of inclusive investing?
These questions are precisely the ones we have asked ourselves again and again at Swarm. As a nonprofit, we enjoy the ability to take a problem like this and zoom out until a holistic, far-reaching solution becomes apparent. When we launched our live digital securities issuance platform back in January of 2018, we enjoyed a positive reception and gained a reputation as a project that delivers on its promises. However, despite launching with several inaugural funds in our digital securities marketplace, it was not until the most recent fund to tokenize with us, TheArtToken (TAT), that we celebrated a successful capital raise on Swarm. What we learned over the course of the past year in the lead-up to TAT meeting its funding goal calls attention to the need for a fundamental adjustment in the way we approach the issuance of digital assets.
We intentionally did not charge fees to our inaugural funds in order to populate our marketplace with opportunities quickly, and to familiarize ourselves with the ins and outs of tokenization in an ever-evolving space while doing so. Over the course of the year, eight unique investment opportunities launched on Swarm’s marketplace, ranging from Real Estate to Impact funds, each with its own interesting angles and aspects. Just in time for TheArtToken to launch on our platform, we applied two specific findings gathered from our experience and research which we believe contributed to the successful funding of TAT.
First, we answered the long standing request from our community to supply a fiat gateway for investing into digitized assets. While the need for such an onramp had long been obvious, it took us months to find the right partner before settling on Mercury FX, known for its reputation as a trusted global currency specialist, providing transaction services in over 30 currencies, and for being an early participant in xRapid, Ripple’s new cross-border payment solution. Investors responded enthusiastically, and TAT met each of its staggered funding goals at a quick clip - significantly aided by funds committed in fiat currencies.
Second, we had a bit of an epiphany regarding fees: they aren’t really necessary.
As a nonprofit, we’ve had the luxury of prioritizing efficiency and decentralization — two classic crypto values — over our own margins. We believe this perspective has much to do with our realization that the technological infrastructure required to issue digital assets is not at all expensive. Further, staking not only largely negates the need to charge upfront fees to token issuers, but can even allow issuers to be rewarded for digitizing their offerings via Swarm’s technology, thereby contributing to the expansion of the network. There are some excellent in-depth explanations of staking available, and we suggest you read them to fully appreciate it. However, no research is really required to take advantage of it.
How does this work? By decoupling the technology layer from legal, marketing and other services related to security token issuance, we are able to offer security token issuance for free. The stake, based on a nominal (and capped) percentage of the value of the tokenized asset, is converted to SWM and held in a smart contract for the life of the security token issued — remaining fully owned by the token issuer. When the issuer has redeemed or burned all tokens, the staked SWM is returned to the token issuer.
At a high level, staking with Swarm’s technology works as follows. An issuer uses Swarm’s infrastructure to create and list their DSO at no cost. Once the security tokens are sold, there are two routes to staking. The easiest option is to simply allow the custody provider of their choice (pre-selected at the time they customized their security token) to handle the conversion of the stake required. Otherwise, crypto veterans and DIYers can convert and send the required stake to the staking contract themselves.
Either way, the staked SWM simply sits there until the issuer gets it back at the end of the life cycle of the issued tokens.
TheArtToken has been the first beneficiary of staking to raise capital on Swarm, and by all accounts they have been pleased with the process and its results, tokenizing a large portfolio of post-war contemporary art and reaching their funding goal of $16m. Unburdened by fees related to the actual digitization of the asset, they have been completely at liberty to focus budget and bandwidth to their legal counsel and marketing campaign — two requisite considerations that exist for funds launching on or off the blockchain.
At Swarm, we continue to deliver on our promise to seek, design, and build solutions that lower barriers to entry and benefit all in the investment space. Rather than extracting value from the outset, we are instead capturing and engaging value dynamically. By delivering a DSO issuance model sans upfront fees for those who would bring that value to this burgeoning ecosystem, we are doing our part to pave the way to mass adoption of digitized securities and fractional ownership of any conceivable asset.
Interested in issuing a DSO fee-free with Swarm’s technology? Learn more here. Subscribe to Swarm on Medium to learn more about the ways we offer infrastructure and onramps to all (including in-depth explorations of the philosophical implications of staking and more). Stay tuned for upcoming blog posts that will detail how we’re mitigating the need for adherence to one blockchain — otherwise known as blockchain-agnosticism, and on the latest developments with Swarm’s streamlined compliance solution: Market Access Protocol (MAP).