DLTs, NFTs & Crowdfunding

The proximity of NFTs and crowdfunding led me to research what exactly Distributed Ledger Technologies (DLTs) can provide to contributing members of a community with different forms of retribution. Soon enough, I came across the concept of fractionalization and its possibilities.

About 5 years back, the idea of distributed ledger technologies (DLTs) actually helping to crowdfund was a novelty. In her paper, Navroop K. Sahdev exposed the potential DLTs had in the field of Equity Crowdfunding in a further analysis of the possibilities provided by crowdfunding platforms.

Different from other ways of raising capital, crowdfunding comes with a couple of qualitative differences. For starters, crowdfunded companies are, understandably, subject to less regulatory compliance therefore during the investor screening process, company information disclosed is much less than those of companies looking to go public. That’s why when dealing with a crowdfunded company, investors are met with a great deal of uncertainty in regards to future profits

But crowdfunded companies can especially benefit from DLTs –blockchain– to the raising capital-equation when considering one of the basic pillars of the trading market: the asymmetry of information. Equity trading exists only under a framework of asymmetric information. If all participating parties shared the same knowledge about the market, the number of unbiased investment decisions would all diverge toward the same place –this is the so-called perfect market. The integration of DLTs raises the question of exactly how far away it may be considering DLTs lean towards a more transparent model of information reporting.

Navroop finds that DLT–blockchain– is cheaper than traditional trading, streamlines shareholder voting processes, and is backed by disambiguated bookkeeping. All of these seem like the perfect upgrades for a market known to be sluggish, occasionally elitist, and often bureaucratic.

In terms of operationalizing systems, crowdfunded companies looking to adopt DLTs are quicker, smoother, and more transparent. (This is why Navroop states it's important to note what kind of investors are interested and what their specific liquidity requirements are.)

But what happens when DLTs like non-fungible tokens (NFTs) are the (main) form of retribution to those engaging in a specific crowdfunded company, project, or, more popular yet, a decentralized autonomous organization?

In comes, fractionalization. If you’re not familiar with the term, maybe thinking of shares of a company could help.

Shares are a pretty common form of fractionalization. The value of a company’s worth is separated into purchasable units of ownership distributed proportionately to participants vested in a given company. The performance of said company is the incentive for participants to either invest or sell. Owning shares usually implies profit paid on a yearly basis (dividends) and in some cases grants voting rights to shareholders with the highest stake in the given company. When it comes to fractionalization within the the realm of DLTs, shares can be thought of in the form of NFTs, or in this case Fracitonalized NFTs (F-NFTs).

But NFT fractionalization isn’t meant to merely replace the notion of shares but rather to expand upon the possibilities of supply and demand.

It’s about reimagining the whole end-to-end process of finding and matching investors with investment opportunities, and the subsequent secondary market opportunities once an investment has been made. There are potentially new opportunities on both the supply and demand side. Especially in private markets. Private markets are manual, slow, opaque, and with high overheads. — Mark Wightman

But the main concern for NFTs, say, carrying IP for example,would be their liquidity. As of today NFT liquidity, popularity, and, more so, their legitimacy is umbilically tied to their creator, developer, or designer. That´s to say unless you´re somebody in the world; the difficulty to make NFTs valuable resembles the difficulty of making it in your field of work. But maybe the untapped potential for NFTs doesn’t just rely on the creator economy.

Regardless of NFT liquidity, their practicality as vehicles to carry value simply optimizes the current framework under which investing is carried out in private markets. Even more, the value behind NFTs might not even be what we´ve understood to be valuable up until now.

Sure, NFTs can expand upon (democratize?) the base amount of investors looking to take part in a given project that tokenizing some kind of valuable asset but as younger generations of investors begin to populate the market, understanding value as an exclusive financial return may progressively begin to whane.

REITs (Real Estate Investment Funds) & ETFs (External trade funds) have shown us the way for public markets, now there are ways of cheapening the process and making the investor and issuer experience richer and better in the private markets. — Mark Wightman

The tokenization of assets in the private market allows for all kinds of new investment opportunities. If the decentralized future is concerned with ESG (environment, social, and governance) issues, one could argue that the value future investors find may begin to change over time; where instead of thinking of tokens like shares over a company they act more like promotional assets. Instead of a financial yield, these can act like rewards or benefits for those committed to a given project. All in all, stand-alone NFTs aren´t valuable, but they for sure carry value as good as any other medium before.

At THEOS, we envision a new way of thinking, minting, and trading NFTs, and have developed what we believe will become the next-generation community-governed NFT platform.

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