Tokenization is a very innovative function that allows investors to transform a real asset into a token with an immediate market-making function. This means that only two actors are needed to come together to complete a transaction without the intervention of the middleman. This concept offers the opportunity to change the way companies raise capital when planning to develop their businesses. Asset-backed tokens act as shares that can be bought and sold whenever the investor deemed it necessary but limited within the legal token agreement (e.g. minimum time holding period). These trades are executed on the ledger that makes them secure and traceable and instantaneous as the legal agreement and settlement of the transaction is within the token.
Some of the tokens offered by the platform are
The ecosystem is designed in a way the investor stake in a project (Token) defines the weighting of their participation. This relationship allows the investor to participate in a specific type of voting right, predefined within the project token generated. Each project token can be different, and the details will be clearly outlined to the investor. This option is only applied to investment into one project only not to the pool SPV funds where the general rules are defined in their respective tokens.
Also, we have introduced a way for an investor to have the ability to realize their investment by releasing some of the investment early on. The proportion of investment/participation will be multiplied by the “freezing period” (i.e. the period during which the investor cannot disinvest). This solution will help to manage investor expectations on when it can liquidate his investment and gain some returns. This approach can create flexibility for liquidity purposes and to enhance ecosystem quality and reputation. An incentive for the investors to come into the project at the early stage the locking period will have the option to be fixed at discounted rate together with discounts provided during the initial sales.
Escrow services will be available to projects, but they will not be compulsory for all. This factor will contribute to the definition quality of the risk investment and the final overall rating of that specific token to investors. In case an escrow is used the critical assets of the company are transferred to an escrow company to minimize the risk of eventual improper company disposal. Our ecosystem is supported by artificial intelligence that allows automation of decision making via prediction market. The investor can either delegate their decision to the artificial intelligence or use it for recommendations, but the basic actions are performed manually by the investor
There are various assets which the ecosystem will be able to provide, but all with the same investment philosophy that are: abilities to start with a steady growth but small investment; abilities to show on the paper first and then on practical term tangible returns; provide return on investment in the range of at least 20% annually. Every single token will be vetted through the ecosystem and following a rigid financial assessment standardized by DCI best practice and supported by artificial intelligence.
Project backed tokens are tokens generated to support specific company’s projects. This could be an exciting way to raise capital without increasing the number of equities in the company or the level of liabilities. When the expected return does not match the required minimum return of investment with the DAB token type, and dilution of investment is unattractive, we have created the PB tokens.
This is based on the revenue generated by a project. The loan will be provided to the company based on the project funding needs, and payment will be proportional to a fraction of the annual revenue generated. This payment will progress until the company has paid back the expected initial agreement (e.g. 1.5 – 3 times the initial loan). We think this should be an attractive solution for a small company with revenue of around a million to five million dollars.
This token is very similar to the way funds are release to large construction projects. The funds are locked until certain contractual agreements are achieved, this does not necessarily mean it is based on milestones.
The system might use two ways guarantee to help the companies in a specific circumstance to receive the funding that otherwise would be locked. The entity in control of this power is within the DCI ecosystem.
A legal representative “arbitrator” will also be used to solve future disputes between an investor and the company. This way, the arbitrator will be assigned and will be through a pool of arbitrator and voting to accept the arbitration case. This will also be based on time stamp agreement to complete and close arbitration case.
The ecosystem offers to create Digital Assets backed Token Group; this is like the creation of a fund investment with the simple focus on a specific segment where the token owners of a group asset are entitled to a share in revenue and profit of the underlining assets in the same group.
DCI Ecosystem issues the Digital Assets Backed tokens where each of the assets is pledged to a legal entity. A legal charter will be defined to protect interests of the token holders and changeable only with the majority of token holder voting using democratization capability mentioned before in this paper.
The DCI tokens are released for each project and can be tailored to the need of a specific project. They are used to accessing the services and applications offered on the application tool layer. Once a new project request is approved they can raise capital.
The Capital will be collected and provided by the particular vehicle network to the project. The project will receive the funding to their wallet held on the DCI ecosystem. The way the project will pay the money back to the ecosystem (special vehicle network) will be defined as the token offered.
In addition to this also third parties can participate in the special vehicle investment and participate by providing their service. They will need to activate their interest in the network with the use of DCI utility token. This a way for third-party services provider to be advertised on the SPV/Fund network. Token agreement between projects and third parties will be handled outside the SPV/Fund with a tailored token exchange between their interested parties.
The ecosystem offers a powerful new approach to fund management that we call “open fund management”. Today a fund manager must align with a company standard and philosophy of investment, with our platform any fund manager can operate freely with their philosophy of investment without any interference.
The funds created by fund managers will be assessed by DCI legal and compliance team before being approved and tradeable on the platform. A fund manager can either create its own fund or contribute as in this specific token fund to the creation of a pool fund with others fund managers.
The voting and decision making will work in a similar way as the democratization principle we use of the DCI ecosystem enhances with the addition of the creation of a syndicate group composed by fund managers responsible for the creation of the specific fund. The ecosystem will reward the contributors (Fund Managers) to the created approved fund through the release of a token to the contributor (CHFT) proportional to the success provided by the hedge fund.
The investment strategy can include anything from a portfolio of cryptocurrencies, derivative market making, trading between cryptocurrencies and mining proof of stake tokens. The profit obtained from such activities of the fund both from profit and price gain when selling underlying assets, will be distributed to the fund token-holders minus the fund management premium and expenses like the way it works on today market, but with much lower fees due to the intrinsic nature of the digitalized fund that requires minimum running costs. The CHFT are issued by a legal entity provided by the ecosystem in accordance to the rules pre-defined. Fund managers token holders of the fund will be able to make management decisions in proportional to their token participation holding.
This is a token offered to Fund Managers, Investment house, Venture Capital that desires to tokenise their existing publicly listed funds or to create a fully digitalized fund. The ecosystem provides to our client, additional distribution vehicle, that will increase liquidity opportunities without increasing their distribution fee base structure but reducing the overall cost as the ecosystem will not require any distribution, settlement backend lengthy process for the settlement of investment position.
Let’s review the features that support the tokenization in a positive aspect and then the negative aspect for reader clarity. What you are losing for tokenizing a fund and how much this is true?
By tokenizing a fund you are not changing the underlying financial product itself, this is still a fund, where a pool of money is managed by a person (fund manager) or organization to create additional future value. The portfolio created still hold the same portfolio theory principles, for this reason, a tokenized fund is still a fund!
This is also valid when looking at the risk investment, the risk calculation of a portfolio of tokenize funds still works perfectly fine apart from using tokenized start-up assets that do not provide enough fundamental data to perform fundamental analysis of the asset.
Tokenization offers additional advantage regarding operational “freedom” due to the light regulatory environment compared to the traditional share model. The other aspect is that investors have liquidity availability, and this allows to take a much longer-term view, when required, in investment since the pressure for liquidity needs of limited companies is not there anymore.
The token is very similar to the fund unit, and its behaviour is the same as the fund unit, and its value fluctuation is related to the portfolio performance. Tokens can be purchased, sold, transferred, and accessed on the market exchanged.
The “democratization” approach to invest has been around for quite a while with crowdfunding but the lack of portfolio view exposes investors to higher risk fund instead had embedded in its nature. Additionally, the initial crowdfunding round of funding is only limited to LP investors and VCs, mutual/pension funds and not accessible to the larger public.
We could think about fund tokenization as the next evolution, maturity level of the crowdfunding you can now invest in a portfolio solution reducing the risk of investment, participate to any stage of investment where before with restricted access and have better and lower risk investment.
When we look at the liquidity topic, we could argue that it was essential to have a mature secondary market where to sell your shares of the tokenized fund same as it works today, and it can improve returns. You could exit your investment early on when the NAV growth enough to justify the divestment and by consequences increasing the IRR of the investment. Liquidity should be seen both as a premium or penalty dependent on it levels (high liquid should pay a premium, low a cost).
We do not want to justify fund tokenization in the name of democratization or liquidity, because compensation needed to be paid to a fund manager will be required even in the tokenized world.
ow let’s focus on the advantages of tokenization. The main advantage is liquidity. When comparing to a VC investment that generally can bind investment for anything between 2 to 10 years or more with a high degree of uncertainty on the outcome, with negative IRR for the first few years and hopefully a positive one at the end of the binding investment period.
DCI believes that most of the companies would move to tokenization soon will become the standard practice as liquidity offered by the tokenization will become a competitive disadvantage for both the fund-raising company and the venture capitalist.
This liquidity aspect of the tokenized fund leaves us with an additional advantage that money previously bind to a long-term investment is now freely open to a multitude of investment opportunities.
The tokenization (Smart contract) and the management of digitalized funds help to achieve operational scaling from the investment and onboarding process to the exit proceeds with thousands of investors.
The tokenization and IPOs are very similar in many ways and they both aims to provide liquidity to investors so that they can take a longer-term investment
The process of IPO is very complicated, costly and it is only accessible and not easily accessible. ITOs has brought a new simple, and easy way to access fundraising to companies and it also provides liquidity to their investors, and it is democratic. This product should be of interest to VC investors as today they are facing liquidity issues and work on a model that is dated to the early 19th century. We hope that by bringing liquidity to LP interests in VC, we will increase the amount of money that is invested there and therefore make the overall VC industry bigger which in turn should benefit the entire start-up ecosystem.