The Implications of Crypto Assets Part 2: Decentralized Exchanges

Continued from Part 1

Crypto CrowdfundingThe decentralized exchange has been viewed as the first big step towards Bitcoin 2.0. The basic idea is that anyone will be able to issue their own stocks, currencies, ETFs, and other assets from the comfort of their own home. All of those assets can then be traded against one another for little to no cost. This means that someone could potentially create a new currency instantly that is backed by an ounce of gold sitting in a safe at their house. On the other hand, entrepreneurs will realize that it is easier to find investors when they can sell shares in the company rather than promise to provide their early backers with t-shirts and bumper stickers. Let’s take a closer look at the real implications of the coming decentralized exchanges.

Colored Coins and Smart Property

Colored Coins is a project that is aiming to build a decentralized exchange where user created assets and smart property can be traded by anyone in the world. The project is nothing more than a new layer on top of Bitcoin, and it comes with its own wallet. The way it works is that users can color their bitcoins to represent certain assets. Going back to the gold example, the person holding that gold could take one of their bitcoins and say that the bitcoin now represents an ounce of gold. They can break that ounce of gold into 100,000,000 pieces, just like a bitcoin. The same concept applies when talking about a new company that wants to offer shares to the public. They could take 10,000 satoshis and say that each one of those satoshis represents a share in their company. Owners of those shares could then trade them for anything from bitcoins to the gold-backed currency mentioned above on the decentralized exchange found in the wallet. A user of the Chromawallet can basically back any of their satoshis with whatever they want. You could even say that one of your satoshis represents the title to your house or car.

Initial Public Offerings

Before the creation of crypto stocks, the process of going public was quite expensive. For example, Twitter recently spent nearly $60 million just on underwriters and IPO fees. The sad part is they actually got a pretty good deal for a traditional IPO. Issuing an IPO also means going through an S-1 filing. The SEC has to take a look at everything laid out in the prospectus, and they’ll ask for changes to anything they don’t like. There is usually a back and forth between the SEC and the company’s legal team for a few months before the government finally allows the company to go through with the IPO. In the early days of crypto stock exchanges, entrepreneurs and heads of companies sometimes had to get permission from the centralized exchange for their particular asset to be listed for trade. With the upcoming decentralized options, an IPO can be launched as soon as the prospectus is ready. The entire process is also completely free. There will be many new, exciting assets created simply because it will be so easy to create them. We could see the fine line between an IPO and a crowdfunding effort become blurred thanks to crypto assets.

Crowdfunding with a Purpose

Before centralized crypto stock exchanges, there were many centralized crowdfunding platforms. On a website such as Kickstarter, an entrepreneur can basically have their customers pay for a product before it is released. This way, the company can have money to work with during the period of time where they are creating a prototype or getting ready for their first shipments. For example, many app developers kickstart their apps by having many people around the Internet donate a few dollars. They can then use those funds for living expenses while the app is being developed. This is definitely a move in the right direction, but it doesn’t come close to the crowdfunding experience we will see on the decentralized crypto exchanges. Instead of only offering the product or certain perks to the people who participate in the crowdfunding effort, an entrepreneur can now offer actual shares in the company.¬†For example, Adam Carolla crowdfunded his upcoming movie on a website called FundAnything. The fact that he was able to raise nearly $1.5 million on this website is simply amazing because he wasn’t really offering much more than t-shirts, access to the Road Hard website, spots in the movie, and other perks to the people who funded the movie. Now, how much do you think Carolla, or anyone else for that matter, would be able to raise if they were able to easily sell shares of the future profits that the movie could make from the theatrical release, Netflix licensing, and everything else? A crypto asset could also be used as a token that can be redeemed for a copy of the movie after release. It will be interesting to see the kinds of unique funding methods that entrepreneurs can create in this environment. Whether you’re an author looking to kickstart a book or a company worth millions of dollars looking to go public, decentralized crypto stock exchanges are going to be your best option.

Shareholder Voting

Most of the early Bitcoin stock exchanges allowed for some form of shareholder voting on their online portals, and we can expect to see the same option in all of the decentralized exchanges. The only difference is that the voting could take on a proof of stake system. With this setup, someone who owns a crypto asset would basically have to digitally login to the voting portal by signing a message with the private key from the Bitcoin address that holds their shares in the company.

Asset Backed Crypto Currencies

While the main point of Colored Coins and other similar projects is to allow people to issue assets and then exchange them in a decentralized manner, there is another aspect of this revolutionary concept that needs to be addressed. At the end of the day, these new assets could basically turn into their own cryptocurrencies. For example, some merchants may want to accept a gold-backed ETF from one of the decentralized exchanges as payment for goods and services. We could even see people paying for groceries with bits of Apple stock. As of right now, you could make the argument that Apple stock would be a better form of currency than bitcoins. After all, the market cap of Apple has been hovering around the $500 billion mark, which is about 50 times the value of all the bitcoins in the world. This system could also work for a form of bartering. Let’s say you decide to help a musician or band kickstart their album. They give you a crypto asset that can eventually be redeemed for the released album after you send them some bitcoins. What’s stopping you from using that album token as money to pay back a friend for lunch? These are the kinds of possibilities that are leading many people to rethink their own definitions of money.

Continue to Part 3