Asset Blockchainization on Bytom (I): Asset Get Freely Flow from Solid to Gas State
When it comes to the most controversial blockchain-related topics, asset blockchainization (asset migrated onto chain) must top the list. Asset blockchainization, that is, to connect atomic asset in the real word with blockchain technology. The article focuses on asset blockchainization, its essential factors and application cases, as well as its future vision.
What is asset blockchainization?
An essential question shall be given priority to before getting know asset blockchainization- what’s the state of asset before it is migrated onto blockchain? We can get a hint from Chang Jia (Founder of 8btc News and Bytom) and Xiao Feng (CEO of Wanxiang Blockchain). They both present an interesting statement- the circulation of asset goes through three states:
- verification of asset
- asset securitization
- asset blockchainization
which can be likened to three phases of solid, liquid and gas. So before putting onchain, asset is either in the stage of verification or securitization.
The following concepts are interpreted:
1.verification of asset: the process of turning substance into a credential of certain right. Substance, take housing property for an example, it is for the purpose of living, while later title deed appears which is to prove the right of the property and serve as transaction document. This is the stage of asset verification. It has a long traceback and still exists till now. We purchase the property and then get the property ownership certificate, which shows the asset verification stage of a modern house property. For the asset could not easily flow with the attribute of this-is-mine in this stage, we can describe this as the solid state of the assets.
2.Asset securitization: the process of turning asset into security. The asset securitization here is not limited to that in the field of investment banking – ABS (asset-backed securities), but a broader concept of turning asset into equities, bonds, warrants, etc. Assets at this stage can be properly split in parts and traded in exchanges regulated by the state. It gains more liquidity in recent years due to the outbreak of the Internet, we’d like to compare it to the liquid phase of asset evolution.
3.Asset blockchainization (asset go onchain): along with the development of blockchain technology, all sectors related to asset registration, transaction, settlement, etc, can be done onchain. Offchain trading shall follow the onchain requirements. Decentralization without platforms is realized in this stage, so that asset could easily flow like air and enter into the most convenient stage, a bit like a gas phase.
The three phases of asset are the evolutionary process, the appearance of one phase does not related to the dying of another, they might co-exist.
Key elements in asset blockchainization
There’re three key elements lying in the process of asset blockchainization: asset, verification, and circulation. Asset is the focus, verification is the safeguard, and circulation is the value.
(1) Asset is the focus. A specific asset is a must when it comes to securitization and blockchainization, and in which stage an asset should be depends on its type and specific demand of the asset holder. For example, a low value consumable (supposing it is a bottle of water), as an asset, its focus lies in proving the right belongingness (whose water it is) and its right to use (who can drink it), so it is not necessary and unable to securitize it. While it is a bit different when it comes to a commercial real estate, the solid phase is involved. If the owner wants to get financing, it can be operated to be a securitized asset; and what if the owner wants a transaction with more liquidity? He can register it an on-chain asset.
In this case, we divide assets mainly into monetary assets, commodity assets, property assets, creditor’s right assets, equity assets and other derivative assets.
(2) Verification is the safeguard. “Any transactions and circulation without verification could not be taken seriously.” Ahead of the liquid and solid phase, a lot of verification work is needed.
The verification in the solid phase is quite simple. In the rural China last century, the stone-stacking method is widely adopted to differentiate lands owned by different families, and the village community will go through land registrations to mark the location and size of every piece of land. The land, by stacking stones and registration, thus has the concept of right to use. Based on the essence of this primitive verification, there develops modern professional ones undertaken by government authorities and professional agent.
The verification of the liquid phase (securitization stage) is more complicated, for the securitized assets are usually entitled with more right-duty relations. As the following chart shows, we make a rough degree of verification difficulty based on the complexity of right-duty relations.
Taking equity/share (the bottom one) for example, IPO is a large-scaled verification. An enterprise shall go through a long preparation period including reorganization and restructuring before IPO. Various intermediaries will get involved, with the securities broker releasing the prospectus, legal opinions from the lawyer, the accountant’s audit report, and the consulting institution’s FSR (feasibility study report)… all these paper work and systematic preparation are to ensure the owner and value of the equity, together with a review from the CSRC (China Securities Regulatory Commission), corporate equity then turns relatively measurable, so that investors can know the real value of the equity, otherwise, it is like in a cyber romance, one may never know whether the guy behind the screen lives up to his expectation.
The verification in the blockchainization stage is on the basis of the first two stages, for it is involved with complex issues of atomic world and cannot totally rely on the onchain work, precisely: (1) verification is needed to ensure the corresponding relation between onchain asset and offchain asset; (2) From both operational and legal aspects, it is necessary to ensure that assets, transactions, and their information are updated synchronously on the blockchain. It strikes a warning to those who preach blockchain could completely get rid of third parties, for the existence of third parties engaging in verification work is quite essential and blockchain plays a supplementary role in it.
(3) Circulation is the value. Say the asset holder of solid phase cares only about it’s-mine, those of liquid and gas phase are demanding on the asset liquidity, or liquidity even has great impact on the asset itself. Exchanges for the assets in liquid phase are engaging in online and offline transactions, while exchanges for assets in gas phase focus on onchain and offchain with fewer transaction intermediary, surely assets in gas state are featured by more liquidity.
To put it broader, the securities market in liquid phase, stocks with high liquidity are apt to get higher valuations, which makes refinancing more effective and a more respected market position preemptive for future mergers and acquisitions in the industry. For another, as the first mature application of blockchain, the bonus with the advent of epoch-making bitcoin, more importantly, lies in it solves the problem of long waiting of transnational capital flow.
Practice of asset blockchainization
And now let’s come back to the reality – the scenario of blockchain-based asset. There could have be many applications, for almost all of the public chains support asset migrate onto blockchain; While there are actually few successful applications of blockchain-based asset for the moment, except those realized on the Ethereum-supported smart contract. However, we can foresee that asset blockchainization is a main trend. As Chang Jia predicts,
“atomic asset migrated onto chain would reach up to more than one thousand billion dollars in the future.”
1.Private equity goes onchain- NASDAQ LINQ system. Nasdaq stock exchange has been exploring asset blockchainization since 2015. Although assets on the platform of Nasdaq is still in the liquid phase, its LINQ system facing private equity market is blockchain based. To some extent, it was a significant leap from liquid to gas phase. The primary function of this platform is equity management and transaction, on which enterprises included in the LINQ system can register their equity onto the blockchain, and investment institutions in the system can easily find out financing requirements made by others in the system. Online-contract-signing is another important function of this platform, while it is not open to outsiders yet, and it still needs registration from relevant government authority to come into force.
2.Shares of listed companies goes onchain- OVERSTOCK system. OVER STOCK, a well-known American listed company, has developed a securities trading platform called T0. As the name implies, T0 means T+0 (trade date plus zero day). It is a great leap of the existing T+3 (trade date plus three days) stock settlement rule in the U.S. Apart from the sector of settlement, OVER STOCK has important advantage than LINQ, namely from private fund-raising to public stage (by acquiring an ATS company and thus get approval from SEC), shares of OVER STOCK can be traded both on Nasdaq and its blockchain-based trading platform.
3.Multiple financial assets go onchain- Bytom. Bytom, an interactive protocol of multiple byte assets launched by 8btc, is coming soon. Heterogeneous assets (warrants, securities, dividends, bonds, digital asset, etc.) that operate in different forms on the Bytom Blockchain can be registered, exchanged, gambled and engaged in other more complicated and contract-based interoperations via Bytom, committed to building a global asset internet. It has established partnerships with a line of local financial assets exchange, local stock exchange and local commodity trading center to provide technological support for them and achieve win-win by outputting onchain assets back to these trading platforms in accordance with their variety and requirements.
Blueprint of future development
The future here is not a short-term concept, but a rather long period of development. Regulatory factors are excluded in this blueprint (that’s why we call it a “blueprint”), based on this, we’ll talk about the future of asset blockchainization in terms of decentralization and disintermediation.
First we’ll talk about limits of asset in the liquid state. Liquid needs a container, which refers to the asset trading platform. So securitized assets cannot freely be traded across platforms. Pricing comes from trading, but there may be some obvious market distortions along with it. A recent news is a stark reflection of it,
“The market value of Qihoo 360 (a Chinese internet security company known for its antivirus software 360 safeguard) was 9.3 billion dollars (about 59 billion Chinese yuan) when recently delisted in the U.S., while it wowed up to 444.2 billion yuan after it got listed in class A share back to China, ranking 13 in A shares and leading the high-tech shares.”
The market value of the same company increased nearly seven times in different market environments, it is a very phenomenon worth our thinking- whether it was undervalued before or overvalued later? And why? Analysts provide several interpretations. Generally, it is roughly the difference between vertical audience groups (investors) and horizontal comparisons (investment targets). An easily-understood comparison- assets are flowing in different watercourses (exchanges), during this, the current (market value) speed mainly depends on the condition of river dyke (regulations and financial intermediaries).
1.Disintermediation. In the future vision, “river dyke” can be firstly removed. For example, sites engaging in asset registration and settlement could be removed according to the rules of blockchain’s distributed ledger; then commercial banks come to an end by adopting blockchain trading tools; next comes securities company, which would be replaced by “wallet” at disposal of investors.
2.Decentralization. The final removal of watercourses (exchanges) means asset has turned into that of gas state from liquid state. How can watercourses (exchanges) be removed? A bold imagination- by realizing the Decentralized Autonomous Organization. Traditional organization is like a person, and the brain makes most decisions. If the head is cut off, the man turns out to be a dead body; However, a distributed autonomous organization is like a starfish which has not a central head and broken parts of its body can easily grow back. This is exactly the case with bitcoin. As a decentralized autonomous organization, bitcoin, its brain-like inventor – Satoshi, still remains a mystery, so in the bitcoin organization, no one can play a leading role, though his derivatives as Ethereum are fast growing. In an exchange with distributed autonomous feature, assets can freely flow and circulate with only few established basic rules and contracts, allowing investors to find the best portfolio without the regional and scenario limitations.
Asset blockchainization is a big topic. This article is just a beginning to outline Bytom’s thinking about it. Following it we’ll focus on different types of assets and deepen the understanding of asset blockchainization.
Translated from the article “比原链资产上链研究一：资产从固态到气态” by Ma Qianli, vice president of 8btc News, responsible for the scenario realization of asset migrating onto Bytom Blockchain. Having competitive capability in IPO, M&A and asset securitization with many successful cases, Qianli was the director of investment banking arm in Codi Capital, and securities affairs representative of vöhringer after graduating from Shanghai University of Finance and Economics.