Tokenized Crowdfunding: The next big wave in digital asset tokenization

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Peter Da Vanzo

Dec 3, 2021

15 MIN

Tokenized Crowdfunding: A Primer

 

The next big wave in crypto is coming. 

 

In March 2021 IBM’s America’s Blockchain Partner Ryan Rugg estimated that the digital assets market will be worth $24 trillion USD by 2027. Characterised as Crypto 4.0”, we will soon see an influx of bespoke digital asset solutions for specific industries, use cases, and countries.





The crypto space tides move fast and present a wealth of new investment opportunities. In this article, we’ll take an in-depth look at one such opportunity, Tokenized Crowdfunding, and talk about why we think this will be the next big thing for savvy crypto investors. 

 

We’re Still Early

 

On January 3, 2009, Satoshi Nakamoto, the mysterious figure who penned the original Bitcoin whitepaper and mined the first block of the Bitcoin network,  created a brand new currency and store of value. 

 

In 2015, Ethereum, an open-source blockchain with smart contract functionality launched and popularised the concept of the smart contract, which in turn led to the creation of a universe of DeFi applications.  

 

2021 has been the year of the NFT, an asset made possible by both smart contracts and cryptocurrencies.  Virtual digital collectibles, in-game items, artwork, real estate and more could be easily tokenized and traded.  

 

Let’s take a closer look. 

NFTs

 

NFT stands for “non fungible token”, something that represents value and exhibits non-replaceable characteristics. 

 

Artist Mike Winkelmann (AKA Beeple) sold this NFT of a digital image collage for $69 million:






“The sale positions him “among the top three most valuable living artists,” according to the Christies auction house. The record-smashing NFT sale comes after months of increasingly valuable auctions. In October, Winkelmann sold his first series of NFTs, with a pair going for $66,666.66 each. In December, he sold a series of works for $3.5 million total. And last month, one of the NFTs that originally sold for $66,666.66 was resold for $6.6 million”

 

By tokenizing a piece of art, Beeple made a digital representation of the asset underpinned by blockchain technology. Selling an NFT in this way is another source of funding for aspiring artists and other creators. 

 

Trading NFTs has also been lucrative for many investors. Back in June of 2021, a cryptopunk #7523"sold at auction house Southerbys for $11.8m. 

 

“Michael Bouhanna, Contemporary Art Specialist at Sotheby's said the sale demonstrated continued strong demand for NFTs. "We are excited to continue to explore new and interesting ways in presenting these cutting-edge works." Anyone can view the artworks the NFTs represent, but only the buyer has the official status of being the owner”.



There have since been higher value sales of cryptopunks and other NFTs. 

 

NFTs are one form of Tokenization. 

What Is Asset Tokenization?

 

Asset tokenization is the process of creating digital tokens that represent ownership of a real-life asset. 

 

Beeple’s asset was his art and the NFT was the digital token that represented ownership of that art. That ownership token could then be held or traded as the token is stored on a blockchain, in the same way as a bitcoin is traded and stored. 

 

However, any asset can be tokenized and traded. You could create an NFT against physical assets like a car, boat, aircraft or house. You could also tokenize intangible assets like trademarks, copyrights, and patents. Significant value for the investor is unlocked if demand for the token increases, as has been seen with popular art NFTs. Asset tokens can represent all or a fraction of an asset. The possibilities are limitless.   

 

Asset tokenization using DLTs and smart contracts has the potential to deliver multiple benefits”, says Johann Palychata. The developments in decentralised finance (DeFi) – based on open, neutral infrastructures – show how more complex services are enabled by a large availability of tokens. Over time it could be a real game changer.” - Johann Palychata, Head of Partnerships and New Platforms with BNP Paribas Securities Services

 

The Asset Tokenization market is expected to be firmly embedded by 2025 and experts predict it could be worth upwards of $24 trillion US dollars. That is ten times the value of the current crypto-coin market. 

 

How Crowdfunding Works 

 

Crowdfunding is a way of raising money. 

 

Traditionally, entrepreneurs have gone to venture capitalists to fund their ideas. The problem, however, is that many investors are locked out of early stages of investment due to accredited investor legislation. You typically need to be a wealthy, well-connected investor in order to participate in early stage funding rounds. 

 

Crowdfunding went some way towards solving this problem. Sites like Kickstarter allow ordinary individuals to back a project, typically in exchange for a special offer on a future product. However, these types of projects don’t allow for equity shares or tradeable instruments. 

 

One form of crowdfunding, namely equity crowdfunding, allows an entrepreneur to raise funds from the public in exchange for unlisted shares in the business. 

However, this process can be clunky, slow and lack transparency. Also, in some cases, if a company doesn’t reach their funding goal, any finance that has been pledged will be returned to investors

 

Tokenization, Meet Crowdfunding 

 

The next big trend in Asset Tokenization is Crowdfunding. 

 

Projects will launch by issuing tokens. Compared to floating a company on a stock exchange or seeking venture capital, this is an easier way for founders to fund a startup. It is also much easier for retail investors to back projects in which they see potential. 

 

Gigi Levy-Weiss, a General Partner at NFX, a seed-stage venture firm headquartered in San Francisco notes the advantages of tokens over shares

 

  • Tokens are accountable, trackable, and impossible to counterfeit. 

  • Transaction costs are lower (close to zero)

  • Tokens enable fractional ownership with no overhead

  • Liquidity is (subject to the token restrictions) far greater. Equity investments in startups are illiquid for years. 

  • Security tokens allow for greater flexibility (for example, investors may receive a percentage of revenues instead of profits as per the terms of the security token)

  • Depending on regulation, security token offerings (STOs) may only require limited disclosures relative to IPOs or other traditional offerings, which would reduce the costs of issuing companies

  • Given all of the above, there may be a larger pool of potential investors with security tokens 

  • Because of these benefits, we can think of a tokenized security as an improved form of equity. In the not too distant future, many companies will issue security tokens instead of shares (assuming serious regulatory obstacles don’t arise).



This platform is a win-win for both entrepreneurs and investors. There will be increased access to liquidity, more transparency, automated compliance and a wealth of opportunity for the retail investor.

 

As much as this all sounds sparkling and new, traditional evaluation of an investment opportunity still applies. Venture capitalists typically look for good industries with high growth potential and invest in the people as much as they do ideas. When they get it right the upside potential is, of course, enormous.    

 

However, one of the challenges in this space is regulatory. 

 

“Asset tokenisation, mostly theoretical just a few years ago, is now a reality with successful pilot projects around the globe. Early uses were largely centred around Initial Coin Offerings, associated with non-compliant financial instruments, unfulfilled promises to investors and outright scams. But in

the years since, tokenisation has found a place in mainstream finance with use-cases in tokenised equities, bonds and commodities. The launch of the SDX platform for digital assets by the Swiss Stock Exchange gives a good indication of where we are headed” - OECD, 2021 - Regulatory Approaches to the Tokenisation of Assets, OECD Blockchain Policy Series

 

If a company floats on the stock market, the owners must make disclosures and meet regulatory and legal obligations. There are few ,if any, similar standards in the crypto space, even though the industry is screaming out for this type of robust regulation. 

 

However, when this space does get an appropriate regulatory framework, the market will surely explode as tighter regulation provides greater security. It will provide confidence for the smaller investor and allows large institutional players to participate. 

 

This is why we think Tokenized Crowdfunding is on the brink of widespread adoption. The base layers, namely smart contracts, coins and tokenization are in place, and regulatory frameworks are now being developed. A wealth of opportunities in this space, from real estate to intellectual property, will make NFTs look like minnows.   

 

Ian Lowe, the CEO of Dacxi says “The current equity crowdfunding sector is valued at $10 billion. With necessary systems like the Dacxi Chain in place, we believe that the tokenized crowdfunding sector alone can hit a $1 trillion valuation in the coming years.