A new paradigm of highly efficient markets
At the end of the last article of “Separation of Money and State” I alluded to the digital economy, tokenization of assets and how this is a new paradigm emerging in the world of investments. Let’s take a deeper dive into these concepts and what it could mean for us.
Traditionally, investments are divided on liquid and illiquid investments. Purchasing real-estate for instance is considered a non-liquid investment because it takes time to sell it and involves multiple parties to come to consensus on price, condition of the property, required renovations, etc. Purchasing stocks, bonds, cryptocurrency on the other hand is considered a liquid investment, because there is an active market for it where you can sell (liquidate) your investment usually within a couple of business days. The most liquid asset of course is cash, which is the default means of exchange for goods and services around the world.
Invention of Bitcoin, which created a new class of digital assets, started a chain reaction of events that are going to disrupt this traditional investment model by creating a liquid market for traditionally illiquid investment, creating new investments, and dramatically reducing friction in the process of doing so.
The price we pay for stocks, bonds, futures, and options liquid market is the legacy design of the traditional stock, bond, and derivative markets. When you purchase shares of a company, you can’t really withdraw your shares or sell them immediately. Your broker usually informs you of a process called “clearing” which usually takes 2-3 business days. To go around the process brokers offered you a service of borrowing cash or shares which you can use while your other transactions are clearing. Clearing is the process created to keep all parties honest. The clearing houses are in charge of making sure that when you buy shares you can take possession of these shares and if somebody else sells the shares, they can actually deliver these shares to you.
As more people experience the peer-to-peer nature and instant settlement of a public blockchain like Bitcoin and Ethereum, people ask themselves why do we still need the clearing houses, 2-3 day delays, and lack of transparency of the traditional markets? In addition, the emergence of ERC20 tokens on Ethereum set the precedent for a near instant secure transfer of assets digitally without the need for any clearing houses. Finally, if it’s supper easy to create a token on Ethereum or Ravecoin blockchain why can’t I tokenize my investment property, sell shares of it to investors, who in turn can earn a pro-rated portion of rent from that investment property? This could allow average American purchase a share of a high-rise apartment building and get healthy returns (many as a high as 10% per year) from rents all the residents pay. This is exactly what RealT and tZero (subsidiary of Overstock.com) are doing. And not only these tokens are allowing anyone to participate in the extremely profitable investment projects, they are also becoming liquid by trading on the instant settlement and highly efficient exchange like tZero. If you want to learn more about the emerging token market, please visit the information aggregator site Security Token Market.
If we can tokenize real-estate and create an efficient and liquid market for it, what else can we tokenize? $12b worth of Art was traded in 2018, can we tokenize art? Sure, we can. Can we tokenize an exclusive resort on a beautiful island? Sure, we can. Can we tokenize U.S. Dollar and make it easily transferrable peer-to-peer electronically without a bank or a centralized entity? Sure, we can. Can we tokenize a human being? Yes, we can tokenize a human (or a person’s time) as well!
Tokenization and token economy creates easily accessible, liquid and highly efficient markets for all kinds of investments. It disrupts traditional capital markets, commodities, real-estate, currencies, art and any other assets that can have value. How do we navigate these new markets? Does this present us with new opportunities, would the token economy allow access to lucrative investments traditionally only available to affluent participants? Only time will tell.
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