I have been researching the application of the blockchain to finance, with a focus on Tokenization. Part of my research has included studying a finance platform called Fluidity.io . Today while looking for further examples of Tokenization uses in finance and commerce I found an article from Forbes Magazine link, which led me to an article in Harvard Business Review link, which lead me to an article by Fluidity detailing the Pilot Project to create a Tokenized Asset Portfolio.
The articles are filled with loads of good information, including the various components necessary to create this project; legal, accounting, securities and the use of the Ethereum blockchain, it’s smart contracts and the Maker DAO platform. This concept of Tokenized Asset Portfolios uses decentralized financing platform the MakerDao to recreate the traditional bank model of duplicative cash backed loans, the core business and income stream for banks via non-fungible stable coins backed not by cash, but by something more widely traded, US Treasuries. The process has already been laid out; You use fiat to buy treasuries, creating a Special use vehicle to be the custodian and guarantee they are securely held, use these securities to collateralize the creation of Ethereum ERC Tokens, this wraps the treasury securities in a digital wrapper, creating a tokenized asset portfolio out of your treasury securities. These Ethereum ERC Tokens are pledged to the Decentralized Bank the MakerDao on the Ethereum blockchain as an asset to establish a line of credit in Dai. Then the recipient of the line of credit can draw down on the line of credit to obtain MakerDao tokens know as Dai, at an interest rate of 1%, then the recipient exchanges the Dai for fiat currency, loaning out this fiat to clients in the form of loans, allows the creation of an arbitrage situation just like banks and creates the chief stream of income for this whole concept.
This sounds a bit convoluted, but it basically means using fiat to buy treasuries, tokenize the securities to create Ethereum ERC Tokens, use the tokens as collateral for a low interest a line of credit, use this inexpensive money to fuel a lending business, earning money off the difference in interest rates.
Why? Good question.
In this example we used fiat to buy treasuries, tokenized the treasuries and used the Tokens to collateralize a low interest loan. This allows us to keep the treasuries but to access the equity or value of the treasuries for other business ventures. Thus we can keep the treasuries, which are appreciating in value and utilize that same value to create another stream of income. So this allows us to make interest on the same money twice, one as the securities appreciate in value and second is by loaning out the value of the securities to create loans paying interest. The second good reason is access capitol in securities you own and are keeping as a store of value to obtain cash to buy more appreciating assets. You could in theory buy treasuries paying 4-9% interest per annum, tokenize those securities to obtain a 1% line of credit in Dai from the MakerDao, trade the Dai for cash to buy more securities paying you 4-9%, tokenize them and use the new tokens to collateralize a line of credit from the MakerDao at 1%, draw down the Dai, exchange them for cash, use the cash to buy more treasuries and do this process again.
Notes: the tokenized asset portfolio used as collateral for the MakerDao has to overcollateralize the line of credit, meaning you only get 90% of the value of the securities as a line of credit. So $100.00 worth of treasuries collateralizes a $90.00 dollar line of credit at 1%. This then becomes a second tokenized asset portfolio, but it’s value is 90% of $90 or $81.00.
So your first tokenized asset portfolio is worth $90.00, your second one is worth $81.00 and the third one is worth $72.9.
So like a commercial bank you get to keep loaning out the same collateral, minus ten percent each time until your 1000$ turns into 9000$ worth of loans making you lots of money like a bank.
I have one parting thought to complete confound your noodle. Remember that Steem-Engine offers non-fungible Tokens you could create the equivalent of a tokenized asset portfolio on Steem-engine with fewer fees then on the Ethereum blockchain if @aggroed created a MakerDao to provide a new Dai line of credit, which then could be exchanged for fiat. Then we could borrow Dai at 1%, exchange it for fiat, buy more assets, tokenize them, rinse and repeat. The MakerDao would earn 1% interest on overcollateralized loans with automatic seizure via smart contracts of the collateral, so low risk and consistent profits. This would create utility for the MakerDao Token and the Steem Token. This opportunity is purely a function of the blockchain. I intend to put some of these ideas into play, and see if theory works in practice.
This pilot program was described in the Fluidity.io article.
References;
https://www.hbs.edu/faculty/Pages/item.aspx?num=55466
Stay thirsty for knowledge my friends!
✍️ written by Shortsegments
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