Blockchain business model ideas – Virtual Crypto Shares

finance investment

I do not know how it is for you, but I constantly keep on thinking about ideas and business models that the blockchain could be used for. Ideally these ideas would be doable on the Steem blockchain.

Unfortunately, there is far too little time to work on all of them and some are also clearly beyond my technical capabilities. I can code, most of the things I would like to do I manage to get done, but often it takes a very long time because I have no computer science background but come from the finance side.

finance investment

So what to do with these ideas? Just put them in the drawer and do nothing? That would be a shame and it would help nobody. So I decided to post some of these ideas – maybe they inspire somebody else and help to increase the overall acceptance of the blockchain and Steem in particular.

Virtual Crypto Shares
As mentioned above, I have a finance background and thus a strong 8also professional) interest in the stock market. Shares that are tradable as tokens on cryptocurrency exchanges would be a great feature, as it would allow people around the world to invest in shares without having to leave the cryptocurrency environment. This would for example allow automated savings plans for an investment in shares paying in cryptocurrencies such as ether. However, before an investor would buy a virtual crypto share he would have to be certain that the token moves in value in line with the underlying shares.

finance investment

One possibility would be to engage a trustee, which issues virtual crypto shares with the promise to refund the current market value of the shares at any time against fiat or crypto currency. The big problem with such a solution is however a significant regulatory and counterparty risk. If the government, in which the trustee is situated, should at any time in the future forbid the business of the trustee, money invested in the crypto shares might be lost.

The problem could be solved with a smart contract based solution, which combines long and short bets on shares and indices.

Functionality
For the investor interested in buying shares, “long tokens” will be issued in relation to the value (e.g. in Ether) he invests. The money will however stay in the smart contract (without any crypto shares being issued) in the smart contract, until another investor is willing to bet on declining share prices. This short investor will also need to pay a margin into the account. Once the two amounts match short and long crypto shares will be issued to the long and the short investor. With the shares moving up or down the total amount won or lost will be a zero sum game. If the margin payment of the short seller is used however, the coin’s functionality ends. Long investors can exchange their crypto shares back into the net asset value, while the money of the short seller is lost. Long and short investors can pay cryptocurrency into the smart contract. Once per day after market closing the two sides will be matched and coins will be issued accordingly. If money from one side remains unmatched this will remain in the smart contract and will be matched according to the order it was paid in later. It can however also be redeemed at any time.

Investors can at any time claim repayment on their crypto shares. They therefore have to call the repayment function of the smart contract. If there is a waiting list for new investment the coins will be paid back the same day. If there is already too little supply on that side, investors will have to enter a waiting list, until further demand for their side arises.

Schematic overview of the virtual crypto shares

Problems

Investors are not able to invest or redeem their holdings at any given time. However, given that coins are tradable, this should not result in significant problems. If an investor for example starts to sell his coins on an exchange as there is no liquidity to return the money in the smart contract, this would result in falling prices for the coins on the exchange. This would however open up arbitrage opportunity as arbitrageurs could buy the short coin cheaply and hedge this position in the real world market by buying the shares (and hedging them into cryptocurrency).

Business model

With every transaction a fee of e.g. 0.3% could be charged and automatically transferred to the account of the person or business who created the smart contract.

I would be very interested in your view of the idea? Any critical points? Ideas for improvement? Seen this before already in business? Let me know.

Oh yes, and if you decide to be inspired by the idea and become a billionaire with it…. think about me 😉

All the best to you,

rondras