Securitization enabled by blockchain networks is becoming increasingly popular. More specifically, the rise of individual securitization has grown enormously over the past year. So let’s talk about
1) Securitization broadly
2) Individual securitization more specifically
If you’re already fairly knowledgeable about securitization, skip the first section and jump straight the exciting stuff!
More Broadly: What is the Value in Securitization
For those less familiar with the concept — securitization is the process of turning something into a financial instrument. Typical securities include stocks, bonds, and all types of derivatives. One of the key traits of securities is that investors are always looking for unoptimized asset classes. More often than not, securities are used to hedge risk, obtain leverage, or speculate.
Bitcoin, Ethereum, and crypto-assets at large are one such new and unoptimized asset class. As standard financial products like futures, options, and other derivatives are integrated into crypto, the asset class will become more efficient. There are two broad categories where crypto is enabling securitization:
1) optimizing existing securities
2) creating new assets
Optimizing existing securities is on the enterprise front where financial industries and banks are exploring blockchain to further automate existing securities and reduce costs in asset lifecycle management. Both Santander and Societe Generale have previously issued bonds on the Ethereum public mainnet. This is a fairly standard security to tokenize and reduces costs in a few key ways:
- Reduces the cost of issuing and distributing the asset to investors
- Smart contracts can automate interest payments
- It enhances compliance and reduces the costs of auditing because anyone can examine the bond and its makeup.
Of course, this is a simplification of the securitization process but it demonstrates how blockchain networks like Ethereum can help optimize existing assets, which in turn can increase asset liquidity and availability. This is only one application of securitization on blockchain networks. Companies around the world have identified use cases that will benefit from increased asset optimization. Here are a few examples that companies are currently working on:
- Real estate funds
- Letters of credit
- Carbon credits
- and of course, fiat currency
With the exception of fiat currency, the potential benefits of optimizing existing assets pale in comparison to creating new types of assets.
Derivatives make up the largest market (over $550 trillion) when compared to all other financial assets. The derivatives market is massive, in part, because derivatives are classified as futures, options, swaps and other contracts between individuals based on the performance of an asset, index, or entity.
As you can see, there’s quite a low barrier for what can be considered a derivative and as such there are tens of thousands of unique derivative products traded every day. Unfortunately, most derivatives are only available to large financial institutions and accredited investors, which is a topic — more of a rant — that I’ll save for another day.
While the cost reduction of derivatives and financial products will increase accessibility, the more exciting application of securitization is the creation of new financial products. I know, you just read the words “exciting” and “securitization” in the same sentence, but before you close out of this blog post into Google heaven (or Mozilla hell), indulge me for a moment.
Cryptonetworks like Ethereum enabling the creation of new assets that can create new markets and unlock unoptimized asset classes. Let’s examine one asset class — human capital.
More Specifically: The Securitization of Human Capital
Human capital refers to our individual skills, education, knowledge, judgment, and creativity. A software engineer’s ability to write great code, Warren Buffet’s judgment, and Ronaldo’s striking ability are all examples of human capital. Individuals with high human capital are rightfully rewarded, however, the way our society views human capital is sometimes inefficient. After all, it’s really hard to assess someone’s creativity, judgment, or potential to be great at something. More importantly, when you do believe someone could be great at something, it’s nearly impossible to bet on an individual, with the exception of venture capital or hiring that person. The lack of an incentive mechanism or alignment to foster human potential disservices society.
Income Share Agreements
Income Share Agreements have been the most recent trend to align human capital and value creation. Free Agency, Lambda School, and SharpestMinds are just a few examples.
Lambda School offers 9-month full-time programming bootcamps for students that want to learn web development, data science, and full-stack engineering. Students pay 17% of their income (cap at 30k) for a few years once they get a job that pays over $50,000. If the students don’t get a job, Lambda Schools receives nothing.
Another company, Free Agency, helps Tech Talent get hired and in return takes 5–10% of the first year’s salary over monthly payments. If you find yourself unemployed again, their services are free.
SharpestMinds takes a different approach by pairing aspiring data scientists with experienced mentors that work with them on a project and help them find a job. In return for mentorship, mentees agree to pay a small percentage of their first-year salary after obtaining a full-time job.
ISA marketplace Edly estimates that $500 million in ISA’s will be originated by the end of 2020. That sounds like a lot, but for context, private student debt sits at about $120 billion while federal student loans are north of $1.5 trillion. ISA’s are one instance of a mechanism that optimizes human capital by providing upskilling, mentorship, experience, or job placement.
ISA products are set to become the hottest financial product since mortgage-backed securities (nothing ominous here, keep reading). More products like pooled ISA’s, apprenticeship ISA’s, or potentially life-long ISA’s are all within the realm of possibility. There will undoubtedly be companies that abuse ISAs, but overall I think these types of products are a welcomed alternative to the standard four-year degree.
Cryptonetworks can similarly enable contracts where one person purchases a security in exchange for cash flows, expertise, or time.
Individual Securitization of Cash Flows and Income
Brooklyn Nets Point Guard and self-described “tech guy with a jumper” — Spencer Dinwiddie created a token of himself. Essentially, Spencer Dinwiddie tokenized his contract that will distribute interest to investors who purchase his tokens. In exchange, Dinwiddie will receive payment of his contract upfront (you know what they say about a dollar today). Spencer Dinwiddie has stated that he would award some of his token holders with additional perks, such as taking them to future All-Star games if he gets voted in.
This type of securitization is beneficial in a few ways. First, Spencer receives payment for his contract upfront which he can use for investments, his kid’s education, or whatever he chooses. Investors receive interest on their initial investment, diversify their portfolio, and potentially receive other perks such as jerseys, all-star tickets, or whatever Dinwiddie offers them for their loyalty.
This is an easier example of securitization because it’s a valuation of cash flows from Dinwiddie to investors. More interestingly, Ethereum opens the floodgates of securitization for unique contracts and individual securitization.
Individual Securitization of Time and Experience
Some crypto native individuals have already taken advantage of Ethereum’s ability for securitization and issued tokens that represent their time and equity.
One of, if not the first personal token was created by Matthew Vernon aka dApp_BOI. Matt is currently the lead designer at Dharma Labs and launched his BOI token which can be redeemed for one hour of design work including prototyping, UX review, and more. Matt’s token is valued based on his work, so if his work increases in value, naturally so will his token.
Reuben Bramanathan, who previously worked at Coinbase as its Head of Asset Management also issued a personal token. His token — Counsel ($CNSL) — can be purchased and redeemed for an hour of Reuben’s time as a crypto consultant and advisor. Interestingly enough, Reuben has attempted to balance the price of his token by making automated adjustments to the CNSL supply to ensure that his time remains valued between the $150 to $250 per hour. This is an interesting mechanism and is likely better aligned for the continued use of a token.
For instance, what if an upcoming equities trader — let’s call her Kate — issued a personal token that was worth $100 per hour. Her token could be redeemed for financial modeling and the moments in life that you need a spreadsheet wizard. After a year or two, Kate suddenly rises to fame after betting against the educational debt market and profiting widely from her trade. If she were to have provided a soft floor and ceiling for her token value then her time would still be valued at a similar rate($100-$200 per hour). There wouldn’t be a large incentive to speculate on Kate’s token — called CATE because KATE was taken. However, if Kate’s token was fluid and subject to the free market, her token may suddenly skyrocket to $1000 per hour after her fame and investors of Kate’s poorly named token might hold onto the token rather than exchange it for her services. Now obviously, this is hypothetical, but it does bring up an interesting conversation of whether people will price their tokens with floors and ceilings or leave them uncapped which may entice speculation.
Most interestingly, owning Alex’s token will entitle investors to exposure to his future career. In my opinion, this is one of the most interesting use cases because it enables a talented entrepreneur to obtain capital for their ideas and essentially provides securitized human equity. If Alex goes on to become a billionaire, owning his token could provide a handsome return depending on what type of exposure he is providing.
Roll the startup that enables anyone to mint and control their personal token has posted some stats about the “$ALEX economy”:
- Over 200,000 $ALEX have been distributed on over 150 wallets across Roll, MetaMask, Trust Wallet, and Discord.
- There is a fixed supply of 10MM $ALEX with 3.4MM ALEX currently in circulation.
- The remaining 6.6MM $ALEX will be vested in about 200,000 $ALEX increments monthly over the next 33 months.
Alex is looking to take his token a step further and initiated an interesting side project that will be connected to his token.
This list is not exhaustive and there are lots of other individuals who have issued tokens, and I’ll be sure to cover those in the future.
One important caveat is that not everyone will need or should create a token. Most people’s individual tokens will likely be highly illiquid and add more friction to working with them. Just like all startups, some personal tokens will be widely successful while most will fall flat on their faces (the tokens, not the owners). It’ll be cool to see where we are five to ten years from now.
The Takeaway: The Rise of Individual Securitization is Coming
Individual tokens are mostly experimental, but I’m optimistic about them for a few reasons. First, individual tokens/securities can be tradeable and subject to market pricing which over time could help identify and rewarded individuals. Second, providing talented entrepreneurs access to capital could spearhead the creation of impactful businesses. Alternatively, the model might reward the loudest entrepreneurs and create more WeWorks, but that’s where judgment comes in.
There are dozens of possibilities that will make personal tokens more valuable. For example, an influencer combines personal token and content creation. What other incentives can be attached to personal tokens to make them more worthwhile and novel? What happens when you can more directly invest in individuals?
I want to leave you with one final thought.
Joy’s law is the principle that “no matter who you are, most of the smartest people work for someone else.” However, what if the market could more accurately price talent and reward those individuals? Maybe the smartest people could finally know their worth and start working for themselves.
Advancing Web 3.0 is a weekly newsletter about cryptocurrencies, decentralized finance (DeFi), and technologies that are shaping the next era of the Internet. Welcome to the bleeding edge. Welcome to Web 3.
About the Author: I’m Mason Nystrom, a writer and aspiring angel investor. Previously I worked for ConsenSys as a marketer focused on marketing strategy for ConsenSys and its portfolio companies. Prior to joining ConsenSys, I worked as a Business Analyst at Gatecoin, the first cryptocurrency exchange to list ether, Ethereum’s native cryptocurrency.
The views, information, and opinions expressed are solely those by the author and are meant for informational purposes only and are not intended to serve as a recommendation or investment advice to buy or sell any securities, cryptoassets, or other financial products.