Asset Blockchainization On Bytom (III): Equity Scenarios
In the first two articles of this series, we have introduced the background of asset blockchainization and the vision of Bytom, as well as Bytom’s concrete actions towards it. As a continuous part of the first two, this article will take an in-depth look at substantial scenarios, offering a more detailed thinking and observation related to asset blockchainization. It is actually not possible or even necessary for Bytom to be the most professional team to provide panacea applications, what Bytom aims is to provide methodology for participants in the Bytom ecosystem, so that they could find pain-point themselves and tackle it with Bytom’s solutions.
This article is outlined in three parts. The first part is an overview of the equity scenario; Next comes the difference and similarity between the blockchain-based tokens and enterprise’s equity; And the final part is the infrastructure construction by Bytom in the equity asset layer.
The conclusion of this article is that the largest application of blockchain in terms of equity scenario is not about token, but that equity is “a natural fit for on-chain registration” and it is “programmable”.
Overview of equity scenarios
In the atom world, equity of a limited liability company is a stockholder’s right. It is a right of the stockholder represented by his ownership position in a company in accordance with the company law and articles, including dividend allocation, distribution of surplus, vote, transfer, etc. From the perspective of enterprises, equity plays a part in financing, employee motivation, as well as company management.
To understand the combination of equity and the latest blockchain technology, we’ll start with the history of equity. Here, the author gives a brief sketch. The earliest equity is a kind of primitive agreement. Most scholars believed it first came from the Mediterranean sea trade of the Middle Ages. At that time, the poor seamanship, adverse natural conditions and rampant piracy scared many businessmen with large amount of capital away from the lucrative sea trade. But they came up with the idea of making fortune by cooperating with those adventurers who were equipped with superb navigational skills and willing to be risk-takers. Those rich businessmen would offer financial support, and the latter took the charge of navigating. Profit would be split between the two parties. In such a pattern, we could see that equity is a priced capital of risk, indicating the invest that businessmen would like to make under certain risks. After a thousand years in the 15th century, a more advanced equity system emerged, represented by the British East India Company, a chartered trading company in colonial trade. The separation of ownership and management in the company was realized via the equity system. What was interesting about it was that the equity was not fixed, investment into shares would be returned after a shipment was done, and another round of financing would be initiated before the shipment started. In this period, equity and creditor’s rights are closely related, and the equity system became more mature. Until 19th century, as the penetrating of Industrial revolution, equity system went further forward with the shaping of modern enterprise system.
The advent of blockchain and Internet play a similar role in increasing the efficiency of equity transaction. And the former is better for its deconstruction of the equity, that means, blockchain can go further in refining and expanding the rights and obligations of an equity. We’ll go further in the following two parts.
1. Start with registration — equity is a natural fit for onchain registration
Blockchain is naturally suitable for registering credentials with value, and equity is one of the most valuable credentials in human society.
Blockchain was invented for first use in bitcoin as its distributed transaction ledger. It can also act as a distributed archive for the recording of information with value like stock and bond rather than valueless files. Its underpinning technologies including distributed storage, peer-to-peer transmission, encryption mechanism, as well as consensus mechanism are exactly what stock and bond registration need. Distributed storage could provide a solution for the deficiency of existing equity system in registration. As the encryption mechanism can realize asymmetric encryption, only employees granted permission by the enterprise could have access to more private content in such a mechanism, and the government and other regulatory nodes can supervise the enterprise on a blockchain. The consensus mechanism makes it tamperproof, providing a solution for double-spending problem without the need of a trusted authority or central server.
Under the current legal framework, equity register on blockchain is supported as it is not related to transactions, and for another, the country’s current company law requires limited liability companies to include a list of company shareholders. Some states and local governments have already recognized the superiority of equity register on blockchain, such as Delaware where more than half of U.S. stocks apply registration there has announced equity registration on-chain. The French government has also issued new rules that allow some companies to trade shares previously registered on the blockchain.
2.Expansion of connotation — programmable equity
People easily get lost in the “definitions”. The naming or defining of a certain substance may confine our understanding about it.
When equity was the contract of the medieval Mediterranean coastal merchants, people trusted each other; When equity is a written document issued by the East India Company, people abide by the written agreement; When equity is a string of numbers on the Internet, it can be freely transferred; When equity is a piece of information on a block, it is not only the information itself but also a string of programmed contract procedures — a “living and dynamic” equity emerges for the first time. The Internet keeps the recording of circulated equity, and the blockchain gives equity a value carrier and the programmable connotation.
Equity, alive on blockchain, can be in varied forms depending on the shareholder’s contribution to the company, either represented by different shares or rights to unleash the potential of the company. Apart from that, some more specific functions could be realized on blockchain, such as in the case of a hostile takeover, the bidder acquires large amount of share equity from several targets, and the shares he acquired may automatically turn into an equity that limits his voting if some mechanism is triggered in such a circumstance. Some companies, if allowed, can accept anonymous shareholders, where they can hide their identity against certain policies. From the perspective of regulations, the government can make full use of the blockchain to better supervise enterprises, especially under the condition that the initial standards of this blockchain are set by the government.
Difference and connection between token and equity
Token is really a recent buzzword along with blockchain. When it comes to blockchain projects, questions like “any quotas of this token left?” flood in. Some projects go straight to issue tokens even though it might not be necessary for them. Token is indeed essential for blockchain projects. But please, no more tokens out of nothing, we need tokens with real applications.
1.Token is for real use, not for speculation
We’ll mainly take Bitcoin, Ethereum and Steem for example. Bitcoin itself is the value it transmits and also a value incentive mechanism. In the bitcoin network, bitcoin functions as a peer-to-peer digital currency, and also a reward for miners recording transactions in a public distributed ledger. And in the Ethereum network, ETH acts as fee for implementing smart contracts and also reward for miners’ maintaining the system.
And for Steem, it is a bit more complicated. Steem is based on the Smart Media Tokens (SMT) protocol, developed by Steemit, a blogging and social networking website, where users can post articles and comments using its Steem blockchain-based rewards platform. The Steem blockchain produces three tokens — Steem, Steem Power and Steem Dollar.
Figure 2–1 Three-token system of Steemit
The three tokens have different uses and can interchange, among which Steem, as the core token, can be traded in crypto exchanges, and the other two are its by-products. The positioning of Steem Power is kind of “a stake”, and Steem can be exchanged to Steem Power but cannot be traded any more, or, we can see it in lock position. The exchange of Steem into Steem Power indicates the user’s confidence in the platform and thus the platform will empower you with more privilege such as more weight in upvoting likes and more rewards. To put it this way, Steem Power is what the platform most want to accumulate, and the Steemit platform belongs to these people who own Steem Power. While the positioning of Steem Dollar is “a debt” which appears when the platform gives reward, and it promises 1 Steem Dollar equals one-dollar worth Steems. The unique three-token system forms the unique framework of Steemit and amasses a large number of users in short time.
In the three-token system above, token, acting as a must in a decentralized scenario, does create value. Especially in a public chain, as the fuel for the operation of decentralized mechanism, token is the starting point of a public chain ecology, it is even incomplete for a public chain to start without token. However, the essential of a token is for real applications, not for speculation, which is a thorny issue in the current token market.
2.Connection and Difference between equity and token
Equity is a collection of rights and obligations in a centralized organization, essentially it is an asset of the atom world, corresponding to the enterprise’s ownership interest, and it stands for the total assets of the enterprise together with liabilities.
Ownership interest (Stockholders Equity) + Liabilities = Assets
Token, is a broader concept. It can represent the right to perform some operation, and some critics even think it has the connotation of both equity and debt. But most tokens are assets of the virtual world without any corresponding assets of the real world. It is for sure that token is a flexible equity for the decentralized applications in the blockchain world. The similarity of token and equity lie in their role in financing, and their liquidity. While there’s also big gap between them.
In fact, equity can learn the flexible exchange mechanism of token, as well as its peer-to-peer advantage with great speed and convenience after it goes onchain. While as I mentioned in the first article of this series, equity has to go through strict verification procedures and complies with regulated market rules in the trading process.
Bytom’s infrastructure construction in the equity layer
Bytom is a public chain different from that of bitcoin blockchain and Ethereum, it is a dedicated public chain protocol for asset.
1.Focus on asset starting with the building of bottom protocol
Figure 3–1 Architecture comparison between Bitcoin(BTC) blockchain and Bytom(BTM) blockchain
As mentioned in the second article in the series about Bytom’s efficient value transmission, Bytom’s multi-asset management system would enable enterprises to create and manage their various assets. Meanwhile, as Figure 3–1 shows, starting with the bottom protocol, Bytom build a set of systems suitable for equity going onchain such as ledger system, peer-to-peer transmission system, consensus system, and asset transaction protocol system. That is to say, Bytom is a system well-suited for asset registration and transaction based on its reliable bottom layer. Asset holders could realize more professional and complex financial functions via Bytom and go beyond the connotation of equity.
2.Be a technology provider for financial institutions
Bytom is actively building enterprise-level applications based on blockchain for domestic financial institutions and exchanges. just as blockchain developer Chain built a private securities transaction system for Nasdaq.
At present, these applications have entered the stage of the demonstration stage, we’ll briefly disclose three points. First, the system will have good interactive interface. The system built based on Bytom would reflect the latest news and real-time industry data, that means investors can get updated information which suits their taste via the system. These information is securely recorded on the public ledger. Second, adopting blockchain technology, the system can complete real-time clearing and settlement of financial products based on the blockchain-supported smart contract, efficiency is substantially improved and market fraud is greatly eliminated. Thirdly, the system will introduce third-party services such as online audit so that the audit nodes can undertake real-time audit, and regulators can conduct real-time supervision.
In conclusion, this report makes an elaboration on asset blockchainization in the equity scenario, mainly discusses several scenarios related to the combination of equity and blockchain, and draws the conclusion that the biggest application of blockchain in terms of equity is not about token, but that equity is a “natural fit for on-chain registration” and “programmable”; and gives an in-depth look at Bytom’s effort in infrastructure construction of the equity layer. We hope every participant could work together to jointly build a better Bytom ecology.
Translated from the second article over asset blockchainization on Bytom “比原链资产上链研究三：股权场景” by Ma Qianli, vice president of 8btc News, responsible for the scenario realization of asset migrating onto Bytom Blockchain. Having competitive capability in IPO, M&A and asset securitization with many successful cases, Qianli was the director of investment banking arm in Codi Capital, and securities affairs representative of vöhringer after graduating from Shanghai University of Finance and Economics.