I would like to preface that I am no expert in the intricacies of finance. Nothing in this post is profound, I just wanted to propose an idea I have had and was curious what the community might think of it. This is just a high-level overview and even though the logic is not that complicated, I currently do not have time to write the ErgoScript contracts.
Learning about the basics of the financial system has been quite underwhelming. I suppose this is one reason why I am here. I found it rather silly that the stock market is essentially a glorified game of musical chairs, and I have personally come to the conclusion, born out of confusion and frustration, that there can really only be one legitimate claim of ownership in a portion of a company: a right to its profits, either as an employee or an investor. Anything else is really just a game, and there is no glory or triumph in timing when the music stops - play stupid games, win stupid prizes.
As has previously been proposed and implemented in the Ergo ecosystem is the idea of profit sharing, which is great. However, this usually requires there to be a project token, which although we would all like to claim is not a security, our behaviour would sometimes suggest otherwise. For example, the all too frequent Twitter posts of token charts with the adage “token X is doing it’s thing," fervently waiting for exit liquidity. Now, do not get me wrong, I do have a sense of humour, but I don’t find this particularly funny, only sad. The token is not sentient, it’s not doing anything, someone else just bought or sold it.
In the spirit of Ergo and its mission of being a tool for economic empowerment, I want to propose an alternative to pure project tokens, to serve both as an investment for buyers and a method of raising funds for businesses. It makes use of the idea of smart-contract locked tokens, and could replace project tokens, or more practically used as an addition to them in order for raising development funds. I like the term “dynamic token,” which only means that a token is stored in a box guarded by a contract serving as a proxy representation for the token. The data in the box can change, but the token’s representation, the meaning inscribed to it, does not change. “Static token” would just refer to traditional native assets in a box, but unrelated to its contract or other contents, like a picture NFT or a token used as a singleton token identifier in a protocol.
At a high-level, we want to combine the idea of profit-sharing with that of a traditional company share, minus the game of musical chairs. I would like to call this tool a long-term investment of trust (LIT). Trust is involved since we must ultimately put ours in the people working at the company to create and provide the service they claim to want to create and provide.
LIT Issuance Tx
The LIT tokens, after being minted following EIP-4, will be sent to a box guarded by the LIT Issuance contract, which lets the investors buy tokens or sell tokens back.
Buy LIT Tokens From Company Tx
The company now can sell their LIT tokens, each for a fixed unit price, and interested investors can buy them. Instead of the tokens being sent to a box with the buyer’s PK address, they will be sent to a box guarded by the LIT contract, containing the PK in one of the registers so the box can be directly associated with the buyer.
- LIT Issuance
- Buyer Proxy
- LIT Issuance (recreated minus purchased LIT tokens)
- Treasury (containing funds acquired for development from the buyer)
- LIT box (containing the purchased LIT tokens)
Profit Sharing Tx
Once the company raises money and wants to begin the first round of profit sharing, a corresponding Profit Issuance box holds the funds to distribute. Through a transaction, the correct amount of funds, based on the percentage of total LIT tokens the investor has, would be given.
- Profit Issuance
- LIT box
- Profit Issuance (recreated)
- LIT box (recreated)
When the investors no longer want to hold onto their LIT tokens, they can sell them back to the LIT Issuance box, redeeming the funds stored in their box while their LIT tokens are returned to the LIT Issuance box. These returned LIT tokens can then be purchased again by another buyer.
- LIT Issuance
- LIT box
- LIT Issuance (recreated)
- Buyer PK box (with rewards from profit sharing)
To Sell State
Alternatively, suppose their are no more LIT tokens available or too few left, a LIT investor can place their LIT box up for sale so they can be purchased directly by another buyer. In order to do this, the state of the LIT box will be changed to a “sell-state” and the investor may also determine a sell-price. These would be parameters set in the registers of the recreated box.
- LIT box (in the lit-state)
- LIT box (recreated in the sell-state with updated registers)
- Buyer PK (with rewards from profit sharing)
Buy From Seller
Once the LIT box is in the sell-sate, these boxes can be purchased by any valid PK buyer. The recreated LIT box will contain a new PK in its register, effectively transferring ownership of profit rights, and the original LIT investor receives the extra rewards from their list price.
- LIT box (in the sell-state)
- New Buyer Proxy
- LIT box (recreated in the lit-state)
- Seller PK (with extra rewards from list price)
I have neglected the design details of what one would actually need to implement the ErgoScript, but this should be a good enough outline.
- No musical chairs game.
- LIT tokens represent true ownership in profits of the business. This can perhaps serve as a better incentive for employees and investors, since profit is a more direct indication of a company’s success. An employee need not worry about stock price if they decide to hold their LIT tokens, only the true performance of the company defined by the quality of its products and services.
- Investors need not worry about the stock price, no more “technical analysis.” There is no expectation that the price of the asset increases over time since it only represents an ownership right.
- A simple way of raising funds for development.
- This may or may not be a security.
- This may or may not be a security.
- Implementing this requires a LIT ui for minting, buying, redeeming, and selling.
- No good way of tracking a specific box within a wallet, a LIT add-on to mobile wallet would be needed for example.
- Not as potentially lucrative as traditional stocks, but perhaps more safe and sound.
- Not clear how tokenomics should be handled to account for LIT tokens. In this model, it would make sense for the company to own a majority of the tokens.
- Not obvious how viable this model is, how much of the profits can be given away every quarter while still making the business run properly?
- Can only process one LIT box at a time with the design outlined above.
Like I mentioned at the beginning, this is just an idea, probably not that novel, or even a good one. I personally would think this to be a less speculative way of investing in a company, with returns potentially more consistent, and no fear of “losing my money.” I am curious what anyone else might think of it.