Our Blog

26/09/2016

Crowd Investing Platform built on an Ethereum Blockchain

Note: For abstract purposes we shall use ‘X’ as the name of the company and some questions will be left unanswered to engage those reading the text and exploring blockchain technology with us here at Amani.

“Marketplace for startups.”

Directed By : Joshua Ndolo

X aims to aid startups and ventures track and record their financial and growth metrics securely on an open source platform known as the blockchain, allowing investors to more efficiently assess a company’s credibility and therefore potentially shortening the closure time and increasing the number of successful deals.

This will allow for an efficient due diligence process that can be performed by different investors in real time and also having the startup share their audit or data privately with interested parties and thus digitizing the funding process of startups.

HOW?

Transparency and trust is very essential when assessing a company’s records during the due diligence process. With the implementation of blockchain technology transparency is made possible through an online distributed ledger that is accessed by nodes on the system that have access to the network. The distributed ledger is not only timestamped of which ensures an efficient audit process but the ledger is also immutable and utilizes cryptography to ensure trust across the network stopping any malicious practices without the existence of a third party. Peer to peer transaction is then possible on this network.

Data being securely stored on X using features of the ethereum blockchain will help to better store data and transactions (funds coming in and out of the venture). Cryptography and the immutability of X will drastically reduce fraud and simplify all the paper documentation from invoices to letters of credit and thus saving Investing firms money that is used to employ third parties (accounting firms) for the due diligence process.

X will also due to its distributed ledger feature be able to make processing time of information and transactions faster due to the lack of intermediaries involved and thus sharing of data can be near instantaneous, allowing accurate, in real time, feedback on risk and exposures. The use of smart contracts that are also enabled on the ethereum blockchain will also help to eliminate counterparty risk associated with contractual obligations.

X aims to help evolve and automate the accounting process of startups and ventures from paper intensive to digital records and help all parties involved gain access to a multi-bank, multi lender receivables marketplace on one intuitive platform including automated settlement and collection.

Depending on when the business is accepted on the shared ledger network investors can have access to the entire transaction history of the potential investment and data such as financial projections and the business plan to go along with the historical data of the business. The registration fee will be used to buy ether (the cryptocurrency for the ethereum blockchain), and this will be used to buy gas to run smart contracts on the platform for the business. The more ether a business has the more gas it can acquire and therefore be able to run more smart contracts on the platform. The code used for the smart contracts is open and auditable, so no need for a centralized, trusted platform and therefore the only fees X will be paying for are just the gas fees and rewards to miners who create the blocks.

Through the use of smart contracts on the platform the investors will be able to track how money is spent not only before investment to see if the business meets the investors criteria but also how the money is spent after money is raised on the platform. The distributed ledger will also enable the investors to track how rewards are managed and kept.

Once a business is on the platform and investors can view the accounts and perform due diligence then all nodes(investors) on the network will agree on goals and deadlines that have to be reached in a specific time frame in order for the startup to access the funding. Investors will purchase tokens in ether as an obligation and not the right (similar to an option in capital markets) to buy equity in the startup at a specific date depending on whether the agreed on deadlines have been met. The investors cannot opt out of the agreement once they have purchased the digital token and can only sell the token to another node on the network. The price of the digital token can increase or decrease before maturity if goals are predicted to be met or not by the business and this will create a market for speculators as well.

The price of the digital token will also depend on economic forces of supply and demand. That is depending on how many tokens the business issues and the demand for the tokens in the market. A business may find it wise to have two separate issues and issue 50% of the tokens available on the first public offer. This is to ensure that no one investor or node can acquire more than 50% of the tokens and have monopolized decision making power on the smart contracts. This is because the more tokens you have the more input you have on the smart contracts and this will destroy the consensus feature that is essential to the functioning of the system.

The functioning of the business is enabled by smart contracts on the ethereum blockchain and the smart contracts are auditable by the investors who will form a Decentralized Autonomous Organization(DAO). This will allow for consensus on the code to be used and thus smart contracts stored on the platform for the business. This will make syndicated investments (syndicated loans take up to 20 days to settle) more efficient as all this is done on a shared ledger.

The mining and creation of blocks is done on the ethereum blockchain and members of the DAO after the public offer have access to the records of the business. (Consensus protocol better though?)

Search and match algorithms that helps investors find startups that look like their target industry, geography and maturity, ranked also by valuation estimates (through their financial records).

The cryptography in blockchain that involves public and private keys allows for business to only share what they want to with potential investors. Startups however, will find it wise to be as transparent as possible so as to attract investment.

Will a proof of stake protocol be better than a proof of work with such a platform?, Prediction markets such as Augur and seen in the ‘Trutchoin’ white paper viable in predicting success of startups? What is the incentive to coordinate with a proof of work system? (prisoner’s dilemma comes to mind)

References

Truthcoin Whitepaper

Hyperledger Whitepaper

Ethereum Project

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