The digitisation of shares is advancing
For crypto enthusiasts, the possibilities of the blockchain are almost limitless. Now the first crypto providers are venturing into share trading on the blockchain. The first virtual shares of the popular tech giants Amazon, Tesla, and Apple have already been developed.
These are digitised shares
Stock market trading based entirely and exclusively on the blockchain? What sounds like dreams of the future to many is no longer a pipe dream in the field of Decentralised Finance or DeFi in short. Within the last year, the two crypto projects, Mirror Protocol and Synthetix, have created so-called synthetic shares that are based on their real counterparts but are exclusively digital.
There are now virtual shares of tech giants such as Tesla, Apple and Amazon, but popular ETFs also already exist as blockchain-based assets. The difference to existing stock tokens is that the synthetic securities have been programmed to reflect the prices of their real counterparts without buying or selling the underlying assets. They are, therefore, virtual mirror images of the originals, which can also be traded in the cryptoverse.
The exact technical background of such fake shares is quite complicated. In simple terms, however, traders are offered an incentive to manage the supply of virtual shares to correspond to the movements of their real counterparts. This is made possible by allowing market participants to “mint” new tokens if prices become too high, for which they must deposit collateral. On the other hand, tokens can also be “burned” again if prices drop too much.
In practice, synthetic shares can vary from a few cents to several dollars compared to their real counterparts.
Trading volume still low
The trading volume for these fake shares is still minuscule compared to regulated shares but holds great potential for the DeFi sector. The founder of the financial company Terraform Labs, the driving force behind the Mirror Protocol, Do Kwon, relies first on making rather than on obtaining permission: “It is better to act quickly and break things. It is counterintuitive to wait for fragmented regulatory frameworks to emerge before innovating,” Bloomberg quotes the Terra CEO as saying.
DeFi as a competitor to the traditional financial system
Terraform Labs has created its blockchain with its own cryptocurrencies. The fintech is now using this network to make it possible for developers to generate synthetic shares. The fact that these fake assets are currently unregulated is an advantage, according to Kwon. After all, he says, Terraform Labs’ goal is to create a digital financial system independent of big banks and FinTech app makers. As Fortune echoes the crypto expert, another advantage of synthesised shares is that they are accessible to everyone. Thus, it is also possible for “a small retailer in Thailand” to get hold of the shares more efficiently, which would otherwise be denied to him.
Thus, trading in fake assets is possible around the clock, seven days a week, no matter where the trader is. According to Kwon, there are no capital controls, know-your-client rules, or other contact points with the traditional financial system. Critics assume, however, that it is only a matter of time before the stock exchange authorities also take aim at the Mirror Protocol project, similar to what is already the case with the crypto exchange Binance and the stock tokens offered there.
Unlike Binance or Coinbase, however, the fake assets are traded decentrally directly on the blockchain. Automated markets such as Uniswap or the company’s own Terraswap can be used for this. So a whole ecosystem of its own is developing.
Terraform Labs benefits from financial injection
As Fortune reports the Terraform Labs CEO, the crypto company does not earn money from transactions with terra cryptocurrencies or synthetic shares but relies on external financing. Recently, the FinTech company received an investment of 150 million US dollars from an investor syndicate that includes Pantera Capital and Arrington XRP, two cryptocurrency investment heavyweights. The financial injection is to be used over the next few years to further expand the ecosystem around the Terra Blockchain.
So far, Apple, Amazon, Microsoft, Netflix, Twitter, Alibaba, Tesla, Google, Facebook, Airbnb, AMC Entertainment and GameStop are among the Mirror Protocol’s synthetic stock offerings. But mirrored cryptocurrencies such as Bitcoin and Ethereum can now also be traded, as can index funds.