How can Blockchain and Digital Assets help in Investments?
The investments sector, as other sectors in finance, is facing numerous challenges such as inefficient processes, paperwork and low liquidity, among others.
These problems can be solved in a variety of ways using blockchain technology and digital assets. First, the openness of blockchain brings about new business models and new methods of investments for investors. Digital assets can also help to fractionalize assets, creating more liquidity and allowing investors to invest in asset classes not usually available to them. In addition, smart contracts have the ability to automate the performance of financial contracts, increasing effectiveness and lowering errors. There has been a significant rise in market size of blockchain within the financial services sector, with a steady growth in adoption over time. Market analysts predict that the size of the worldwide blockchain in retail banking is anticipated to reach $37.8 billion by 2028.
With such impressive growth expected in the coming years, we have identified three key application areas of Blockchain and Digital Assets in the investment sector for you to understand its current landscape.
Blockchain and Digital Assets Application in Three Areas
Customer-facing
From a customer’s point of view, blockchain and digital assets can open new forms of investment, reduce transaction costs and increase the liquidity of assets through fractionalising assets. Some typical application areas are listed below:
- Liquidity Pools
Liquidity pools are pools of tokens held in a smart contract on a decentralised decentralised finance (DeFi) platform. The purpose of a liquidity pool is to provide a source of liquidity for trading and other activities on the platform without the need for a traditional order book and market-making intermediaries. Liquidity pools also introduce yield farming, a new form of investment strategy where users can earn rewards by staking or lending their cryptocurrency assets in DeFi protocols. In yield farming, users deposit their cryptocurrency assets into a smart contract-based protocol, such as a liquidity pool on a decentralised exchange (DEX). By providing liquidity to the pool, users can earn a share of the transaction fees generated by the protocol. Additionally, some DeFi protocols offer additional rewards in the form of their own governance tokens or other cryptocurrencies for providing liquidity.
Real-world Application: Uniswap
Uniswap is a decentralised cryptocurrency exchange that operates on the Ethereum blockchain. It uses an automated market maker (AMM) system, which allows users to trade cryptocurrencies without the need for a traditional order book and market-making intermediaries. Instead of matching buyers and sellers to create liquidity, Uniswap uses a liquidity pool model where users can deposit their assets into a pool to be used for trading. Uniswap aims to solve the traditional order book system liquidity issue of exchanges by providing a consistent liquidity pool, allowing people to exchange cryptocurrencies anytime. Find more on this project on CFTE’s analysis of blockchain projects.
Infrastructure
Blockchain applications in infrastructure can enhance investment operations by opening new avenues to invest, improved transparency, increased efficiency, and a better customer experience through automated and streamlined processes. Some typical applications are listed below:
- Asset Tokenization
Asset tokenization refers to the process of converting real-world assets such as real estate, stocks, or commodities, into digital tokens that are stored on a blockchain. These tokens can represent ownership or partial ownership of the underlying asset, and can be traded on a decentralised platform. Tokenization allows investors to diversify their portfolio by investing in a wider range of products, and also invest in products that were previously too expensive to trade. At the same time, tokenization also opens new doors to trading different asset classes. Real-world assets such as real estate which are not usually traded easily can now be invested in through digitalised forms, opening a new flow of trade.
Real-world Application:Polymath
Polymath is a security token platform that allows companies to issue security tokens that represent ownership in real estate assets. The platform is designed to comply with securities laws and enables real estate developers to raise funds through security token offerings. Polymath has recently partnered with Cardano to create Polymesh, the world’s first security token blockchain. Polymath was registered with the SEC to bring standardisation and regulatory compliance into the process of tokenized capital raising, providing trust and security to investors. Find more on this project on CFTE’s analysis of blockchain projects.
- Distributed Ledger Technology
Distributed Ledger Technology (DLT) is a digital system for recording and verifying transactions in a decentralised network. It enables participants to record transactions in a secure and transparent manner without the need for a central authority or intermediary. With the use of DLT, investments can be conducted with increased transparency and security by recording all transactions on a blockchain. This creates an immutable and auditable record of all ownership transfers and changes, reducing the risk of fraud or errors.
Real-world Application: Northern Trust DLT
Northern Trust’s DLT is the first commercial deployment of blockchain technology for the private equity market. The network, which is built on Hyperledger Fabric in collaboration with IBM, provides real-time insight and transparency to fund managers and investors as well as regulators when required. The blockchain solution allows the fund to transfer ownership stakes and be managed, serviced and audited throughout the investment lifecycle on a transparent platform offering what they call – “one version of the truth” to participants. Where the existing infrastructure in the market is slow, disorganised and manual, the new network aims to provide a transparent, automated one-stop platform for increased efficiency, security and transparency that is in compliance with regulation for the lifecycle of private equity investments. Find more on this project on CFTE’s analysis of blockchain projects.
ESG
Blockchain can help investments in ESG initiatives by increasing transparency and inclusiveness, automating compliance and improving ESG data reporting. It allows secure and decentralised access to ESG data, incentivizes borrowers to improve ESG performance, and offers more sustainable investment options for customers.
- Environmental Impact Tracking of Investments
Greenwashing has been a prevalent issue in today’s marketplace, with many companies making false or exaggerated sustainability claims on their projects for investments. Blockchain helps to address this issue by allowing companies to demonstrate their sustainability claims with immutable and auditable evidence, making it harder for them to falsely market their products as environmentally friendly without proper certification. By using blockchain to increase transparency and accountability, consumers can make more informed choices and hold companies accountable for their environmental impact.
Real-world Application: Project Genesis
Project Genesis is a collaboration between the BIS Innovation Hub and the Hong Kong Monetary Authority (HKMA). Two prototype digital platforms were developed to bring to life the vision that an investor can download an app and invest any amount into safe government bonds, which will develop a green project. Over the bond’s lifetime, the investor can not only see accrued interest, but also track in real time how much clean energy is being generated, and the consequent reduction in CO2 emissions linked to the investment. The project aims to streamline the processes of a typical bond life cycle, on a private and public permissioned distributed ledger platform, including origination, subscription, settlement and secondary trading as well as to increase the transparency and tracking of the environmental impact of green investments. Find more on this project on CFTE’s analysis of blockchain projects.
Conclusion
Blockchain technology is revolutionising the investment industry by providing secure, transparent, and efficient solutions. Understanding the potential of blockchain and digital assets is becoming increasingly essential for individuals and businesses to stay competitive in the digital age. Therefore, it is crucial to stay updated on the latest developments and learn more about the potential of blockchain technology and digital assets.
More contents to be discovered…
If you are interested in discovering how blockchain is implemented in the industry, these are some of the best resources that can help you out!
