A few months ago I wrote about why tokenizing listed assets make sense.
The key problems with real world (or offchain) asset tokenization are
- Programmable verification of existence of the Asset
- How to price the offchain asset
- Programmable liquidation of the asset
- Censorship resistance of the process
I have purposefully left out regulations and decentralization out of the picture here.
Permissionless access is important but not critically so.
Crypto investors routinely use centralized exchanges where they have to do AML KYC. USDT is not decentralized, but it is definetely proven to be censorship resistant which is enough for the time being.
We have considered several real world assets till date, real estate, invoices/receivables, shares, commodities etc.
Where they all struggle on is programmable liquidation of the asset.
If you make a contract for a mortgage on someones house, and the person does not pay back then you are dependent upon some offchain manual intervention to liquidate the asset which can be quite a drawn out process.
Sean and I were in Singapore early 2019 and we met an OTC desk operator whom we presented our concept of tokenizing real world assets.
He flatly told us it wont work as we did not have the liquidity to start.
The biggest concern they had was how fast could they lay their hands on cash if they wanted to. And in the absence of a liquid market we did not have a good answer for this.
It was a chicken and egg issue.
I eventually came to the conclusion that this was best solved by starting with listed assets which sit on liquidity pools several orders of magnitude larger than the entire capitalization of crypto itself.
Listed assets have a continuous price discovery going on, so that takes care of problem #2 listed above.
A typical retail trader typically does trades based on their intuition manually. However the bulk of today’s stock market trading is done by automated bots. These bots run predefined programs that continuously search for opportunities and execute them without manual intervention.
One could create a script that executes buy and sell orders on a stock exchange based on the instructions of dAPP. All of this would work without manual intervention.
The code for such a script can be made open source so that it can be verified that it is doing what it is doing. The only thing that remains is the passwords via which the script connects to the exchange API.
As whoever controls the password controls the system, so it is not completely censorship resistant. I have not completely devised a solution for this yet, but the general idea is to have a zk-Snark based solution that puts the credentials in control of a DAO which operates such a listed share tokenization platform.