Technological innovation is ushering in a new era of payment that is more accessible and flows across borders swiftly. Decentralized finance grew from $15 billion at the end of 2020 to about $110 billion in 2021. Digital Securities have received a lot of attention recently! In fact, global investors are paving the way for STOs as a mainstream form of financing.

Meanwhile, the Decentralized exchanges are focusing on developing new issuance solutions to optimize the most of blockchain and digital security token. Issuance and exchange of digital assets are technically accessible for everyone, and all other aspects of the lifecycle have been neglected. Decentralized exchanges are creating blocks of the DeFi (decentralized finance) ecosystem. Users now trade crypto directly without using an intermediary. The need for a credit risk evaluation has been eliminated. Read on to seek a detailed analysis:

Potential DEXs Finance

DEX investors place new asset-backed tokens against crypto assets. The objective is to enter and exit the process at a higher exchange price. In certain cases, an annualized percentage on stable coins is obtained, 10X or more than fat deposits. Staking digital assets on a smart contract that conducts new tokens offers high liquidity and influences the protocol by receiving transaction fees. 

Decentralized exchanges are non-regulated, and hence SEC may take action against current regulations that attract investors with the promise of returns. Some DEXs use borderline practices interpreted by the SEC as violating securities laws. DEX validated the concept of decentralized tokenization platforms where crypto investors create liquidity pools for new tokens and swap them with listed cryptocurrencies.

Transformative Impact on Investment & Beyond

Popular DEX investing method accounts for a 3% market share in the crypto-finance space. The cryptocurrency world promises to make money universally accessible to everyone globally. At the same time, Decentralized Finance (DeFi) takes that promise a step further. The decentralized world is different from everything we have ever seen before. Investors who need robust training in a volatile market must invest in DeFi protocols. The growth of decentralized finance is stumbling, with a market cap hitting close to $100 billion this year and the important aspect of this growth is decentralized exchanges (DEX). They manage liquidity and execute trades with smart contracts. It removes the need to rely on central authorities and intermediaries for a peer-to-peer trading environment.

What’s next for DeFi?

Finance has always been in one form or another since the birth of human civilization. The digital security token is the latest financial service that we use in today’s fiat system. The world has already seen asset issuance, exchange, borrowing, lending, and so much built-in crypto space. So, what's next!

The generation relies on collateral as a safeguard; you need to own crypto in order to borrow more crypto. However, traditional borrowing and lending will need to rely on an identity system, unlike today's credit systems. A universal decentralized identity that seeks privacy can be seen as an innovation in space. However, the black swan for DeFi is a smart contract vulnerability. Millions of dollars could be drained instantly if a bug or hack exploits an open source.

Choosing DEX Signifies:

Greater Access- No user data is required to trade on DEX, but a public address is needed before starting the process. So you are not subject to any interference done by a central entity. As a result, DEX represents a more inclusive and equitable ecosystem. The ‘non-custodial' process also lets DEX users access their private keys.

Secure Exchanges- CEX users cannot control private keys and can be attacked. One of the biggest examples was BitMEX being hacked in December 2020. DEX seems to sidestep this risk by offering trades through smart contracts without having to be passed through an intermediary third party.

Better Privacy- Data leakage is on top of every investor's mind! DEX doesn't need you to provide sensitive personal details to third parties while registering for exchange. Everything is logged, traceable and transparent. Trading on CEX occurs off-chain in local databases, which means there is no proof that someone bought something at a given price.  Well, this can’t happen on DEX.

Reliability- DEX is a more reliable option that has no centralized entities with total control. They can simply shut down trading when the market crashes or when a number of users liquidate their assets. However, with growing technology, there is still room for improvement.

But how is RedMatter Capital unique?

This platform is completely regulated under Montenegro’s Capital Markets Authority license. Users can issue and trade asset-backed security tokens on DEXs. In addition, RedMatter invites issuers to create digital security token by physical and digital assets to trade on DEX marketplaces.

RedMatter Capital Mechanics

RMC (RedMatter Capital) private Ethereum based digital securities are converted into BSC (Binance Smart Chain) Tokens listed on decentralized exchanges. BSC is preferred over Ethereum due to its lower cost and high speed of transactions. Here is step-to-step guideline for your convenience:

1. First of all, issuers register security such as equity, debt, revenue share, etc., on RMC. Let's name the asset backed tokens of RMC private Ethereum ERC 20 type ’BLCK.’ Now, assume BLCK tokens are purchased at 1 USDT. The primary market offering securities of the issuer are priced in fiat or stable coin.
2. After that, the issuer can convert BLCK tokens into BSC tokens at one conversion rate. For example, let us say that the converted BSC token ‘BLCK X’ is a BEP 20 type token. So, 1 USDT purchase 1 BLCK X token.
3. A new Binance Smart Chain Contract is generated while issuing the BLCK X tokens. Now it can be paired to a BSC cryptocurrency such as XRP, LTC, BNB, or others listed on DEX. For example, 500 BLCK X will be traded for 1 BNB on crypto exchanges.
4. Issuer stakes BLCK X tokens into a liquidity pool against the valued amount of BNB tokens to Automated Market Maker (AMM).
5. DEX for supporting trading liquidity. BLCK X is airdropped to identified major liquidity providers. DEX traders can buy and trade BLCK X for BNB tokens in their wallets.

Digital Security Token: A Boon for Digital Era

The idea of denominating fractional ownership of a real asset in digital security tokens is more structured. Investors can see if the ownership stake is preserved on the blockchain ledger. A security token is a bridge between the traditional finance sector and blockchain. Assets divide up through tokens that exist in the traditional market like equities (either public or private equity) or real estate. Many platforms directly undercut ICO models by tokenizing equity rights for pre-IPO companies.

Utility tokens have been restricted, and companies raising capital can circumvent institutional finance and the costs involved. The volatility of the crypto market has become riskier to launch an ICO and expect stability to run a company. Many projects take cash out immediately to remain solvent. ICO participants are “investors,” opening doors to new ideas.

In A Nutshell

RedMatter is the first-ever DEX smart contract to trade BSC tokens backed by digital securities against crypto. We provide a new way to invest assets safely. While DEXs are ahead in the market, DEX 2.0 brings together both traditional and crypto investors to trade in tokenized physical assets.  Our Proof of Asset protocol registers assets on smart contracts, and asset-backed security tokens are traded on decentralized exchanges. Talk to our experts today and learn more about the process!

Why Millennial investors and tech are changing how markets work

Tech-savvy millennials have been exhibiting an appetite for making their own decisions and choices on where to invest their money, a very different approach than that of their parents who heavily relied on personal relationships with their investment broker or banker.

Given the level of access to financial information on companies and markets, all it takes are a few clicks on an app for millennials to undertake some research on a company, review a prospectus, get advice and commit funds.

Other indicators support the idea of a radically different approach to investing:

- Millennials comprised 57% of the consumers buying cryptocurrency in 2020

- The average age of a Robinhood user is only 28 , 78% are under age 35

- Factors such as social responsibility and environmental responsibility play a key role in where money is invested

- More than 30% of millennials are more loyal to brands that are technology focused.

Millennial locked out of pre-IPO, private markets

Examining the price growth curve of highly successful listed companies, its easy to see why direct investments into pre-IPO companies would fit into the millennial investor’s approach and interest areas.

Typically, a slow price growth between Year 4 and Year 1 is followed by an X times price increase in the 12 months prior to an IPO listing and opening day trades.

Let’s take a look at an example: Slack, the popular business collaboration application went public in 2019. Slack’s stock was valued at $11.91 per share in the last VC funding round 2018. In less than a year, Slack’s shares after IPO opened at $38.5 per share or 225% above the last private funding in the prior 10 months period.

The typical case seen with Slack and other unicorns is explained by the fact that a private pre-IPO market was held by the founders and early-stage investors using offline brokers and investment banks that resulted in pre-IPO trading activity ahead of the actual listing. Moreover, the level of activity directly co-relates to the anticipated listing time and forecasted opening day pricing, thereby explaining the fast run up in prices only months before, as exhibited on the chart below.

Moreover, the level of activity directly co-relates to the anticipated listing time and forecasted opening day pricing, thereby explaining the fast run up in prices only months before, as exhibited on the chart below.

As much as millennials would be likely to participate in a pre-IPO market, they are locked out as investors are limited to accredited investors (in most cases) and large transaction sizes (several million at minimum), thereby restricting the market to wealthy and institutional investors.

Between the time of the private market close and opening day trades, marketing noise usually gets applied to pump up the prices, arguably at the expense of the retail investor. As a case in point, shares of Airbnb originally priced at $68 prior to listing, opened trading at $146 per share but closed the day at $144.71.

The above examples are not the only factor why 86% of Millennials said they distrust Wall Street but it’s a good example. As Elizabeth Warren states: ‘It’s not about protecting people from making bad trades. It’s about keeping the playing field level…Wall Street is a rigged game’.

Democratizing investments via a public pre-IPO market

The SEC would state that securities laws are designed to protect the individual, non-professional investor from investing into companies who haven’t filed a prospectus with the SEC. However, those same laws are used by Wall Street to take advantage of retail investors.

Democratizing the pre-IPO market would need a large re-think of current regulatory frame works in order to allow retail investors to purchase and trade in early-stage companies. An additional problem for regulatory agencies is that technology is evolving faster than their ability to keep up, as exemplified by crypto currency markets, new asset backed tokens such as NFT tokens and products built on decentralized Blockchain applications.

Although there are existing platforms presenting pre-IPO investment opportunities, the limitations for accepting only accredited investors from specific countries of residence and without a secondary market — all put up serious obstacles for investing into the next unicorn.

Fractional investing: digital securities on Blockchain

To realistically implement a public market for pre-IPO companies that supports fractional investing , the technical issue of how to settle small volume trades at a low cost is a big issue.

However, innovative Blockchain marketplaces provide a solution via decentralized peer to peer trading where fractionalized trading is fully automated and executed at virtually zero cost using Ethereum smart contracts:

- Shares or other company assets are registered on Blockchain

- Investment security terms entered off chain are uploaded to a smart contract

- Digital security tokens, backed by the shares on the physical company registry, are issued

- Buyers purchase any amount of asset backed tokens representing the underlying asset (e.g. (e.g. a fractional share)

- Payments are made by credit card or crypto for real time transfer of tokens to a buyer’s wallet

- Buyers and Sellers can trade tokens on the secondary market without any restriction

New regulatory environment: investments for everyone, anywhere

Regulatory agencies are reluctant to adopt new regulations markets that support technological innovations such as trading digital securities.

However, new capital markets like Montenegro (the small Balkan country that borders the EU) are embracing the potential. Recently, the Capital Markets Authority of Montenegro (the equivalent of the SEC) has provided a license to Red Matter Capital to issue digital securities for companies from any domicile and to allow investors (including retail) to purchase and trade asset backed token on a secondary market.

The Red Matter Capital platform is a good example of how private capital can be more efficiently raised when connecting issuers directly with followers who support innovation and believe in the value of a company.

Technology will eventually level the playing field, allowing millennials and future generations of investors to directly participate in the success story of companies that represent their values and interests.

If you are an investor or company interested in digital securities and want more information on Red Matter Capital, please free to reach out to me at info@redmatter.capital. Sign up early to get a free account at https://www.redmatter.capital .

Overview

DEX investors place bets on new tokens issued against tradeable crypto currencies with the intention to exit at a higher exchange rate and in some cases to obtain an annualized % on stable (pegged) coins that is 10X or more over fiat deposit rates. Additional scenarios involve staking crypto on a smart contract that governs the new digital security token to provide liquidity with the advantage of influencing the protocol and receiving a % of transaction fees.

The Perspective on DEXs

Some DEXs have used borderline practices that in the past have been interpreted by the SEC as violating securities laws.  Since DEXs are non-regulated markets, there is a strong possibility that the SEC may take action against current DEX practices that are designed to attract investors with the promise of returns.

From a market perspective, DEX have established and validated the concept of decentralized exchanges where crypto investors create liquidity pools for new asset backed security tokens that can be swapped against listed crypto currencies. 

There are opinions (which we agree with) that DEX investor returns of 100X are a bubble that will pop whenever a correction hits financial market.

DEX Evolutions

 DEXs rely on crypto owner appetites for greater returns but are limited to trades involving crypto assets and currencies. The question to be asked is why aren’t minted new tokens hedged against physical assets such as stocks, commodities, indexes, debentures, shares in pre-ipo companies, real estate and even digital media assets. The answer is that this would fall within the Howey rule definition of a security and consequently be subject to SEC actions. As Red Matter Capital (RMC) is a fully regulated platform under Montenegro’s Capital Markets Authority license and is able to issue and trade securities, RMC is able to list asset backed security tokens on DEXs.

Red Matter will differentiate itself and be poised for DEX 2.0 by inviting issuers on its platform to create digital securities backed by physical and digital assets that can be traded on DEX marketplaces.

The Mechanics

Red Matter will uniquely convert RMC private Ethereum based digital securities into Binance Smart Chain (BSC) tokens that can be listed on DEXs (note: BSC is considered a better choice than the Ethereum mainnet for significantly lower cost and speed of transactions).  

Here’s how it works:

 Step 1: issuer registers a security (e.g. debt, equity, revenue share...) and issues security tokens on the RMC platform. Those tokens are RMC private Ethereum ERC 20 type tokens and for this example lets name the issuer token ’BLCK’). Let’s assume that BLCK token can be purchased at a rate of 1 USDT for 1 BLCK token (note that issuer securities are normally priced in fiat or stable coin). This is the primary market offering for digital securities.

Step 2: issuer is able to convert a portion of BLCK tokens into BSC tokens on a 1 to 1 conversion rate. Let’s call the converted BSC token ‘BLCK X’ which is a BEP 20 type token. In effect, 1 USDT purchases 1 BLCK X token.

Step 3: a new BSC smart contract is deployed by RMC at the time of issuing the BLCK X tokens which can then can be paired to a BSC crypto currency like BNB (or XRP, LTC or other coin) and then be listed on a DEX. In our example, let’s assume BLCK X is paired against BNB on a DEX, where 500 BLCK X will trade for 1 BNB (we assume here that 500 USDT buys 1 BNB on crypto exchanges).

Step 4: issuer stakes an amount of BLCK X tokens into a liquidity pool against an equal valued amount of BNB tokens in order for an Automated Market Maker (AMM) based DEX to support liquidity on trades. Additionally, issuer airdrops BLCK X to identified major liquidity providers to

Step 5: DEX traders can then purchase and trade BLCK X for BNB tokens in their wallet as they currently do now.

How DEX trades benefits the issuer

The issuer can devise a range of tactics using tokens to motivate crypto owners to purchase BLCK X. For example, an airdrop can provide a reward in exchange for creating a liquidity pool for BLCK X on the DEX (see below). As demand grows, the trading price on the secondary market for BLCK X also creates demand for BLCK on the primary exchange.  

Here is an example of how that can occur:

When BLCK X tokens are first listed on DEX, the price is based on the USDT price for BLCK. So, the initial listing price would be 500 BLKC X to 1 BNB. When demand grows for BLCK X, the rate may positively change to 300 BLCK X to 1 BNB. 

However, the issuer’s Ethereum smart contract for BLCK tokens has a fixed at the rate of 1 USDT to 1 BLCK token. Assuming the USDT price to BNB is still at approx. 1 to 500, an arbitrage opportunity opens up for a trader to purchase BLCK on the primary market and then convert it into BLCK X, providing a much lower BNB rate of exchange than what is being traded on DEXs. 

For the issuer, the DEX listing therefore creates demand for purchasing digital securities on the primary market, which is further enhanced over time as the issuer’s business grows and a new round of securities are issued. Traders can swap in and out of the 2 issuer tokens based on the value and arbitrage between the tokens relative to crypto currencies.

In this way, an RMC private Ethereum ERCC 20 digital security token that is convertible into a tradeable BSC BEP20 token creates demand and subscription for an issuer’s securities without expensive marketing and legal costs. Importantly, the BSC tokens are linked to the issued digital security token and consequently the BSC token price is additionally influenced by the future price of the ERC 20 token

Game Theory

PancakeSwap and SushiSwap have demonstrated that gamification plays an important role for crypto traders on DEXs. 

Red Matter can adopt a sci-fi theme (vs. farming and food theme) to engage DEX players in view of the fact that its name is derived from an event that occurs in the popular sci-fi series Star Trek, where Red Matter can create singularities and multi time wormholes.

 The concept that could be adapted is to issue a reward token called ‘Dilithium’ which is a mineral that powers ‘Warp Drive’ for interstellar travel. 

 Let’s look at only one example of how game rules can provide a high level of engagement:

• When airdrops happen, they give free Dilithium tokens (DLT)
• DLT is also acquired in return for staking the BLCK X token with BNB in the liquidity pool
• When enough DLT tokens are on a user’s wallet, they power Warp Drive which gives liquidity providers an extra % of trade commissions on DEX

Summary

Red Matter positions itself to become the first DEX where digital securities back up BSC tokens that are traded against crypto. This would differentiate against current DEXs while being ahead of the market for deploying DEX 2.0 which will bring together both traditional and crypto investors to trade in tokenized physical assets.

 Initial comments by DEX traders on Reddit corroborate this in comments to our question regarding the future of digital securities on DEXs:

‘You’re absolutely right. and I know securitisation is a scary word but I think it is a natural evolution. and I’m really excited about it’ – DeFi Reddit forum