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