The outdated stock market may be facing digitization through ethereum’s smart contracts if an unassuming team of developers is to take their idea forward.
In a five second description, the project can be called as Dai, but for stocks. You basically put out an order for say 1 share of Tesla at market price with it paid by eth. Now whoever wants to buy your Tesla order needs to put down eth collateral.
At a certain future date then this settles, with the stock itself not really moving hands, but the price difference.
All this was coded during the EthSanFrancisco hackathon, so the idea is pretty raw with plenty of fine edges needing smoothing out. Yet in the explanation of why this works, they say:
“Such contracts typically fail to work due to counterparty risk: in the above case, Jay could decide to not buy TSLA stock.
But this does not affect Li since, at the expiration date, the amount the TSLA stock would have been worth is disbursed to Li.
Li gets to enjoy the profit/loss of investing in TSLA—it doesn’t matter if Jay buys the actual stock or not. If Jay doesn’t buy TSLA, and by the expiration date the TSLA stock increases 50% in value—Jay is forced to cover this amount using the collateral he placed when entering the agreement with Li.
This collateral is the maximum value of TSLA stock holdings that Li is able to liquidate at the expiration date.
If Jay doesn’t buy TSLA, and the stock price declines—then Li gets an amount less than what he invested, while Jay taking the difference.
In summary, it’s Jay will be exposed to risk by not honoring the purchase agreement. Buying the stock upon entering the contract and selling it at expiration is the only risk-neutral strategy for Jay.”
In other words this is a sort of futures contract, with a locked in price today then eth settled in two weeks based on the price difference of the stock between today and in two weeks.
If price goes up, then the buyer, the person who initially placed this bid, profits. If the price goes down, then the seller who is mean to buy the stock but doesn’t have to, is the one that makes a profit.
Now that this base layer is formed, we can go one level up to basically create a liquid futures market running on ethereum. They say:
“The contract itself is an ERC721 that Li can sell to a third party in the open market (via 0x v2). The new owner of the contract now becomes entitled to the profits/gains at expiration. Thus, this is a way to create synthetic futures contracts on the blockchain.”
The example given is stocks, but this can be anything such as gold, commodities, wine prices or whatever one wants.
All are fairly difficult markets to access for ordinary investors, with US stocks for example not easily available outside of US.
Yet there is no trust component as all is running on smart contracts with price feeds from spot stock trading taken from Chainlink which describes itself as:
“A decentralized oracle which can be used to provide external data to Ethereum smart contracts. Connecting external data allows a contract to have knowledge of real-world external events, APIs, and other blockchains.”
In this example eth is used as collateral which might have the added volatility of eth prices, but arguably dai can be used just as easily.
With it in effect opening the stock market to all in a just click manner, so allowing for easy conversion of eth or other cryptos into Tesla and back.
As stated, however, this was a hackathon project so it might need quite a bit of work to be ready for market. Thus whether it works remains to be seen, but the idea sounds interesting as it might make many investment markets far more accessible and liquid.