Tokenization of companies - from TheDAO, ICOs and security tokens to now. / Christoph Jentzsch

Transcript

thank you very much so it's great to be here in Prague it's not too far from my home to drive here so tokenization of companies um if you think about when all of this started with Bitcoin essentially it was always about digital ownership this is what made Bitcoin create and I was in 2013 and that's when I was started starting to like get interested in Bitcoin and buy some and experiment with it and get to know the technology and so then in 2014 I got to know ethereum so and then in summer 2014 I joined ethereum foundation and if you think about the core of ethereum if you read the white paper

there are a lot of those things actually happened except of nfts are saying vitalik prophesied almost everything um and in there you see this is a snippet from the white paper the first implementation of a token which could represent almost anything later on we got to standardize it we call this erc20 just the esc-20 standard so it's easy to get compatible with wallets exchanges and other things but this digital ownership this is how it evolved and this is always at the heart of a video at most of the applications in blockchain so then after 2014 I I started a company called slog it and we did something called the Dao I don't want to talk too long about this this is a yeah for some

of you a really bad memory for me partially too to say it lightly well for those of you who have been not in space in 2016 I give you a very very short condensed overview what happened so we got ethereum now we got smart contracts now so it was so obvious you had to do something with it and so the Dow nobody really had an actual decentralized autonomous organization which should run on chain coded so I wrote the code I wrote the white paper we released it we wanted to build something called the universal share Network which is like a decent last way of doing sharing economy similar to Airbnb or Uber and yes it was um successful meaning

there was about 11.5 million ether what it raised back then it was 150 160 million dollar and this was again price was something like five to ten dollars per East at a time interestingly we also got a lot of press New York Times actually globally and a lot of attention towards ethereum about what is the thing a decentralized autonomous organization so we got to explain it a lot and actually if you speak to people a lot of people came into ethereum during that time because they got this the thing got attention um also it was fairly distributed so the top 50 token holders collectively owned only 42 this is the um and also some of those were exchanges where a lot of

smaller um token holders are behind it so it was for a Dao for the first one actually very good a very good distribution um so we had about 23 000 addresses of course you don't know if if one person has many addresses or behind one address could be in exchange with many persons so we do not know exactly how many participants we actually had so you know the end of the story we do not get into the details of the hack and then the towel Wars and the whiteheads and then at the end the hard Fork I often like to end this story with this quote you never know how far you can go and until you've gone too far and yes we went too early too much another story for another day so but what we did learn is that tokens work very well for

organizations for governance and for ownership this is the main lesson from the Dao technically it failed but conceptually we were on track so what happened after the Dow so you see this little thing here in 2016 is 166 million but actually after that we got this Ico craziness we got billions of dollars being raised through icos and a lot of them you know where scams many many bad icos out there and I don't also don't want to get into those details but the fundraising process itself was really nice you could just pay some ether get some tokens you could see on chain what is like how many tokens are in existence the circulating Supply will calculate the market cap so the transparency and

the process of fundraising was really good just the projects some of them or many of them really bad so this was the Ico area and it was permissionless and was a crazy really interesting time so after that so at about 2018 well as you see coming in and we had like all The Regulators paying attention what is happening here there's always selling unregulated securities so and then people start this business model of setting up a Swiss foundation and having a utility token which is somehow attached to the value of the product so yes it's a utility token but it's scarce we have limited Supply and if more people use the product they need to buy

it so the price goes up so they all had to artificially create this non-profit organization and somehow create a token which somehow is linked to the success of the product which you could sell and not call the security of course this is this is a dangerous path for many so they went to pass towards the security tokens but what's taking tokens they are there but they have not taken off maybe yet maybe they will come but there are some inherent problems in security tokens that's for the most part they leave everything as is and just put a token on top so if you have to transfer the rights to dividends or some actually ownership rights what you actually want to give to your torque holders that's the ironic

thing there's Founders want to give them governance rights dividends the actual thing but they cannot because then they feel it's a security and they have to follow all those laws so that's this is hard part but if you do something like this a security token you have usually contracts we have one the rights are transferred and you have all the paperwork and Germany and it if you have a gmbh you have to notary and on top you get the token but the token just makes things more complicated and doesn't really make things much better so I like this quote I use this a lot when I speak about the beginning of ethereum because a lot of the things we do in the ethereum space can be brought down to this thought this this thought at least so you never change things by fighting the existing reality to change something

build a new model that makes the existing model obsolete now a lot of the things we do in this space are following this parallel paradigm so now think about companies and talks again let's take one step back so what is a firm a firm just unites a group of people whose contracts and having a joint mission to do something so it usually protects the owners of Founders through limited liability that's actually a gift now the government is giving us limited liabilities actually something very nice and help for a lot of innovation and people taking risks so the management of shares are usually happening in contracts or public Registries that's the case in Germany for gmphs we now talk about governance some people ask me would you do a dial again or

something like this and I would say actually no not that kind of Tau why because I do think that dollars are really well suited for public goods for maintenance of protocols such as es or many of the other things you hear here today for Community ownership this is what those are really good at what those are not really good at is for product development finding product Market fit that's called the Silicon Valley style startup which tries to find something what people like for this period you need a strong founder and it's some kind of centralized governance maybe for this in traditional firm is usually more Suited but you still want to have the benefits of the tokens and how do we get them so I will get to this

so now okay I'm from Germany I'm talking about gmbh but this is for most other jurisdictions it's very similar in the U.S you have the LLC and they act in a very similar way but I'm talking about this one because that's how we start with our solution we have to start monitorisdiction so most startups are private companies like LLCs or gbh of course there's a simple setup simple governance less rule compared to others so it's much much easier but if you would now go to your lawyer and say I want to tokenize my company the first thing they would say is go somewhere else Cayman Islands Bahamas I don't know Singapore whatever go there Estonia there are solutions for this but don't do it here but it's this creates a lot of tax problems and other problems so if

they say if you want to stay here in my case Germany at least making AG which is similar to an ink in the U.S and then you don't need a notary it's a bit easier but even this is such a big hurdle financially and governance wise and all the processes I have to follow that people don't like to do this that's why we have about 1.15 million gmbhs only 50 000 he's in Germany and the way people raise capital is often in using convertible nodes but that's just like a circumvention of the traditional way of doing it meaning you just give a loan but you don't want to give a loan you want to have ownership and so a lot of problems with this and those convertible nodes they don't dilute each other that's not how it

should be done times Founders are very surprised when all those convertible loans are converting how much they have left in the company so then you have insurance Capital here you have to go to notary cumbersome process you don't want to do this and the other problem is you have those companies and you have a lot of stakeholders but they have different assets so let's take the founder he has actually shares in the company then you have an investor with a convertible loan then you have an employee they have something like virtual shares or ease up and thousops in Germany and it's different assets they are not secondary you cannot trade them on the second days it's just different kind of thing but they all have ownership kind of in the company so it's actually really really weird structure so how do we fix this of course was a token but how does this

token work you could think about the public registry in Germany handles register is something like the layer 1 of Company ownership and yes it's permission to write only the notary it's slow it's expensive it's not digital and then you have layer 2 which in our case is the public ethereum chain which is that a permission to write a specific all of the token is fast cheap programmable I like to call Ether programmable money and this is now a programmable Equity if you want and you have you can interact within the D5 ecosystem you can use this tokens on uni swap or give yourself a loan using the token as the collateral all those nice things the question is how do we combine those tokens and those rights and here we have worked now for a very long time paid a lot of money for lawyers to find the

solution and I will now quickly go through this um so so first of all what is it it's a participation right but if you have your token you can get dividends liquidation proceeds exit participation and information right so you can look into the books of the company and very important give a put option to give the token back and have a way to receive actual shares so you can kind of convert it so the details I can you can find the paperwork on a website so they're therefore a token is economically speaking the same as being a shareholder is especially because you have this way of converting it so that's the rights so it's similar to security tokens but now comes the Innovative part where we are the first

one doing it that way I can explain to you a security token has this problem of having agile contracts giving one the rights from the seller to the buyer you always have this contract so it's a chain of contracts giving those rights to the next so let's say you trade this token uni Swap and this token has no history of 100 different owners what if one of them was actually not authorized to do this or his eight-year-old daughter signed this transaction or for whatever reason this contract is invalid then you have the biggest problem ever because the token continues to trade but the rights over someone else so if this token holder tries to exercise as rights then the other sky comes say I want to exercise my rights and I guess my token

is gone but the rights are with me because this was invalid because I was the person who did it wasn't authorized to and then you have a big legal mess so the question is how can you avoid any contracts or any chain of contracts and have the actual right with a token the solution to this is a German word called auslobum the best English translation I could find is public reward how does it work you basically say I don't give you those rights based on a contract but based on an action you can only do when you own the token so to compare it so I could say publicly I announced that whoever solves this math problem I give I give to this one person one million dollars the other person doesn't need to sign it's like a

one-sided contract but I'm legally bound if someone solves this problem I have to give him one million dollar and if he comes and solves it he can bring me to court I have to give him the money so I'm basically rewarding an action the same thing we do with the token we reward the action of holding the token with dividends we reward the action of giving the token back to the company which is with the right to receive an actual share but we don't give you this right based on any contract they give you this right based on an action you did and this action you can only do if you have a token and with this we don't have this chain of contracts that's the core idea this is why it doesn't matter how you got the token if you did get it from uni

swap or if you get it from a friend just some transactions without any actual contract it doesn't matter if you have the token you have those rights because you can actually you can do those actions so this is the core idea of how we combine or tie together those rights economically speaking like being a shareholder to the token and now we have access to this defy system okay so anyone I want to go quickly because I have only six minutes left to what you can do with this token and because I think I think it becomes obvious first of all um okay you have those programmable shares you can use them in the defy ecosystem or they have three walls and you still have this gmbh which gives you

live with limited liability traditional company with all the benefits we have from it from having this and if you have to talk you can do fundraising and I call it fundraising as supposed to be we have on our platform two different ways to fund ways one is a private offer you're actually using a smart contract with create two op code where you don't see beforehand you offer but only when executed the complete dealers executed in the Constructor of the smart contract which is just a nice thing to do this and there you give a particular investor a fixed offer for a fixed amount of token for a fixed amount with an expiration date tpg can execute the buyer talk at a certain price that's one usually for business angels family and friends or some investors we already

executed this with our own company so this works the other one I think is a more interesting part this reminds me a little bit of this Ico time which is the public offer which I like to call continuous fundraising because why are we raising in rounds pre-seeds seeds Stills a b c d because there's so much hassle and you don't want to do it all the time but what if you could just say you have an invest Now button on your website which everybody can push and there you see the terms like current company valuation or price per token how much tokens are currently available and if they want they can just buy it's a continuous public offer where the parameters can be set by the founder if you want to like if he is fundraising he makes the tokens to be sold high if you

want those that's not the fundraising right now you can just pass it you can change the price let's say a continuous offer to the public where everybody can invest now everybody of course I get to regulation in a second so another thing you can do is to employee participation you can give the exact same assets to employees we are fasting smart contracts with a cliff which you can just use as you use in other programs to incentivize your employees they are tax optimized I don't get into those details but it's also available on the platform so in our circulation I like this tweet from Alex why a lot of people would do exactly this they have a company would love just to put the equity on uniswap without going to jail so so far what I

explained to you is the Civil Right part of it mean it delete the law how we tied it rights to the Token now the other side um you would say in Germany I'll say stretched or what in the US would be the SEC in Germany debuffin so there are there are rules for those kinds of tokens which you have to follow and we have to follow them as well so tokenize it acts under a liability umbrella of vitalo which means they have a broker license we have to of course fulfill all those requirements qyc AML check and so on so this is the one part the other thing is if you do an offer now I'm speaking only of Germany and it's similar in other countries you usually have to make a prospectus which is very expensive and takes a lot of time but there are some

exceptions and we of course make use of those exceptions one of them being if you make an offer for only up to 149 investors in our case the private offer that's okay don't need to have a prospect so that's one thing you can do on our platform of create 149 links which you can send to people to invest the other one if you want to raise up to five or eight million then you need something called the verb papier from its own Splat which is also not too hard to get takes about three to four weeks cost you about three to five thousand Euro it's doable with this because we do have this poker license under um liability umbrella we can help you basically do this public crowdfunding

where everybody can invest we check if they're allowed to invest and if yes they can do and most of them actually can so with this we have created solution within the legal framework we are living in which gives you very similar experience to what we have back then with the Dow or icos and others but giving you something which is not just utility somehow tied to a product but actually dividends actually right to do to convert a pathway to convert to shares all of those things so that's what we have built and so our mission is actually to enable everyone to become a co-owner of a company so it becomes as easy to be become a member of a Dao of some token based project you can become a member of a gmph or some limited

liability company and that's that's we want to work towards all jurisdictions we're just starting in Germany because that's where we are based and our homework we have to do is now go through all the other jurisdiction all the other countries we start with Europe to build exactly the same solution and adopt our legal templates we have on our platform to allow Founders to do exactly this fundraising is supposed to be incentivization of employees customers and whoever like you do in the web 3 world so that's our mission and I hope you join us helping us using it giving us feedback and we hope we have a dao-like world also in the traditional world so thank you very much thanks

we have a big time for questions so if you have some questions go ahead okay I have one minute left here so one minute left here to discuss one minute for questions yeah go ahead uh recently tokeny and other um tokenized providers were putting out on LinkedIn that free tradable Securities as erc20 is bad for the ecosystem what's your common to that so it's a complicated question now first of all to all the stuff I said here I'm not a lawyer disclosure have your own lawyer and so on um you have to separate between you can trade with your friend just doing a

private deal and a public offer a public offer this is the more complicated part and if you for example I said you can trade them on uni swap yes this is technically true but if you go on the unit swap user interface they would not list any Securities there because they are not a broker but if I'm building a user interface what we intend to do on our side using uni swap contracts following the laws of a broker we can use this so this just is a question of user interface and the requirements you have for letting the general public investing companies but if you do private deals there's a complete different thing saying they're letting that general public on it and yes it is unfortunately not that easy but it's also not impossible sometimes people think it's absolutely not doable

you can yes you have to do kyc yes we have to do AML you have to do those checks that's the law but after that we can let you invest yeah I don't I don't think it hurts to have them as erc20s so unfortunately my time is up but you can contact me on tokenized website or some contact forms such as Kristoff at tokenize it you can reach me [Music]