Creating a DeFi Layer for Fortune 500 Companies

Written by TJ

On February 15, 2022

Institutional adoption of blockchain technology has become a major focal point over the past 2 years. In August 2020, we saw the first announcement of a public company holding Bitcoin on their balance sheet when MicroStrategy purchased $250 million worth of bitcoin. 

Since then, companies like Square and Tesla have also made announcements about adding Bitcoin, and more recently KPMG Canada announced that they would add Bitcoin and Ethereum to their corporate balance sheets. 

What makes the most recent announcement potentially more groundbreaking is the implications of a corporation not only holding ETH on their balance sheet but also using it as a gateway to the expansive world of decentralized finance, which encapsulates the Ethereum network as well as all the major L1s and L2s where ETH can be ported into. 

In an environment where interest rates currently sit at 0.25% and 30-year bonds net a mere 2%, it is impossible for a corporation with a sizable amount of cash sitting on their balance sheets to beat the current inflation rate of 7.5% using any of the available fixed income instruments offered by the traditional financial system.  

MicroStrategy realized this in 2020. As CEO Michael Saylor described it; “We really felt we were sitting on a $500M melting ice cube”.

While many corporations have begun to seek ways to park some of their cash in Bitcoin to help fight inflation, the risk profile of this strategy in 2022 (with Bitcoin at $40k in the midst of a rising interest rate environment and geo-political instability) is quite different from where we were in late 2020 when Bitcoin was still below $20k and the bull market was in its infancy. 

In the current environment, corporate CEOs, including Michael Saylor, are recognizing that there is value in putting crypto assets to work through lending or other methods in order to generate yield while the broader market cools down. 

Yet despite this need, there is currently no infrastructure for enabling corporate entities to invest in crypto or to tokenize corporate assets and leverage these digital assets to earn competitive yields while maintaining regulatory compliance. 

This a problem that Accumulate is aiming to solve through the use of Accumulate Digital Identifiers (ADIs) to establish a communication and audit layer between corporate entities that reduce the frictions for trading, lending, borrowing, and securitizing assets while maintaining a high degree of security and transparency between permissioned parties.  

Onboarding the Corporate world to DeFi through Accumulate 

Accumulate Digital Identifiers (ADI) are human-readable addresses similar to website URLs that are chosen by individuals or assigned by organizations to represent their presence on the blockchain. ADIs can also represent different types of digital and physical assets including stocks, real estate, etc. 

The value of ADIs is that they can enable corporate entities to establish a shared database and standardized framework for recording the transfer and ownership of assets that sit on corporate balance sheets. We can think about this like a permissioned blockchain, but with the added benefit of an identity system that enables more flexibility and deployment of complex operations by issuing a hierarchy of keys with different levels of access permissions.

To understand how this technology can benefit corporate entities, let’s break down the type of assets that corporations normally keep on their balance sheet. 

Source 

These assets can be classified into 3 types and 6 sub-types: 

  1. Convertibility – The ease in which the asset can be converted to cash 
    • Sub Type 1: Current Assets (easy to convert to cash)
      1. Cash & Cash equivalents
      2. Accounts Receivables 
      3. Marketable securities (i.e stocks)
    • Sub Type 2: Fixed Assets (not easy to convert to cash)
      1. Land
      2. Building
      3. Machinery
  2. Physical Existence – Are present or not present in the physical world 
    • Sub Type 1: Tangible Assets
      1. Land
      2. Building
      3. Machinery
    • Sub Type 2: Intangible Assets 
      1. Brand & Goodwill
      2. Patents & Copyright 
      3. Copyright & Trademarks
  3. Usage – Has or does not have use in daily operations  
    • Sub Type 1: Operating Assets 
      1. Cash 
      2. Accounts receivable 
      3. Inventory
    • Sub Type 2: Non-Operating Assets 
      1. Short-term investments 
      2. Marketable securities 
      3. Vacant land

These classifications are important because they allow corporations to design different techniques for valuing each asset based on their particular classification.    

Using Accumulate, corporations can more easily translate these valuation techniques into the digital realm by assigning assets unique ADIs according to their appropriate classification (convertibility, physical existence, usage) and classification sub-type.  

Each classification could come with its own set of lending rates, compliance conditions, or access permissions (e.g only corporations with a certain level of the creditworthiness or within certain geography can borrow these assets).

These rules could be embedded into smart contract code to allow more efficient and scalable deployment of these assets within the network. 

ADIs for Company Trademarks

For example, envision a scenario where a sports brand like Nike could tokenize its trademarked logo and assign a unique ADI for different regions where the trademark can be licensed. Companies could then license an ADI based on their region and pay a particular rate that would go straight to the wallet address of the entity that holds Nike’s trademark token. 

Nike could further customize each ADI by setting a different expiry date for each ADI or limiting which regions or entities are allowed to sub-license a trademark ADI.

Identity-Based Lending Market for Corporate Assets

In another example, envision a secondary market for lending and borrowing stocks between corporate entities that want to earn a yield on their own stock and companies that want to sell the stock to go short as a way to hedge against exposure to certain sectors of the market. 

Traditionally, companies would have to go through hedge funds or costly brokerage services in order to execute such a strategy. 

Through Accumulates decentralized network, companies could borrow and lend stocks peer to peer using ADIs that specify the borrowing rates and enforce those rules into the lending smart contract protocol.

Furthermore, borrowed stocks could securely and transparently be lent out in different permissioned markets for a higher yield, allowing the loans to essentially repay themselves.  

Such strategies are adopted by retail traders in the crypto markets today. However, due to the massive amounts of red tape and regulatory hurdles that corporate entities face, it is almost impossible for them to participate in most DeFi protocols to leverage their tangible and intangible assets to earn extra yield.

An identity-based permissioned blockchain network would enable corporations to freely navigate the tools available in the web3 space while still maintaining regulatory compliance. Within this closed network, lending markets could expand to also include ADIs representing patents, land rights, or even goodwill assets.  

Segmenting Company Shares into ADIs 

A third example involves the segmentation of a company’s stock into ADIs that each represents a division within the company. A company like Facebook could tokenize a portion of their stocks, then create ADIs for each share representing a segment of their business (Facebook.com, Instagram, WhatsApp, Meta, Oculus). 

This segmentation could provide a seamless way for institutional market participants to gain exposure to the parts of Facebook’s business that they find most valuable without expending additional capital in the areas of the company that are not attractive to them. 

Conclusion 

Accumulate’s ADI solution enables the world of DeFi to be brought to Fortune 500 companies and other corporate entities via permissioned identity-based networks built for regulatory compliant companies.  

This solution would essentially function as a virtual sandbox for tokenized assets to move back and forth between corporate entities with the guarantee that at any point, the final balance could be settled off-chain via traditional means of payment or the movement of physical assets that have exchanged ownership on the blockchain. 

From this permissioned network, we could later envision enabling certain forms of interoperability with more open and permissionless blockchains like Ethereum, Solana, and Avalanche, or DeFi protocols like Aave or Uniswap. 

Through Accumulate’s Anchoring solution, which works by inserting a cryptographic proof of a batch of transactions into a layer 1 blockchain like Bitcoin or Ethereum, companies could encrypt and store transaction data into a more secure infrastructure in order to avoid the centralization risks associated with private permissioned networks. 

Ultimately, Accumulate will provide corporations with the technical and legal frameworks they need to confidently deploy billions of dollars worth of assets in order to generate the returns that will enable them to fight inflation and preserve the value of their balance sheets. 

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1 Comment

  1. Abdullahi Ali Penni

    I am very excited and glad to find myself in this position. It’s a my pleasure to work with you and Accumulate. Please welcome me on board. Thanks

    Reply

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