IMAGINE A GLOBAL MARKETPLACE FOR THE FREE EXCHANGE OF FINANCIAL ASSETS

Coinist was recently fortunate enough to chat with the team behind Lykke: a global marketplace that allows people from around the world to freely sell financial assets. Before we jump into the interview, take a moment and watch the short video outlining exactly what Lykee seeks to accomplish.

Hi and thanks for joining us today to talk about the Lykke project. For our readers who are not familiar with what Lykke is, can you explain what your platform does in a nutshell?

Lykke is building a global marketplace for the free exchange of financial assets. By leveraging the power of blockchain, our platform eliminates market inefficiencies, promotes equal access from anywhere in the world, and supports the trade of any object of value. The Lykke Exchange is fast and secure. Users receive direct ownership of assets with immediate settlement from any mobile device.

Your ambitious goal, as you state in one of your YouTube videos, is to “re-wire the financial system by building a global marketplace”. In that same video, many of the use-cases you provide involve banks. Is this because banks act as auditors ensuring that an asset actually exists? Does this mean that Lykke’s success (at least in these specific use-cases) will be dependent on the successful on-boarding of banks into your project?

Although we say we want to disrupt the banking system, we have to face the reality – it is the banks that control the modern financial system. We want to change that, but the transition should be smooth. Yes, we want to have a seamless, fully regulated connection with the banks. But a bank is not the only institute to guarantee the existence of the asset. There are more and more companies who digitize all kinds of assets: securities, shares, precious metals, real estate – just to name a few. And it is only the beginning.

Now let’s talk about the peer to peer exchange you propose. This is an entirely different use-case and one I find fascinating about the Lykke platform. The platform would allow a user, let’s call her “Freeda”, to issue something that resembles shares in her startup. Another User, let’s call him “Jim”, wants to diversify his portfolio and decides to buy shares in Freeda’s startup. Lykke would provide the peer to peer exchange that would facilitate this transaction. Now I have many questions about this model. First of all, I’m assuming Freeda has some flexibility about how she issues shares in her asset. For example, she might be able to keep 50% for herself or not distribute shares until a certain threshold is reached (a reservable function that is common in crowd funding)? First of all, can you describe what some of this flexibility looks like from the seller’s / asset issuer’s standpoint?

Initial token offering is the new era of crowdfunding, and it’s reality is different to the traditional funding. It’s innate characteristics and values are transparency, freedom and flexibility. Entrepreneurs and investors don’t need to follow the rules and constraints of any middlemen or organization anymore, they have full control of their funds. So it’s up to Freeda to decide how many shares she keeps for herself or how to distribute them. Our part here is to give her professional guidance and consultation on how to handle the process.

From Freeda’s point of view, I’m assuming she can she set the initial asset price? For example, if she’s trying to raise $1000 she could sell 10 shares at $100 each. Those 10 shares could represent 50% ownership or stake of her company. Is my assumption that Freeda could do this on your platform correct?

Correct. We provide the marketplace and the consultation services in financial and legal questions, and it is up to Freeda to decide how to use it. Also, the market decides what is fair. For example, if the price is too high, nobody would buy it.

To continue to build on this case, let’s now look at it from Jim’s (the buyer’s) perspective. First of all, what platform features exist within Lykke that would enable Jim to conduct due diligence on both Freeda and her idea?

To conduct due diligence on both Freeda and her idea Jim needs two basic things: to know about Freeda and to be able to buy the shares in her project at market price. Jim can use the power of Lykke exchange controlled from Lykke Wallet on his phone to do the latter. What about the former, there is a full comprehensive background check of both participants and their equivalent transactions. An issuer may require additional services, such as an ITO focused marketing plan. Having the experience of the past, the network and the quality of our investors we plan for success through solid marketing steps.

Once Jim has completed his due diligence, Let’s imagine he decides to invest in Freeda’s start up. He buys 5 shares, at $100 each for a total of $500 and he now owns 25% of her company. What does this entitle him to from an equity or share standpoint? Due to bureaucratic and geographic restrictions Jim’s name (and all other investors names) probably won’t show up on Freeda’s articles of incorporation (if she has a registered company). So is what Jim buying really more of a “promise to pay”, “phantom share” or a “stake” in her company? What are some different ways you see this dynamic being settled in general, and specifically within your platform?

There is a dynamic approach on the token classification. That is the beauty of this new era of products. A token is designed in such a way which covers Freeda’s needs, but the information is fully available to the public, i.e. before Jim invests. There is a wide range of tokens, some of them are mentioned by you now. In almost all the cases which deal with shares of company, we deal with a promise to pay or to deliver, simply because there is no digital blockchain registry by a companies’ register which allows automated execution and verification of the shares’ transfer. If such a thing exists, then we are not referring to a promise, but to an instant settlement and ownership of the asset, in this case the shares.

Now, to take this a step further, Jim will now have financial expectations from being part of Freeda’s startup. He used the Lykke platform and not platforms like Kickstarter or Indiegogo because he’s not looking for a sticker and a shout out in her next YouTube video. While of course, there is a good chance he wants to support her project because he likes the underlying philosophy, there is an equally strong chance that he’s looking for Return On Investment (ROI). First of all, what can Freeda do to specify what this ROI might look like? Will owning her digital asset provide dividends paid to asset holders? Revenue share? Something else? How is this established from the beginning so the expectations for both buyer and seller are aligned?

Lykke case might be good example here. Having a hybrid model where the token holders are officially registered on the blockchain as Lykke’s stakeholders, they are eligible for any benefit an actual shareholder has. Of course, third party financial audits take place and those are reflected in the price of the token. For the eligible token holders, the company may distribute dividends, or anything else described in the token specification, digitally by delivering tokens as reward. If the company is performing well, and therefore the token price increases, the token holders have the option to sell their shares directly into the market for being benefited from the price of the share instead. A token holder has the flexibility to decide on how to view its ROI and by instant execution and delivery profits are distributed directly to his wallet.

In the use case we first mentioned, the banks acted as a sort of auditor helping to ensure that the asset actually existed. However, in this new use-case between Freeda and Jim it seems to me that Jim will be relying on the voluntary 3rd party auditing of Freeda’s company or just from Freeda’s word that 1. her company actually exists and will continue to exist and 2. its revenues are what she says they are. To me, one of the biggest issues I see, is that this transaction began on a trustless blockchain, which is fantastic. However, the success of the relationship hinges on the trust of off-chain events (i.e Freeda’s revenues and business success). Essentially, there is a disconnect and lack of communication between the on-chain and off-chain events. How does Lykke seek to mitigate this risk for Jim?

At the current state of the economy, a hybrid model needs to exist in order to have a quality company by Freeda. Third party (off-chain) services, like financial and IT auditing have to exist in safeguarding the validity of the company or the project. As an example of such an audit you can take https://www.lykke.com/company/news/auditor-report Lykke requires such procedures to be in place for all issuers in order to keep transparency to its highest. In the near future we will see a fully automated and cryptographically trusted cycle where Jim will feel comfortable to invest in Freeda’s company, because he will be able to monitor directly and in a continuous way the performance of the company.

As we mentioned earlier, Jim only purchased 5 of the total of 10 shares in Freeda’s company. Let’s imagine the other 5 were all purchased by individual buyers. Therefore there are a total of 6 shareholders. Let’s imagine that 1 shareholder wants to gain liquidity and “cash out”. They can go to the open market on Lykke and submit a sell order. Remember, they purchased the share for $100 originally. When they go to the open market what are their options as a seller? Are they able to set a new price? If so, this causes the asset to fluctuate in value. This is, of course, out of Freeda’s control. What are some different real wold ramifications of this? For example, if I buy 1 share at the new price of $110, what am I buying for the price increase? What does this give me rights to? In the traditional stock market, prices are often seen as either expensive or cheap based on a Price to Earning Ratio (P/E). However, P/E is established because the centralized nature of exchanges ensures that everyone on that exchange is audited and beholden to the same reporting standards. Therefore, standardizing P/E is a fairly straightforward process. P/E along with many other financial metrics help investors gauge the risk / reward ratio of their investment. However, without this standardized information it becomes much more challenging to make sound financial decisions. How does Lykke plan to deal with this issue?

Lykke is leveraging the capabilities of the blockchain by having a hybrid model in many of its operations. We are trying to replicate current everyday life procedures on the blockchain. For example, third party controls safeguarding the performance of the company are necessary. The open market defines the supply and demand of the share, based on the information provided by such third parties. Steadily, all company information will be reflected in the market likewise to the conventional markets, like the P/E analysis. Also, at Lykke we have advance algos for the matching of the trades and for the liquidity provision in the market in order to avoid unexpected events, such as price manipulation.

This is a theoretical example, but let’s say Freeda (who kept 50% of her shares) see’s a massive spike in her asset stock price. Let’s imagine that the stock price becomes so inflated that even Freeda doesn’t understand the overvaluation. Let’s imagine it would take her 30 years to match her company’s performance with the asset valuation. The reward for selling her shares in this moment is higher than the reward for keeping them. However, if Freeda sells 100% of her shares what incentive does she have to continue to run the company? Does ownership get passed off to someone else? I understand this is a theoretical example, but it’s possible, so how could you imagine this play out on the Lykke platform? Are their controls or disincentives in place to stop this from happening?

The biggest disincentive is on the client side. Where will the price move when Freeda sells 50% of all the available liquidity? The price will go to the floor, something which is not beneficial for Freeda. Moreover, to cover unexpected events and not just the extreme events, our algos monitor the volume flow and do not allow such big orders to be passed directly into the markeplace. The smart liquidity mechanism acts as a stabilizer for such intense scenarios.

I want our readers to understand as many use-cases for Lykke as possible, so let’s quickly look at a few other ideas. Essentially, anything can be listed on your exchange. I’m going to list a few different assets and I want you to tell me how a possible exchange might look between a buyer and a seller. Please be specific and detailed about how both buyer and seller are rewarded from the transaction.

EXAMPLE 1
– Seller: Needs capital to start an online tennis social network monetized by ad revenues.
– Buyer: Tennis enthusiast who wants to buy into seller’s idea.
– What would a hypothetical exchange look like between the buyer and seller?

A scenario is when the seller generates revenue from the ads in the form of tokens. A percentage of that revenue or profit is distributed directly to the token holder (buyer) using the smart functionality of the token. The revenue/profit delivery is instant.

EXAMPLE 2
– Seller: Owns a fixer-upper property they want to convert into a vacation rental but they lack the funds to properly decorate and repair the home. With an updated property, the owner could generate revenue through nightly / weekly rentals.
– Buyers: Identifies a lack of vacation properties in the seller’s region and would like the help get the property ready so it could generate profit.
– What would a hypothetical exchange look like between the buyer and seller?

Seller issues the token for raising capital and a usage token for the rentals. The ownership token has the functionality to receive revenue generated by bookings, and bookings are tracked by the booking token.

EXAMPLE 3
– Seller: Owns an acre of land with no property, water or electricity. The owner wants to bring both water and electricity to the property to make selling the land easier.
– Buyer: Real estate investors looking for opportunities in land investment and flipping.
– What would a hypothetical exchange look like between the buyer and seller?

Seller issues the token for raising capital and promises dividends to the token holders. The token has the functionality to receive revenue generated from the usage of the land.

EXAMPLE 4
– Seller: An inventor has an idea for new personal use robotics technology. Monetization would occur when / if product gets developed and launched and sold to the public in a few years time.
buyers: Robotics investors who like the fundamentals of the seller’s idea.
– What would a hypothetical exchange look like between the buyer and seller?

Same model with revenue from the token. The market adjusts the token price according to the reports about the technology and the corresponding company. There is a risk for the investor that the idea won’t shoot, but it’s the same with traditional high-risk investment.

Overall, I think the Lykke platform is a brilliant idea. It really does level the playing field. I love your approach to solving some of the major problems with current market inefficiencies. You’ve recently done an ICO to help you further project goals. What were some of the biggest challenges you faced with launching and maintaining your ICO?

Our biggest challenges are the challenges we set for ourselves. And when the standards inside the team are high, the project goes smoothly. So it was with our ICO.

What were some of your biggest marketing takeaways? What were your most successful marketing strategies? What were the least successful strategies?

We usually think twice before starting any marketing campaign, because we want to deliver to our promises. The idea of our marketing strategy is that we want to make the product of such a quality that it will sell itself. By far we have average organic growth of the audience of 30% monthly. We focus on engaging with the community. Our investors know the team and what’s going on inside the company. And we plan to keep it this way.

Thank you for taking the time to chat with us today. To our readers, if you want to learn more about Lykke head over to their website at https://www.lykke.com/

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Answers and comments from Lykke provide by:

Ioannis Menelaou

Ioannis is an investments and digital finance expert with a vision to make financial markets fully transparent and fair.

He has deep experience in investment analysis, portfolio management and crypto-economics. Ioannis’ expertise also includes Anti-Money Laundering, Financial Compliance and Securities Laws. He is a member of several investment committees within the organisations he serves such as compliance, risk management and oversight.

Ioannis is currently the regional director (General Manager) of Lykke Europe (Cyprus). He also holds the position of the Chief ICO Manager for the Initial Coin Offerings taking place on Lykke Exchange.

In addition, Ioannis is an Adjunct Lecturer at the MSc in Digital Currency of the University of Nicosia, the top degree for crypto-economics. Part of his teaching includes topics from the Financial Markets, Alternative Investments, International Currencies, Global Exchanges and Fintech. He also serves other investment and non-investment firms as a member of the Board of Directors.

Ioannis is a Mathematician and holder of the MSc in Financial Mathematics from Leeds Business School – member of the Russell Group – and accredited by Yale University (US). He is a certified investments’ expert by several markets’ authorities and professional bodies.