When it comes to understanding the potential smart contracts unlock for value transfer, the DeFi sector has been home to a number of innovative solutions surrounding capital aggregation.
One of the more notable developments from within the blockchain sector at large was challenging the notion of “going public”.
While this first took form with initial coin offerings (ICOs) and the sale of utility tokens to unaccredited investors in a permissionless, global fashion – it’s obvious that there was much to be improved.
From a high level, the premise of allowing consumers and stakeholders to capture the upside of a company’s future growth from an early stage is quite exciting.
“What might a new capitalism look like? First, business leaders need to embrace a broader vision of their responsibilities by looking beyond shareholder return and also measuring their stakeholder return.” – Marc Benioff, CEO of Salesforece
In this article, we’ll be exploring Fairmint – an SF-based company which coined the term Continuous Security Offerings (CSOs) – to better allow stakeholders and investors to enjoy liquidity on their early-stage contributions.
— Fairmint (@FairmintCO) February 8, 2020
Following the announcement of a $1.2 million pre-seed round from Boost VC, IDEO CoLab Ventures, TinyVC and others last May, Fairmint is now live.
What is a CSO?
CSO’s creates a market where investors can get exposure to a company’s future revenue performance. To launch a CSO, companies commit to allocating a part of its realized revenues for a period of time towards a reserve pool (held in escrow through smart contracts).
“A company may commit 10% of its annual revenues to the CSO reserve, distributed quarterly, for 5 years. The company embed’s Fairmint’s CSO web application on its website and begins issuing tokens representing a claim on the reserves.”
For those of us more familiar with sophisticated token offerings, Fairmint leverages continuous token models (better known as bonding curves) in which token issuance increases for every new token that is created.
By aggregating revenue via an underlying reserve, the tokens can be redeemed for a pro-rata portion of those reserves at any time. Better yet, seeing as the company is contractually obligated to allocate the reserves written in the original terms, buyers can trust that the reserve will grow (hopefully) over the life of the offering.
CSOs offer a unique mechanism for teams to fundraise without losing ownership of the company. Seeing as tokens merely represent a claim on reserves, there is no sale or exchange of equity.
Companies can increase the portion of its revenues that they commit to the reserve but they can never decrease that portion – meaning token price has a tangible value relative to the company’s ability to increase that reserve pool.
“The value of the token is really in the token, it’s not like in an STO (security token offering) where the value of the token is just a piece of paper saying that you have a share somewhere. Here the token has its own value,” said Favre.
What’s interesting about CSOs is that their smart contracts are inherently open-source. The creators of these contracts – Fairmint – are responsible for creating the user-friendly interface that makes it feasible for non-technical users.
Under the hood, everything is running on Ethereum. However, thanks to Fairmint – company’s can ensure their CSOs are launched in a compliant, tax-friendly manner.
With simplified reporting and economic analysis, Fairmint provides issues with the tools they need to launch an effective, valuable CSO.
How is this DeFi?
“While the transactions occur via Uniswap’s protocol, the Fairmint web application interfaces with Uniswap to provide a seamless experience directly from the issuer’s website or app.”
This is yet another example of projects leveraging Uniswap for the trading of unique financial instruments, meaning there stand to be additional income opportunities to those seeding the pools with capital.
While this all sounds good and well, it’s very important to note that many CSO offers will be restricted to accredited investors in jurisdictions like the United States. While this is definitely a step in the right direction, there remain legal checkmarks to ensure sophisticated investors are primarily the ones participating in these new offerings.
While the notion of bonding curves to determine token price (such as Saint Fame’s Genesis shirt sale) is not new to the industry, this is likely the first time when companies will contribute tangible revenue to an underlying reserve pool.
It’s interesting to consider how that reserve pool is diversified (ETH, DAI which earns the DSR or USDC aggregating interest through Compound) but from a high-level, the notion of Uniswap tradable capital claims is quite exciting.
Cooper is the Editor of DeFi Rate and a contributor to leading DeFi outlets like the Defiant and Bankless. He is active in the DAO ecosystem through projects like MetaCartel and Raid Guild where he seeks to incubate governance models and grassroots community development. He is an ambassador of Set Protocol and the Director of Fitzner Blockchain Consulting where he authors a weekly publication called Token Tuesdays. To stay up with Cooper, follow him on Twitter.