Gu Yanxi: Ten Basic Elements of the Economic Model of the Pass
The current US STO market is rapidly evolving. Various platforms that provide STO financing services and related institutions in the securities industry are constantly entering this market. At the other end of the market, the demand side of financing is also very strong. Both domestic and overseas projects in the United States have a strong interest in financing using the STO approach. In the United States, the main industries that use ST for financing are real estate and private equity funds, especially real estate. There are still very few US overseas projects that use the ST method for financing in the United States. Only a few star projects such as Telegram have successfully adopted this approach for financing. In fact, for most overseas projects, financing in the US based on STO is not easy. I explained this in an article in November last year (STO, that is, a game and a dream ). However, this is not to say that all US overseas projects cannot be financed in the US based on ST. Some companies with operating characteristics can use this method for financing. These features are either technical or take advantage of the location of the business or adopt a new business model. Companies that have their own business characteristics and are market-proven after a period of time are very likely to use ST for financing in the United States. If a project is any innovation in the blockchain and encrypted digital assets, then the project will be easily recognized by the investment market. In this field, there are still many opportunities for innovation.
In the current US market, startups based on the CIS model can be said to be no. But this does not mean that the US market does not need this model. I think that the US market has not yet realized the huge potential of the CIS model, which is precisely the opportunity for the application of the CIS model. The promotion of the general economic model in the US market may be similar to the promotion of QR code payment in the US market. The first application of QR code technology in the payment field began in China. The world now knows the impact of QR code payments on the rapid development of third-party payments in China. The US retail payment market has become accustomed to using bank cards and credit cards for payment, but the advantages of QR codes are gradually being recognized by the market. Retail companies such as Starbucks and Target, which are at the forefront of technology applications, have begun offering software based on QR code payments. The QR code-based payment in the US market is now catching up. The application of the universal economic model to the global application may also repeat the same path. For US overseas startups, if they succeed in adopting the CIS model and have been tested for a period of time in the market, then the chances of successful financing in the US market are mostly.
This paper discusses some of the ten basic elements of the general economic model, and hopes to be helpful to the practitioners of the model. But the first thing to point out is that the application of the general economic model must first be compliant. Different jurisdictions currently have different definitions of certificates, and the regulatory systems to be followed are different. The US SEC has a clear definition of the pass in the market, and it can raise funds in its jurisdiction in accordance with some regulations for the securities pass it recognizes. Although the current system in this area is still very restrictive, it still has a certain operational space for the operation of the CIS model (see my article, some considerations of the application of the CIS model in the US market )
1. Applicable industry
Not every type of company in every industry is suitable for the CIS model. Only in a fragmented market facing retail customers is it best suited to the CIS model. In those industries that have been highly developed and have high market concentration, the CIS model is not suitable. One of the most suitable industries for the Compulsory Economic Model is the service industry. Service organizations in this industry are often fragmented. But some institutions can work together to serve a particular target group of customers, such as middle-aged middle-aged women. Such target customer groups have common needs, but are served by different agencies. Such an ecology is very suitable for establishing such an ecology in the form of a pass-through economic model.
2, organizational form
The most ideal form of organization for implementing the CIS model is of course the fully autonomous and auto-run organizational model, also known as the DAO (Distributed Autonomous Organization). But in the current business world, this form of organization is actually difficult to exercise. In most cases, this business is started independently by a management team. The general economic model still applies in this case. The most feasible form of business organization supported by the Compulsory Economic Model should be an alliance or membership organization. This organizational form is supported by the simplest organizational rules, and the main business logic is guaranteed by blockchain technology. Each participating institution node obtains corresponding income according to the size of its actual contribution. In this regard, an approximate application at present is IBM's World Wire. The financial institutions of the countries participating in the project are all based on the amount of business they can generate, and Stellar's technical underlying guarantees the fair completion of the transaction.
3, the design of the certificate
In the past projects using the CIS model, the design of the certificate is also a process of continuous exploration. From the more complex three-coin project to today's basically a token-based project. A typical representative of three generations of tokens is Steemit. The three types of tokens in this project basically correspond to equity, dividends and currency. Since then, many projects have adopted two types of tokens. One token is used for incentives and the other is used for payments within the system. However, with the emergence of stable currency and the requirements of compliance, the development trend in this aspect is gradually inclined to adopt only one type of token, and it is a token of securities type. This design is both in line with the current securities system and easier to operate.
In the design of the security attributes of tokens, the certificate itself provides very strong flexibility. It can customize different securities attributes in the same pass, and the ratio of various attributes can be different. The most creative token design in this regard is EOS. An EOS token contains a bonus and 30 voting rights. In the existing securities design, each common stock contains one voting right, one dividend right and one share. The preferred stock type stock includes a dividend right and a share. In order to avoid the trouble of compliance as much as possible, the project using the CIS model is best to design its securities pass according to the existing stock type. For example, tZERO uses the preferred stock type, and the Colorado ski resort project uses the common stock type.
In terms of the types of certificates included in a project, only the securities-type pass should be used to avoid the use of practical certificates and payment-type certificates. Although these two types of certificates are recognized in some jurisdictions, if they are designed in the project, they will only cause unnecessary compliance problems in the jurisdiction under the SEC. In addition, from a practical point of view, since the emergence of the stable currency, the necessity of these two types of certificates has been greatly reduced, so there is no need to continue to use these two types of certificates.
4, the total amount of pass
In terms of the design of the total amount of certificates, the current project cannot refer to the practical certificate and design a huge amount of certificates. For example, Stellar has designed a total of 100 billion certificates; but it cannot refer to existing securities. Design the total amount of the certificate. In the case of applying the CIS model, the holders of the certificate are the management team, investors and users, rather than the management team and investors in the traditional financing situation. Therefore, the number of holders of the certificate is much larger than the holder of the existing securities. The design of the total amount of the certificate should be the result of a combination of scientific methods and experience. Some key variables that determine the total amount of certificates include the proportion of certificates that are allocated to users, the number of potential users, the frequency with which users use the products and the fees paid, the incentives used for each behavior, and the release of incentive certificates. The total length of time for the mechanism and plan to implement the CIS model, and so on. Based on these variables, the total amount of the certificate will be much larger than the total amount of securities issued.
5, the release time
According to the current US regulatory system, the regulation that can implement the CIS model should be Reg A+. But this regulation requires financing companies to have two years of audited financial data. This means that the financing company must operate for at least two years before starting to implement the certificate economy model. Although this requirement has caused some inconvenience to the financing company, it does take more than two years for a product to test the market acceptance of the product. If the market accepts this product well within two years, then the application of the CIS model after the third year will greatly speed up the acceptance of this product.
For the CIS model itself, the magnitude of its effect depends on the holder's expectations of its future earnings. In the very early days of the company, due to the short time, the business model could not be properly tested, so the revenue generated by the company's operations was small and unstable. This will not convince users to hold these passes. The pass-through economic model therefore does not achieve the goal of motivating users.
From a regulatory point of view, the company that wants to raise public financing is a relatively stable company, not a company that is full of risks at a very early stage of development.
Therefore, on the whole, the requirements for audited financial data for two years are also very reasonable. The most important point is that even so, this requirement is much lower than the existing IPO requirements in the stock market, so it is beneficial for startups to start applying the CIS model early and accelerate the promotion of their products in the market.
6, the issue object
The traditional project that adopts the general economic model, the issue of the certificate is the retail user, without any intermediary. Of course, this mode is also applicable in some application scenarios. But in more cases, between the issuer and the retail customer, it is usually by an intermediary service agency, such as a brokerage and various types of stores. Retail customers typically use the product with the help of an intermediary. The issuer of the pass will therefore need to consider how to distribute the pass between the two types of users, and this allocation mechanism depends on the contribution and size of the two types of users.
7. Distribution mechanism
In the distribution of the various holder types in the pass, the number of decisions assigned to the user is related to other factors. The most important factor is the financing phase. The earlier the project is, the higher the proportion assigned to the user. This is because the project requires users to participate more early, so that this business can be quickly completed and it is easy to obtain capital support. On the contrary, if the project has reached a certain stage, there is usually money to support the development of this project to this stage, so investors should naturally get more shares before, and the proportion of users left will naturally be small.
If the CIS model is used in the US market, the project can start doing this at least two years after the operation. The project party can predict how long it will take to get away from the traditional IPO at this time, and then design the proportion allocated to the user based on the proportion of the company's equity in the IPO.
8. Release mechanism
In terms of the mechanism that the certificate is released to the user, it is necessary to design a reasonable mechanism to be able to motivate the user in a long-term and fair manner. A basic principle in this respect is that the earlier the participants get the pass, the greater the chances of obtaining a pass, so the future gains based on the pass will naturally be higher. Based on this basic principle, more precise design can be done on other dimensions, such as the number of passes released at each stage and the cycle of release of the pass.
The release mechanism should not release the pass prematurely. If a small portion of the potential customer group gets all the passes because they know the information is early, then the pass-through economic model loses its meaning to motivate all target customer groups.
9, dividend cycle
In the current securities system, there is no provision prohibiting companies from allocating their income in a shorter period than the quarter, so the CIS model can allocate income to the holders in a shorter cycle. In fact, using a shorter cycle to distribute returns is one of the most powerful weapons in the CIS model. When users are motivated more frequently, they are more motivated to participate in the purchase of products.
In terms of the distribution cycle of income, it is the use of weeks, months, or other time periods, depending on the nature of the business and the existing payment methods. For example, many companies in the United States are bi-weekly payroll systems, so operators can also distribute income in a bi-weekly cycle. However, the shorter the distribution cycle, the higher the operating costs paid by the operator and the greater the chance of error, so the operator must make a correct trade-off.
10, technical standards
The default standard for securities-based certificates in the industry is the ERC20 standard of Ethereum. If the focus of a project is not on the financial sector, but the use of a securities pass as a securities instrument, the ERC20 standard can be the most reasonable option for this project. For a general securities-type certificate project, the effectiveness of its pass is largely determined by its price in the secondary market. An important factor in determining the price is the trading volume of the certificate, which is liquidity. Adopting the default standard of the industry will enable this certificate to be traded on many exchanges, so it can get good liquidity, so it can also fully exert the incentive effect of the certificate.
For projects involving the circulation of digital assets, the standard of the securities pass adopted by it is not necessarily the ERC20 standard. Instead, adopting this standard will limit the development of this project. In a previous article ( the third technical standard for stable coins ), I mentioned that it is very likely that there will be technical standards for third-party stable coins. Of course, the risk of adopting other standards is high, and the project side needs to weigh the trade-offs.
Although the general economic model is very powerful, it is also a very sharp double-edged sword. Some application cases to date have fully demonstrated this. The basic elements provided in this paper will determine whether the designed CIS model is effective, or whether it will hurt the issuer itself, or accelerate the acceptance of the products sold in the market as expected by the issuer. Companies planning to adopt a pass-through economy model need to be carefully considered.
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