There aren’t many of us who are still around. Those of us who still are can pretty certainly be called crypto natives. As crypto natives, we do love our crypto games. The yield farms, the everchanging shitcoin metas, our LSD protocols, our looping strategies, and so on.
While these games are fun, we still operate in a very niche bubble. Just for context, according to CoinGecko, DeFi has a total MarketCap of $42B as a sector. For comparison, Apple alone has a MarketCap of $2.7T which is around 64x larger than all of DeFi combined.
There’s a plethora of possible reasons why DeFi has struggled to grow out of the crypto native bubble. For some it’s the lack of regulatory framework, for others, it’s the user experience, and for some people, it’s the constant scams that dissuade them. Regardless, we must call a spade a spade, DeFi has struggled to break out of the shackles of crypto nativity.
Therefore, we had this wave of new protocols pop up over the past few months. A sector known as RWAs or Real World Assets. This sector is young and vast, but in short, it’s a way to connect Web 2 and Web 3.
Using tokenization, which is uniquely enabled through crypto, to bring real-world assets such as stocks, real estate, or even agricultural land on-chain. The Web 2 participants get easy access to cash while the Web 3 participants have a new and crypto market-agnostic source of returns.
However, bringing RWAs on-chain helps tradfi as much as it helps DeFi. Tradfi has major issues with liquidity. It is difficult for smaller companies to get listed which means raising funds for these companies is that much harder. More specifically, companies below $500M marketcap cannot get listed, making so many companies shares untradeable.
The reason so many parts of tradfi remain illiquid is because the tech has never been there to make it feasible to make these sectors within tradfi as liquid as they should be. But tokenization with blockchains may finally be the answer. It allows for the permissionless generation of liquidity at large scales for a fraction of the cost of any tradfi mechanism.
Amongst all the Web 2 sectors that could use this tokenization, there is one that has gone overlooked.
That asset class is start-ups
I’m pretty certain the concept of a start-up is not new to any of y’all. However, an undiagnosed issue for the sector is the high barrier to entry for investing.
Usually, to invest in a startup, a minimum of around $50k+ is required as an investor. This means that the game is relatively closed. Only companies and high-networth individuals can invest in a startup and then hold it for multiple years.
In addition, the potential for profit is immense. If you think back to some of the current web 2 giants, most of them were start-ups not too long ago. Some companies have gone on to become $700B – $800B companies which is around 75% of the market cap of all of crypto.
The untapped potential in this market comes from the fact that you have a large number of new investors who want to be involved in the potentially lucrative business of investing in start-ups, but they don’t meet the requirements. This option has only been open to the top 3% of the population.
Therefore, the team at Arcon came up with the solution.
The aim is to democratize access to startup investing. For the first time, not only will more people have access to start-up investing but we can also see the shares of start-up companies traded in public markets.
So without further ado, let me introduce you to Arcon.
Before diving into the details, let me brief you on how Arcton came about.
This project was born out of the University of Zurich. The founders took part in the Fellow Entrepreneurship Grant at the University and eventually won the grant.
Following this success, they were incubated by Tenity. Tenity is the biggest fintech incubator in Switzerland and it is owned by the Swiss Stock Exchange. So they are backed by some of the largest TradFi players.
Off of this foundation, Arcton was allowed to bloom. Now the product is live and set to do some big things in the space.
To invest in start-ups, Arcton has IPOs. This is similar to a traditional IPO in that it’s the time a start-up’s shares are live to the public for investing.
When a user invests in an IPO on Arcton, they receive tokenized shares. These tokens offer the investors the same rights as any other investor such as dividends or proceeds of the sale of the company. An investor can also sell their shares at any time they please in the open market.
The IPO process on Arcton goes as follows:
- Tokenizations – The shares of the company are legally tokenized under Swiss law
- Public Offering – The shares are made available to the public on Arcton
- Investing – Users can buy said shares using either USDC or FIAT
- Registry Entry – Newly created shares are entered into a commercial registry after they have been approved by a Swiss notary and commercial register.
- Liquidity Pool – The startup establishes a liquidity pool on Camelot
- Claim & Sell – The shareholders can then claim and sell their shares in the open market.
The IPOs on Arcton will predominantly be Web 2 companies, thus allowing crypto participants to get exposure to a new sector that’s agnostic to the volatility of the crypto markets.
Since these are Web 2 companies and Arcton IPOs come under Swiss law, there is a rigorous due diligence process that happens before an IPO goes live.
This is a 3-step process:
- Due diligence
In the first phase, there are 3 elements of a startup that are looked at. The team, the market, and the product.
We are all well aware of the importance of a strong team. Can they adapt? How skilled are they? How clear is their vision? Are they driven? Does the founder seem capable of taking things ahead? And so on. All of these elements are looked at.
But a good team means nothing if the market they are entering isn’t ripe for growth. Arcton mainly focuses on companies that are in a market where the total addressable market for that company is at least above CHF 100 million.
If the team looks good, and the market looks good, the last thing to examine is the product. This is where a lot of dependence is put on Arcton’s screening process as it is up to them to determine whether this product has the legs to go to the next level.
The next phase is Due Diligence. This is where the more technical business analysis goes down. Things like business models, technology, terms, general fact-checking, and competitors are all analyzed.
Once all of that information is processed, the team then comes to a decision on whether the company is worthy of an IPO or not. If yes, then the necessary documentation is drafted up and a campaign is put forward on the platform.
I understand that some people have the alarm bells of centralization ringing in their heads. While parts of the process are centralized due to necessity, one thing you do not have to worry about is the flow of money. Arcton or any members of the Arcton team never at any point come in contact with your funds. They are merely responsible for picking the companies to list on the platform.
This covers the general gist of how the product works. But of course, as you can see, it’s a very unique product. Tokenizing shares of startups means there needs to be some innovative way of managing liquidity.
Setting up a secondary market for start-up shares is something we haven’t really seen before, especially when the issuance of these shares is fully regulated.
The Arcton team had a few overarching points of emphasis in mind for creating the secondary markets.
- One trading venue
- As permissionless as possible
- Deep liquidity
- Easy for users (start-ups and investors alike)
Therefore, Arcton decided it would be best to partner with Camelot and use their V2 AMM to set up all secondary markets for the startup shares.
The weight of the pool will always be 50/50 with the same fees applied to buys and sells. However, it is the seeding of the liquidity that is important.
When an IPO is finalized and announced, the start-up will specify how much of the total offering will be added to the liquidity pool. So once the Swiss Commercial Register enters new shares of the start-up into its registry the pool will automatically be created.
Side note: If you want to check the registry for yourself and confirm that the shares have indeed been issued, you can do so at www.zefix.ch
Once the pool is created, the start-up will seed the liquidity into the pool and users can then trade the tokens as they please.
But that is not all anon, this is crypto after all. There are always more ways to increase your rewards. With Arcton, you can use their incentive program.
There are two main aspects to their incentive program. spNFTs & Nitro pools.
Let’s look at how it works…
Anyone can of course become an LP with Arcton, however, to earn additional rewards, LPs can stake their LP tokens in the relevant contract to mint an spNFT. This spNFT can then be deposited into the nitro pool to boost your rewards.
There are, however, some requirements to keep note of which are different from any other protocol you have used. For example, there is a minimum lock when depositing into the nitro pool. This is 30 days. The longer you lock for the more rewards you earn.
Once your spNFT is deposited into the nitro pool, the reward distribution phase starts and the user will begin to accrue rewards in the form of shares. This will of course differ from IPO to IPO because the incentives on offer will not be the same for all.
If this has already piqued your interest then wait no longer because Arcton will be live in less than a month with its first IPO. It’s a simple 6-step process to get set up and buy start-up shares. Click here for the details.
If you needed a reason to get set up, then look no further than this. Arcton already has its first IPO candidate ready. It’s MoneyMasters.
If you want a detailed overview then I recommend going through this thread:
However, the shorter version of this is that MoneyMasters is a platform that hopes to fix financial illiteracy with their app. Arcton believes their visions align perfectly and you will soon be able to trade MoneyMaster shares on-chain.
For the “wen token” crowd who scrolled all the way to the bottom to look for this section, I’m sorry to burst your bubble but there is no token as yet.
However, since the tokenization of shares is a new concept for most of us, it’s important to understand what these tokenized shares really look like under the hood.
In Switzerland, the Swiss DLT bill was passed. In this bill, one of the things that was allowed was for start-ups and companies to be able to tokenize shares. This is how Arcton can tokenize shares.
A typical IPO will look a little like this in terms of token distribution
The shares used for the incentive programs are created during the public sale process as treasury shares and aim to be distributed for approximately four years.
The teams have no tokenized shares which means you do not have to worry about teams dumping on the secondary market like you see with most DeFi protocols. There is also a limited supply which means shareholders will not get diluted with ridiculous token inflation.
New share tokens can be minted, but there is a process to it.
First off, the existing shareholders have to approve the creation of new shares. Any shareholder has the right to challenge it. If new shares are being created then the shareholders must first get the right to buy them and only the excess that isn’t bought by shareholders can be made available to the public. There are also certain price requirements that need to be put in place for the issuance of new shares.
However, shareholders’ rights don’t end at issuing new tokens. There’s a lot more to it under Swiss law. They have the right to:
- Dividends and liquidation proceedings
- Participate in general meetings and vote
- Protective rights
- Know various types of company information
- Criminal actions against the board for company mismanagement
- Liability for wrong information given during IPO
This is truly democratizing finance.
But there’s still one giant elephant in the room that is yet to be addressed.
The end goal of most start-ups is to eventually sell to a bigger or list on a stock exchange. In the event this happens, what does it mean for the holders of these token shares?
In the event of a sale, a potential buyer first enters into a sale agreement with the start-up. Once things are finalized, the shareholders are informed. The buyer sends money to an escrow account, the shares are then transferred to the buyer and the shareholders are paid out from the money in escrow. The liquidity pool is then closed.
In the event of a stock exchange listing, a listing is first proposed. The shareholders then vote on the listing. If yes, the shareholders will have their tokenized shares converted into new shares received via a bank and the liquidity pool will be closed.
Arcton is focusing on a sector ripe for disruption. The investors, especially those in crypto will be licking their lips at the opportunity to invest in start-ups, while the start-up investors will be eager to expedite their growth process with quicker access to capital and a liquid secondary market to assess their performance.
It is fully compliant which means it is safer than a lot of the typical DeFi protocols we use and it also eliminates a lot of the common tail risks such as insider dumping and unsustainable token inflation.
Arcton is playing its part in bridging the gap between web 2 & web 3, and I think it’s time for all of us to hop on board that bridge with them. Keep your eyes on them, because big things are coming.