Hi adarshh, no this is a derivative of a share. The companies do not actually have to do anything - anybody could set up the smart contract. The beauty of the idea is, that the tokens would not fluctuate so much, they would most likely move in line with the shares - which is what the investor wants. As it is backed by Ether as a security which increases with a rising share price, an arbitrage opportunity would come up if the price moved differently.
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hi @rondras, certainly an interesting idea. thanks for explaining. Arbitrage opportunities definitely exist but if the tokens are HODLed then the value of a token cannot be changed once allotted right? Does this make better sense when cryptocurrencies are less volatile? there are possibilities when the cryptocurrency value (say ether) has fallen significantly and more tokens need to be allotted for a transaction that has already happened. Or the other way around when ether is much higher and number of tokens need to be reduced.
if arbitrage payouts into ether is the only exit then it works beautifully. but if the speculator wants to increase his net asset value by not selling then we have the token fluctuation problem
makes sense?
You have to see it like this: there is always two parties, which bet on the opposite event - one bets that it goes up and the other one bets that the value of an asset goes down. What the one side wins is lost by the other side. You can do this with every asset - also the value of a crypto currency. As the number of new tokens is only linked by new money inflows, you can alsways sell the token at the market if it is overvalued and than send money to the smart contract to get a new one. This should keep things in balance.
best way would be for the trusted issuer to back the derivative tokens. issuer can be company or the hedge fund. otherwise use some kind of escrow mechanism so that people dont renege. i am sure that this can be done with ethereum easily
If you had 100% trust that the issuer will pay you what is in the escrow account, then this would be the easiest version. However, you could never be sure that the regulator shuts them down or that the initiators might not be as trustworthy as you thought.