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└── img
├── beta-formula.png
├── order-process-flow-create-new-ctf-tokens.png
├── order-process-flow-etfs-rtfs.png
└── order-process-flow-existing-ctf-tokens.png
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1 | # Brickblock General Whitepaper
2 |
3 | by Jakob Drzazga, Martin Mischke, Holger Schlünzen, Philip Paetz
4 |
5 | ### Abstract
6 | Brickblock is building a new blockchain-based solution for investing in exchange-traded funds (ETFs), real estate funds (REFs), passive coin-traded funds (CTFs) and active coin managed funds (CMFs). Through the effective use of smart contracts, order and issuing fees can be reduced to a fraction of traditional costs. This will make investing in Brickblock more financially inclusive across all income classes. Artificial geographical trading restrictions, including the need for a bank account, can thus be eliminated. Counterparty risk can be reduced to mere minutes. Furthermore, we are introducing a new system of passively managed cryptocurrency baskets, which reduces the risks and high fees of actively managed coin funds by using liquidity providers, incentivized by arbitrage effects. Our system is based on an underlying rule-based asset allocation rather than high-risk contracts for difference (CFDs). It uses the asset-first principle, which incentivizes asset vendors to deliver assets before getting paid, thus further reducing investor risk.
7 |
8 | ### Table of Contents
9 | - [1. Introduction - How does Brickblock work?](#1-introduction---how-does-brickblock-work)
10 | - [2. Market Analysis](#2-market-analysis)
11 | * [2.1. Current Problems in the Market](#21-current-problems-in-the-market)
12 | * [2.2. How does Brickblock addresses current problems?](#22-how-does-brickblock-addresses-current-problems)
13 | * [2.3. Market Review](#23-market-review)
14 | * [2.4. Difference to Existing Projects](#24-difference-to-existing-projects)
15 | - [3. Who is Brickblock for?](#3-who-is-brickblock-for)
16 | * [3.1. Private Investors](#31-private-investors)
17 | * [3.2. Institutional Investors](#32-institutional-investors)
18 | * [3.3. Fund Managers](#33-fund-managers)
19 | * [3.4. Broker-Dealers](#34broker-dealers)
20 | * [3.5. Commercial Paper Issuers](#35-commercial-paper-issuers)
21 | - [4. The Platform](#4-the-platform)
22 | * [4.1. Tradeable assets on Brickblock](#41-tradeable-assets-on-brickblock)
23 | * [4.2. Technical Setup](#42-technical-setup)
24 | - [5. Tokens](#5-tokens)
25 | * [5.1. Brickblock Tokens](#51-brickblock-tokens)
26 | * [5.2. Access Tokens](#52-access-tokens)
27 | * [5.3. Proof-of-Assets (PoA) Tokens](#53-proof-of-assets-poa-tokens)
28 | - [6. Conclusion and Vision](#6-conclusion-and-vision)
29 | - [Glossary](#glossary)
30 |
31 | ## 1. Introduction - How does Brickblock work?
32 |
33 | At present, the crypto-economy is possibly one of the most volatile
34 | economies. Investors can make 10x gains in one month only to lose it all
35 | the next month. Thus far, there have only been a limited number of ways
36 | to diversify crypto-portfolios to mitigate these risks. Real
37 | diversification, across multiple asset classes, is essential for a
38 | well-balanced portfolio.
39 |
40 | Brickblock introduces the first platform where users can seamlessly
41 | invest in real estate funds (REFs), exchange-traded funds (ETFs),
42 | passive coin-traded funds (CTF) and active coin managed funds (CMFs)
43 | through a streamlined process and with significantly lower costs than
44 | traditional investing.
45 |
46 | Each fund on the Brickblock platform has its own denomination and its
47 | own “proof-of-asset” (PoA) token which, via established token exchange
48 | platforms, can be traded simpler, faster and cheaper than on
49 | conventional stock markets. Our asset-backed PoA tokens empower
50 | investors to hedge the risk of cryptocurrencies in real assets without
51 | needing to convert their cryptocurrency into a fiat currency. All
52 | dividends and coupons are automatically transferred to token-holders
53 | through self-executing smart contracts on the Ethereum network. The
54 | content of the smart contract and the PoA token itself is unalterable,
55 | cryptographically secured and visible to everyone on the blockchain.
56 |
57 | To ensure the safety of the underlying assets represented by the PoA
58 | token, a digital trust fund holds the exact same amount of fund shares
59 | as tokens issued. This securities account cannot be claimed by
60 | Brickblock, the broker or anyone else, and is protected by strict laws
61 | regarding trust funds, even in the case of bankruptcy. Only token
62 | holders may reclaim their fund shares, at any time.
63 |
64 | Brickblock’s infrastructure will be implemented as a decentralized
65 | application (Dapp) and run on the Ethereum network. Broker-dealers and
66 | fund managers will be able to list their investment opportunities on the
67 | platform, after being thoroughly verified by Brickblock through e.g.
68 | proof of residence, credit reports and criminal record. Based on their
69 | personal risk/reward ratio, investors can then select an investment from
70 | the offered funds to add to their diversified portfolio. All fees,
71 | minimum investment pools, exchange rates, holding periods, net asset
72 | values, dividends or coupon payments will be listed clearly and thus,
73 | can easily be compared. All investment opportunities will be carefully
74 | validated and audited by independent parties (such as [EY](https://www.ey.com/)) to
75 | eliminate fraud.
76 |
77 | ## 2. Market Analysis
78 |
79 | ### 2.1. Current Problems in the Market
80 |
81 | #### 2.1.1. High Volatility
82 |
83 | Cryptocurrencies are extremely volatile and, due to their limited
84 | acceptance in the traditional economy, investors have almost no options
85 | to disperse their risk.
86 |
87 | Money has three important properties: It serves as a store of value, a
88 | medium of exchange and a unit of account. Currently, cryptocurrencies
89 | are primarily used as a store of value. The use of cryptocurrencies as a
90 | medium of exchange and as a unit of account is still in a very early
91 | stage. This means that there are limited options to escape the
92 | volatility of its value. At present, the only real way out is to
93 | reconvert into a fiat currency.
94 |
95 | #### 2.1.2. Counterparty Risk
96 |
97 | When the counterparty does not possess the necessary funds or assets to
98 | settle a trade, this is known as “counterparty risk”, also “default
99 | risk”.
100 |
101 | In traditional asset trading, clearing and settlement processes take
102 | three days. On the first day, a broker makes a deal with the
103 | counterparty on the basis of trust. Based on this trust, the broker then
104 | makes countless other trades that all depend on the first trade actually
105 | being settled. On the second day, the clearing house logs the price,
106 | amount and payment method of the assets into its network. Only on the
107 | third day, two days after the actual trade, does the settlement and the
108 | exchange of delivery versus payment (DVP) actually occur.
109 |
110 | #### 2.1.3. High Costs and Complexity in Conventional Stock Trading
111 |
112 | Trading fees, broker-assisted fees, account maintenance fees, account
113 | transfer fees, selling fees and commission fees at various stages are
114 | standard costs to consider when buying real-world assets through a
115 | retail broker. In addition to the complexity of determining which costs
116 | apply to which assets, minimum fees apply that make investing small
117 | amounts unprofitable and exclude lower income groups from participating
118 | in the market. Percentage-wise, a user that can only invest $100 in an
119 | ETF pays a significantly higher fee than a professional trader investing
120 | $100,000 - we think this is unfair and want to level the playing field
121 | here.
122 |
123 | #### 2.1.4. Trading Restrictions
124 |
125 | It is highly complicated or even outright impossible for private
126 | investors to buy ETFs or REFs in some countries due to insufficient
127 | connectivity to worldwide exchanges. Investors need expensive bank or
128 | broker accounts and are severely limited in their freedom to trade by
129 | local governments. Furthermore, vastly different tax structures penalize
130 | worldwide investors.
131 |
132 | #### 2.1.5. No Safe Possibility of Crypto Basket Investments
133 |
134 | To date, no secure and easy way to invest in a crypto-basket with **full
135 | market exposure** in exchange for a single token exists. One must trust
136 | a fund manager to allocate the assets and not take advantage of their
137 | position; there is no legally binding contract between investors and
138 | fund managers. Indeed, there are no agreed-upon verification processes
139 | for fund managers or *any* form of regulation. Investors are solely
140 | dependent on trusting that fund managers spend their funds how they said
141 | they would.
142 |
143 | ### 2.2. How does Brickblock addresses current Problems?
144 |
145 | #### 2.2.1. High Volatility
146 |
147 | By enabling the direct purchase of real-world assets, such as ETFs and
148 | REFs, with Ethereum, we are offering a simple way to hedge against
149 | volatile crypto-portfolios with low beta asset classes.
150 |
151 |
152 |
153 | #### 2.2.2. Counterparty Risk
154 |
155 | By using the blockchain for clearing and settlement processes,
156 | Brickblock reduces counterparty risk exposure from multiple days to less
157 | than 1 minute, or more precisely: to the length of a few [Ethereum block
158 | confirmations](https://etherscan.io/chart/blocktime).
159 |
160 | #### 2.2.3. High Costs and Complexity in Conventional Stock Trading
161 |
162 | Through a high degree of automation, blockchain technology and the use
163 | of smart contracts, we are able to bypass a number of third parties,
164 | such as clearing houses and retail brokers. This allows us to reduce the
165 | fees associated with buying and selling real-world assets down to a
166 | fraction of traditional retail brokers. Depending on the country of
167 | purchase, the specific asset and the investment amount, Brickblock is
168 | able to offer up to a **50-fold discount** on the initial purchase
169 | price. If the asset is then subsequently sold on token exchanges, this
170 | discount can easily increase to 150-fold. An in-depth comparison of
171 | Brickblock fees vs. traditional broker fees is available [on our
172 | blog](https://medium.com/@Brickblock/brickblock-will-lead-the-way-in-making-investing-more-financially-inclusive-around-the-world-97952f80925d).
173 |
174 | #### 2.2.4. Trading Restrictions
175 |
176 | No bank account is needed to trade global ETFs and REFs since no
177 | geographic borders apply. This enables Brickblock to offer the cheapest
178 | ETFs and REFs worldwide and the most economical way of order execution.
179 |
180 | #### 2.2.5. No Safe Possibility of Crypto Basket Investments
181 |
182 | For actively managed CMFs, Brickblock will enter legally binding
183 | contracts with fund managers, verify them thoroughly and implement a
184 | cryptographic audit structure. We, not the fund managers, will
185 | commission independent auditors to prevent any potential conflicts of
186 | interest between fund managers and auditors.
187 |
188 | For passively managed CTFs, rule-based fund indices in conjunction with
189 | the arbitrage phenomenon of foreign exchange (FX) markets are leveraged
190 | to obviate active fund managers and decentralize trades toward liquidity
191 | providers. Therefore, human error is minimized.
192 |
193 | ### 2.3. Market Review
194 |
195 | In the past years, many token-funded startups have announced the
196 | development of financial tools to help traders and investors diversify
197 | within the crypto-currency market. In this section, we are going to
198 | examine several of these projects and highlight possible improvements.
199 | However, the purpose of this is not to devalue the competition, we
200 | merely seek to illustrate our motivation for developing our own
201 | solution, i.e. to address these problems. We have the highest respect
202 | for everyone that is sincerely trying to move the crypto-community
203 | forward and deeply believe that there is enough room for many innovative
204 | players in this field.
205 |
206 | #### 2.3.1. Taas
207 |
208 | [Taas](https://taas.fund) is a stand-alone, closed-end crypto-fund. Its [whitepaper](https://taas.fund/media/whitepaper.pdf) states that they have built a cryptographic audit system with
209 | [Ambisafe](https://www.ambisafe.co). Users are able to track the trades of Taas on their
210 | website. We could not find any details about this system besides the
211 | trade records, which are made public on a [subpage](https://ca.taas.fund/wallets/dashboard). From an investor’s perspective, however, there is **no legal contract** between
212 | the user and Taas, which carries potential risks.
213 |
214 | #### 2.3.2. Melonport
215 |
216 | [Melonport](https://www.melonport.com) is an open source protocol (initially based on
217 | Ethereum and currently in development) that aims to simplify the process
218 | of developing portfolios of different cryptocurrencies for investors.
219 | Fund managers, on the other hand, can easily select what
220 | cryptocurrencies they want to buy. In comparison to Taas, the Melon
221 | Protocol, if executed safely in smart contracts, will eliminate the
222 | trust aspect. However, as far as we could interpret from the [green paper](https://github.com/melonproject/greenpaper/blob/master/melonprotocol.pdf), it is mostly based on contracts for difference (**CFDs**) for
223 | non-ERC20 tokens and coins. Since investments can only be made in Melons
224 | or ETH, users are heavily dependent on the stability of these two
225 | tokens. If, for example, a fund manager purchases a certain volume of
226 | [Dash](https://www.dash.org/blockchain-explorers/), no actual Dash tokens are being held by the user. From an investor’s perspective, this means that there is a potential risk of not
227 | receiving the equivalent value of Dash if the Melons or ETH collateral
228 | cannot cover the gains or losses.
229 |
230 | #### 2.3.3. Shapeshift’s Prism
231 |
232 | [Prism](https://info.shapeshift.io/blog/2017/05/21/introducing-prism-worlds-first-trustless-portfolio-market-platform) is also based on Ethereum. The user and a counterparty
233 | both deposit an equal amount of ETH into a Prism smart contract, which
234 | serves as collateral and is therefore also a contract for difference
235 | (**CFD**). The user bets, for example, on a bullish bitcoin (or any other cryptocurrency offered by Shapeshift’s Prism) and the counterparty bets on a bearish bitcoin. This all works well if ETH is
236 | the users’ domestic currency. However, if, as is the case for most
237 | investors, fiat currencies (like USD or EUR) are the users’ domestic
238 | currency, then one could actually lose money. One could lose money even
239 | if they predicted the correct market movement of bitcoin, because the
240 | user’s collateral will always be ETH regardless of the price. On the
241 | other hand, the user’s profit is capped at 100% gains, because Prism’s
242 | collateral matches the user’s. Thus, if one were to bet 1 ETH on Dash
243 | and Dash tripled in price, the maximum gain would not be 2 ETH but only
244 | 1 ETH.
245 |
246 | #### 2.3.4. Digix
247 |
248 | To the best of our knowledge, we are the first platform to build the
249 | necessary infrastructure to tokenize ETFs and REFs. The most comparable
250 | start-up to date, however, is [Digix](https://www.digix.io). Digix, which is currently
251 | in development, tokenizes a real-world asset: physical gold. After
252 | depositing ETH into a smart contract, a new DGX token is created and the
253 | asset vendor delivers the gold to a custodian. An auditor then regularly
254 | verifies whether the gold is still in possession of the custodian. In
255 | the [last whitepaper](https://dgx.io/whitepaper.pdf) we could find, it seems that Digix’s asset vendors receive investors’ funds before investors receive their gold.
256 | For example, if a great amount of gold is bought in a bearish
257 | crypto-market, the vendor either has to lend the money and wait until
258 | the audit is completed to receive investors’ funds or the vendor
259 | receives the **payment in advance**, which constitutes a potential risk
260 | for the buyer.
261 |
262 | #### 2.3.5. Proof Suite
263 |
264 | [Proof Suite](https://www.proofsuite.com) is focusing on developing blockchain tools for
265 | tracking real-world assets. In their whitepaper, they present the
266 | benefits for companies and governments to replace existing systems with
267 | Proof Suite. They are trying to reduce bureaucratic procedures and make
268 | transactions more efficient. Nevertheless, they **rely on change
269 | occurring within companies and the legal acceptance** of their
270 | technology. Thus, if two parties were to trade real estate with Proof
271 | Suite and one of the parties decided to sell the same real estate to
272 | another party on the traditional market, legal problems occure.
273 |
274 | ### 2.4. Difference to Existing Projects
275 |
276 | #### 2.4.1. Legal Enforceability of Claims
277 |
278 | Brickblock enters a **legally binding contract** with every fund manager
279 | and every broker-dealer. In contrast to direct and trust-based
280 | investments in fund managers, this adds an additional layer of security
281 | for investors. On the Brickblock platform, every fund manager has a
282 | direct liability to the investor, which is enforceable through legal
283 | action.
284 |
285 | #### 2.4.2. Full Market Exposure
286 |
287 | We believe that CFDs and other derivatives rely too much on trust and
288 | moderate price trends. In the world of cryptocurrencies, where [flash
289 | crashes](https://blogs.wsj.com/moneybeat/2017/06/23/ethereums-flash-crash-shows-hazards-of-trading-cryptocurrencies/) and price movements of >200% on a single day are a
290 | regular phenomenon, we consider CFDs no suitable instrument for mid- and
291 | long-term investments. Thus, **Brickblock only allows physical shares,
292 | commodities and currencies** instead of betting on derivatives.
293 |
294 | #### 2.4.3. Escrow-backed Security for Investors and Brokers (asset-first principle)
295 |
296 | Brickblock’s smart contracts will only **release investors’ funds to the
297 | broker-dealer after the broker-dealer transfers the assets** to the
298 | digital trust fund. This represents a new way of conducting clearing and
299 | settlement. Through automated smart contracts, the broker-dealer
300 | receives the investors’ funds immediately after transmitting the assets.
301 | Initially, until new broker-dealers trust Brickblock’s asset-first smart
302 | contracts, Brickblock will deposit the investor’s funds in escrow as
303 | collateral. Therefore, if a smart contract does not activate, the
304 | broker-dealer can claim the escrow.
305 |
306 | #### 2.4.4. Connecting Old and New Economy
307 |
308 | Brickblock builds a bridge from the traditional investment world into
309 | the digital realm. We are leveraging existing infrastructure to enable
310 | faster adoption of this new system. All Brickblock transactions are
311 | legally accepted and enforceable in a court of law.
312 |
313 | We believe a transition from old to new is best achieved by **building
314 | bridges**, not burning them.
315 |
316 | ## 3. Who is Brickblock for?
317 |
318 | ### 3.1. Private Investors
319 |
320 | Most importantly, Brickblock will help private investors diversify their
321 | portfolios beyond cryptocurrencies and tokens, reducing the overall
322 | risk. In addition to other benefits, this helps:
323 |
324 | - Significantly lower the costs of investing in REFs, ETFs, CMFs and
325 | CTFs through cutting out the middlemen and pooling investment
326 | volume,
327 |
328 | - Create steady returns in the form of dividends and coupons,
329 |
330 | - Hedge the systemic risk of a heated market,
331 |
332 | - Clarify fees, tracking errors and liquidity,
333 |
334 | - Minimize bureaucratic overhead,
335 |
336 | - Empower **everyone** to invest directly in global funds in every
337 | market, regardless of where funds or investors live.
338 |
339 | ### 3.2. Institutional Investors
340 |
341 | Brickblock will help institutional investors invest their funds in a
342 | diversified digital currency portfolio without having to worry about
343 | holding multiple wallets and handling a multitude of exchange platforms.
344 |
345 | ### 3.3. Fund Managers
346 |
347 | #### 3.3.1. Real Estate Fund Managers
348 |
349 | Real estate fund Managers are responsible for a variety of tasks. Some
350 | of the most important of which are: supervising real estate acquisition;
351 | evaluating consultants, appraisers and property managers; designing
352 | financial models and formulating asset allocation strategies.
353 |
354 | In the traditional system, fund managers must pay enormous provisions to
355 | banks to sell their funds to customers, which is only possible if the
356 | fund is large enough. For smaller funds, which cannot afford to pay for
357 | distribution, their only chance is to maintain all investor
358 | relationships themselves. This represents a significant competitive
359 | disadvantage, since this costs significantly more time, which then
360 | cannot be spent increasing the rentability of the fund. Brickblock
361 | enables immediate global distribution, reducing fund costs, increasing
362 | profitability, lowering fund managers’ workload and overall, leveling
363 | the playing field.
364 |
365 | #### 3.3.2. Coin Managed Fund Manager
366 |
367 | Coin managed fund managers, either professional or social, gain a
368 | platform for advertising their past performance and attracting new
369 | investors. Coin managed fund managers can freely set their management
370 | fee structure and have Brickblock as a legal and trustworthy entity whom
371 | they can contract. Brickblock is interested in productive professional
372 | relationships and will help fund managers establish the initial
373 | management structure. Furthermore, Brickblock will work with third
374 | parties to pro-actively reduce potential legal and cyber security risks
375 | associated with the responsibility of being a fund manager.
376 |
377 | ### 3.4.Broker-Dealers
378 |
379 | Broker-Dealers, sometimes also referred to as “market makers”, are
380 | liquidity providers at traditional stock exchanges. Most large
381 | institutional ETF block trades do not take place at exchanges, but
382 | over-the-counter (OTC) and are not visible to the public. This is
383 | especially the case for illiquid exotic ETF underlyings. In contrast to
384 | the immediate execution on exchanges, broker-dealers prefer to be asked
385 | for the price of specific products and quantities. They prepare all
386 | background hedging and internal risk exposure analyses before quoting
387 | and executing an order. The quoted price is often better than the bid
388 | ask offer on exchanges.
389 |
390 | The digital trust “request for quote” (RFQ) issued by the smart contract
391 | can be parsed and tokenized in a variety of industry standard formats,
392 | such as [FIX](http://www.fixtradingcommunity.org/pg/structure/tech-specs) ensuring compatibility with existing processes and legacy integrations. Brickblock acts as a single counterpart against the broker-dealer. This simplifies compliance and set-up processes for
393 | broker-dealers. Brickblock will assist broker-dealers with a dedicated
394 | e-wallet application programming interface (API) solution.
395 |
396 | The focus is to radically reduce operational costs and enable delivery
397 | versus payment (DvP) support, including crypto-payments. Compliance
398 | costs (e.g. maintenance of segregated accounts), onboarding, settlement
399 | and know your customer (KYC) processes are also included, where
400 | applicable. The key is that broker-dealers are free to focus on the core
401 | business. Broker-dealers profit by increasing their trading volume of
402 | securities, and Brickblock improves the liquidity of the crypto-economy.
403 |
404 | ### 3.5. Commercial Paper Issuers
405 |
406 | Brickblock will help issuers enter the crypto-economy by integrating
407 | existing asset management legacy infrastructure and messaging standards
408 | for both issuance and distribution. There is a strong incentive in
409 | conventional paper issuance to move toward lower cost distribution
410 | models and reach international marketplaces.
411 |
412 | ## 4. The Platform
413 | ### 4.1. Tradeable assets on Brickblock
414 |
415 | After choosing a fund, the user deposits the payment into a smart
416 | contract. The smart contract controls all fees, minimum investment
417 | pools, exchange rates, holding periods, net asset values, dividends or
418 | coupon payments. Therefore, depending on the asset class, there are
419 | three different scenarios.
420 |
421 | #### 4.1.1. Real Estate Funds (REFs)
422 |
423 | Investing in real estate comes with major diversification potential,
424 | depending on both the users’ foreign exchange (FX) exposure and tax
425 | domicile. Our platform will enable fund managers to list real estate
426 | projects with high potential and help users to easily discover
427 | interesting opportunities. Each project will be carefully audited by
428 | independent parties to minimize fraud.
429 |
430 | Real estate funds (REFs) are actively managed by a fund manager.
431 | Depending on its underlying focus, the fund manager acquires a certain
432 | volume of real estate in certain cities, countries or continents across
433 | the globe.
434 |
435 | Real estate has two growth functions. First, there is the value of the
436 | real estate itself, which may potentially grow over time. Second, real
437 | estate produces a steady income in the form of rent, which is
438 | distributed to its shareholders via smart contracts or re-invested in
439 | new real estate, depending on user preference. By choosing a fund, users
440 | can influence the frequency of distributions and other factors such as
441 | costs and fees, area of investment, net asset value (NAV) and minimum
442 | investments.
443 |
444 | Brickblock will start with European REFs and subsequently extend into
445 | more locations. After the processes for REFs are established, we will
446 | further broaden the investment scope to also include real estate
447 | investment trusts (REITs) and real estate crowdfunding.
448 |
449 | #### 4.1.2. Exchange-traded Funds (ETFs)
450 |
451 | Exchange-traded funds are an interesting store of value for many
452 | investors. Unlike actively managed funds, the fees and costs are
453 | significantly lower since ETFs passively track rule-based indices like
454 | the S&P 500, the Nikkei or the Dax 30. Exchange-traded funds can also
455 | track commodities like gold and silver and have the advantage of being
456 | offered at near-wholesale prices without minimum purchase amounts.
457 | Exchange-traded funds [outperform the returns of most actively managed
458 | funds](https://www.justetf.com/uk/news/passive-investing/the-proof-that-active-managers-cannot-beat-the-market.html) that invest in company shares and enable investors to
459 | diversify their portfolio, even with very little capital. By choosing
460 | their preferred ETFs, investors can actively decide in which markets to
461 | invest and spread their risk across different geographic locations and
462 | industries.
463 |
464 | Brickblock will start with the ETFs that track global indices and will
465 | then inquire after the community as to which ETFs to implement next.
466 | Brickblock will establish connections with and request quotes from
467 | different broker-dealers based on past pricing performance. This
468 | guarantees the best execution of orders.
469 |
470 | #### 4.1.3. Coin Managed Funds (CMF)
471 |
472 | Actively managed CMFs provide projects like Taas [@ref5] the opportunity
473 | to offer their funds to the public. Fund managers can manage investors’
474 | funds by selecting specific cryptocurrencies, day-trading, taking
475 | profits out of diversifying portfolios and the active distribution of
476 | funds. Conversely, users can decide which strategies and fund managers
477 | to trust. Each project will be carefully audited by independent parties
478 | to significantly minimize the risk of fraud.
479 |
480 | #### 4.1.4. Coin-traded Funds (CTF)
481 |
482 | Brickblock offers passively managed CTFs and tracking rule-based indices
483 | designed by fund managers and community members. One of these could be a
484 | Top 10 cryptocurrencies market cap CTF. The index would include the Top
485 | 10 cryptocurrencies weighted by market capitalization. Since no passive
486 | CTF currently exists, we are introducing a system based on passive ETFs,
487 | as explained in section \[CTFtext\]
488 |
489 | Further, a separate non-profit organization (NPO) is set up; leading
490 | members of the crypto-finance community are invited to join us in
491 | improving the system and standardizing processes.
492 |
493 | ### 4.2. Technical Setup
494 |
495 | The following framework describes the underlying technical processes.
496 | Our platform will be developed as a Dapp on top of the Ethereum
497 | blockchain. The Dapp will guide users through all of the investment
498 | steps. All Ethereum transactions relevant to Brickblock will
499 | additionally be backed up on our own blockchain, with only one public
500 | node for security reasons.
501 |
502 | #### 4.2.1. Real Estate Funds (REFs) and Exchange-traded Funds (ETFs)
503 | Figure 1 displays the detailed process of investing in real-world assets such as REFs and ETFs.
504 |
505 |
506 |
507 | *Figure 1*
508 |
509 | After choosing an asset class, either REF or ETF, users can select a
510 | fund based on their investment preferences. Users will be informed about
511 | fees, frequency of distributions, areas of investment, current net asset
512 | value (NAV), minimum investment volume, performance or track record.
513 |
514 | Once users select a fund, they will be asked to deposit the desired
515 | investment amount into a smart contract. A minimal creation size helps
516 | reduce transaction costs and decouples the PoA tokens from the nominal
517 | value of the fund. After reaching the minimal creation size, the
518 | broker-dealer places a fund order. The purchased securities are then
519 | deposited into a digital trust fund by the broker-dealer.
520 | Simultaneously, the custodian of the digital trust fund issues a
521 | cryptographically signed electronic document confirming the receipt of
522 | assets. This document is verified by the smart contract to ensure that
523 | the broker-dealer’s order matches the user’s order. If the orders match,
524 | the smart contract treats this as proof that the broker-dealer’s
525 | obligations are properly fulfilled. The smart contract subsequently
526 | releases the user’s deposited funds to the broker/dealer, and a PoA
527 | token to the user. This token serves as a proof of assets.
528 |
529 | The digital trust fund is only allowed to hold the securities for the
530 | actual beneficiary of the PoA token. If PoA token holders want to sell
531 | their assets, they can sell the PoA tokens on token exchanges like
532 | EtherDelta, iDex, 0x or withdraw the securities from the digital trust
533 | fund at any time after going through a KYC process provided by the bank.
534 | If dividends or coupons are issued by the fund, the custodian of the
535 | digital trust fund will send these proceeds to the self-executing smart
536 | contract, which will automatically allocate them to the respective token
537 | holders.
538 |
539 | #### 4.2.2. Active Coin Managed Funds (CMFs)
540 | Coin managed fund managers will be able to offer funding campaigns on
541 | our platform and manage funds by investing in different
542 | cryptocurrencies. A cryptographic audit infrastructure will thoroughly
543 | verify every new individual through, inter alia, proof of residence,
544 | credit report and criminal record. Furthermore, all trades will be
545 | recorded and stored safely. Users can choose between:
546 |
547 | 1. Fund managers who use **secured accounts**
548 |
549 | Users’ funds are transferred to secured accounts at trustful
550 | exchanges, where withdrawal functions are blocked. Users then
551 | receive PoA tokens in exchange for their funds. Through the use of
552 | secured accounts, the risk of fraud and private key loss are
553 | minimized.
554 |
555 | 2. Fund managers who use **unsecured accounts**
556 |
557 | For digital assets that are not traded over common exchanges, the
558 | fund manager receives the users’ funds from the smart contract into
559 | an unsecured account, controlled by the fund manager. Users again
560 | receive a PoA token in exchange. In this case, the legal contract
561 | between Brickblock and the fund manager protects users from fraud.
562 | In case of any irregularities, Brickblock is able to enforce users’
563 | claims through legal action.
564 |
565 | The crypto-backed PoA token represents the invested funds actively
566 | managed by a fund manager. The fund manager diversifies the received
567 | funds into various other cryptocurrencies and tokens.
568 |
569 | Fund managers can choose from different fee structures: percentage of
570 | gains, percentage of funds managed or a fixed fee. Users can then choose
571 | a fund manager based on compliance with their desired fee structure and
572 | risk/reward ratio.
573 |
574 | After a predetermined trading time window, funds are transferred back to
575 | the smart contract, which then forwards them to the users’ Ethereum
576 | wallets, minus the fund manager’s fees.
577 |
578 | #### 4.2.3. Passive Coin-traded Funds (CTFs) {#CTFtext}
579 |
580 | The CTF concept maps the efficient ETF mechanism onto the blockchain. A
581 | CTF is a smart contract that tracks an underlying index of crypto-assets
582 | as closely as possible. The holdings of the digital trust fund, in the
583 | form of crypto-wallets, are stored in cold storage by a custodian. This
584 | is necessary because an Ethereum smart contract currently cannot
585 | reliably handle automated transactions with other blockchains. A CTF
586 | provides both a creation and a redemption basket, necessary for creating
587 | and redeeming tokens. The composition of these baskets helps rebalance
588 | the funds’ holdings according to the underlying index.
589 |
590 | The user first decides whether to buy the token via an exchange trade or
591 | using the creation mechanism.
592 |
593 | ##### The Trading Process
594 |
595 | The investment process for passive CTFs is similar to investing in REFs
596 | and ETFs. Figure 2 illustrates the process flow in detail.
597 | Users can choose between different indexing methods designed by fund
598 | managers. The index is the basis for the CTF composition and determines
599 | risk and performance. Brickblock will support users by providing CTF
600 | factsheets with holdings, past performance and tracking quality of the
601 | CTF.
602 |
603 |
604 |
605 | *Figure 2*
606 |
607 | ##### The Creation Process
608 |
609 | To prevent trading and therefore, trading fees inside the CTF, we
610 | utilize liquidity providers (LPs). The LPs hold PoA tokens in their
611 | account and sell them on exchanges. Furthermore, LPs can create and
612 | redeem tokens from the fund. Figure 3 illustrates the
613 | process flow in detail. Tokens are created by sending the components
614 | specified in the creation file to the custodian and the correspondent
615 | wallet addresses. If the correct basket is delivered to the wallets, an
616 | automated message is sent to the CTF smart contract and the PoA token is
617 | released. Liquidity providers help minimize the running costs of trading
618 | and rebalancing inside the fund and take advantage of arbitrage effects
619 | on the market.
620 |
621 | If the CTF fund accepts cash redemptions (paying out ETH for PoA
622 | tokens), existing PoA token holders are charged for the resulting
623 | trading costs and thus, penalized. Therefore, LPs receive the assets of
624 | the redemption basket in return for the PoA token and must manage the
625 | trading themselves.
626 |
627 | Rather than buying PoA tokens via an exchange, users are allowed to use
628 | the creation mechanism as long as they hold all necessary assets.
629 | However, for unprofessional users, it is more convenient to buy already
630 | created tokens on token exchanges.
631 |
632 |
633 |
634 | *Figure 3*
635 |
636 | All CTF-relevant entities are listed below:
637 |
638 | ##### Users/Investors
639 |
640 | select in which CTF to invest and can trade PoA tokens on token
641 | exchanges. Moreover, users are allowed to create tokens by sending a
642 | “creation unit” to the CTF smart contract and receiving PoA tokens of
643 | the same value in return.
644 |
645 | ##### Liquidity Providers (LPs)
646 |
647 | are at the center of the creation and redemption process of PoA tokens.
648 | They have the right to redeem PoA tokens against the fund’s holdings. To
649 | reduce trading within the CTF and save on transaction fees, the
650 | redemption units are consolidated into blocks of 5,000 tokens. Like
651 | users, LPs can create tokens by delivering the creation basket to the
652 | fund (the custodian wallets). In exchange, they receive the same value
653 | in PoA tokens.
654 |
655 | The LPs act as market makers on exchanges. To properly fulfill this role
656 | and react in a timely manner, the LPs hold PoA tokens in their own
657 | accounts. LPs act as a buffer between the investor and the fund. The
658 | number of LPs for one CTF is unlimited.
659 |
660 | ##### Coin-traded Fund Smart Contracts
661 |
662 | seek to replicate the index as closely as possible. They publish the
663 | creation and redemption baskets on a daily basis. The baskets describe
664 | the assets necessary to create new tokens, or those which the LPs
665 | receive when a PoA token is redeemed. The creation and redemption
666 | baskets are designed to adjust the assets to the underlying index.
667 |
668 | ##### Creation/Redemption Files
669 |
670 | describe the creation basket. It is the composition of the coins or
671 | tokens for creating new PoA Tokens. The creation/redemption file is
672 | released by the CTF smart contract.
673 |
674 | ##### Underlying Indices
675 |
676 | are the heart of the CTF. The CTF tries to track the index as closely as
677 | possible without tracking errors or differences. The methodology and
678 | rules of the index are designed by fund managers or index providers.
679 | These rules can be market-cap oriented, factor or momentum strategies.
680 | Every blockchain asset can be included within the index.
681 |
682 | ##### Custodian
683 |
684 | The custodian holds the different crypto-wallets in cold storage. The
685 | transactions are automatically sent to the CTF smart contracts, which
686 | confirm receipt of the correct creation basket.
687 |
688 | ## 5. Tokens
689 | There are three types of tokens, all of which implementing the [ERC20
690 | token standard](https://github.com/ethereum/EIPs/issues/20). Detailed information about volume, distribution mechanism and the price of tokens will be released separately ahead of
691 | the contribution period.
692 |
693 | ### 5.1. Brickblock Tokens
694 | Brickblock tokens will only be released during the contribution period
695 | in exchange for ETH and Bitcoin. If the Brickblock tokens are stored in
696 | a special smart contract, the Brickblock token holder will receive a
697 | certain amount of access tokens per week until the Brickblock tokens are
698 | withdrawn from the smart contract.
699 |
700 | ### 5.2. Access Tokens
701 | Broker-dealers and fund managers need access tokens to list their fund
702 | on the Brickblock platform and to pay market-determined Brickblock fees
703 | when REFs, ETFs, CMFs or CTFs are sold. The access token is then burned.
704 | Brickblock will determine the amount of access tokens based on supply
705 | and demand.
706 |
707 | Brickblock is incentivized to establish the amount of access tokens
708 | needed in such a way so as to positively influence the usage of the
709 | platform, while still making a profit. All access token holders can act
710 | as competitors to Brickblock and sell their access tokens to
711 | broker-dealers and fund managers on the open market. Brickblock cannot
712 | increase fees without risking a decline in the number of trades
713 | conducted on the platform and cannot decrease fees without reducing its
714 | own profit.
715 |
716 | ### 5.3. Proof-of-Assets (PoA) Tokens
717 | For ETFs and REFs, PoA tokens represent real-world assets in the form of
718 | securities. For CMFs and CTFs, they represent a claim to coin funds on a
719 | secured trading account or in the custodians’ wallets. Users receive a
720 | PoA token in return for every fund in which they invest, which
721 | represents a legally enforceable claim to the underlying assets.
722 |
723 | --------------
724 | ## 6. Conclusion and Vision
725 | Brickblock is an inclusive investment platform that empowers people from
726 | all income classes to diversify their crypto-portfolio with real-world
727 | assets like ETFs and REFs. We will provide legal frameworks to directly
728 | link these assets to our PoA tokens. Furthermore, Brickblock will lead
729 | the development of passively managed CTFs, as well as offer actively
730 | managed CMFs.
731 |
732 | At Brickblock, we strongly believe that digital currencies are the
733 | future. The monetary system and the financial services industry are
734 | extremely old-fashioned and [ripe for disruption](https://www.forbes.com/sites/ciocentral/2017/02/24/is-the-financial-services-industry-ripe-for-disruption/). It still takes 5 days for an international money transfer to crawl through the SWIFT
735 | network, originally [created in 1973](https://www.swift.com/about-us/history), and it still takes 2 days
736 | to complete clearing and settlement processes of asset-transfers.
737 | Present technology is far more advanced than the heavily outdated
738 | regulatory frameworks of sluggish banks.
739 |
740 | Various members of the Brickblock team have spent several years working
741 | professionally in conventional asset management and understand the
742 | processes and issues of trading and settlement. The asset management and
743 | global custody ecosystem is highly complex, extremely cost intensive in
744 | a multitude of ways (execution, reconciliation, allocation settlement
745 | etc.) and exceptionally exclusive.
746 |
747 | Our mission is to change that.
748 |
749 | We believe that by including more people in the global economy and
750 | enabling them to invest their money however they like, everyone will
751 | win: investors will pay significantly lower fees, have more options to
752 | hedge volatility and risks that accompany the digital economy and bypass
753 | unfair local jurisdictions. Furthermore, trusted brokers/dealers and
754 | fund managers will obtain an entirely new group of financiers, and
755 | underfinanced companies and industries will gain access to new capital.
756 |
757 | Incumbent banks neither have the ability nor the incentive to free
758 | themselves from the burden of the status quo. They lack vision. Any
759 | attempt to innovate would meet with disapproval from the board.
760 |
761 | So it is up to us, the crypto-community, to use the aspiring blockchain
762 | technology to eliminate the faults of the old economy and to develop
763 | tools which make it simple, affordable and safe to access the
764 | instruments currently reserved for the financial class.
765 |
766 | It is up to us, to create a system that gives everyone access to
767 | real-world assets and to participate in profiting from global economic
768 | progress. No matter where and no matter if you have a bank account or
769 | not.
770 |
771 | **It is up to us, to make trading, clearing and settlement with any kind
772 | of assets as easy and secure as transferring a bitcoin.**
773 |
774 | If you are interested in shaping the future of investing with us: We are
775 | always looking for talented people to help us in making the crypto-world
776 | better, safer and more inclusive. Get in touch.
777 |
778 |
779 |
780 | ### Glossary
781 |
782 | **Access Token:** An Access Token is used by broker-dealers and fund
783 | managers to pay the platform service fees.
784 |
785 | **Brickblock Token:** A Brickblock Token is received in the contribution
786 | period and is the only way to generate access tokens.
787 |
788 | **Broker-dealer:** A Broker-dealer is an entity that trades securities
789 | for its own account or on behalf of its customers. Broker-dealers are
790 | often market-makers and authorized participants in the ETF market; they
791 | act as liquidity providers on exchanges.
792 |
793 | **CFD:** A “contract for difference” allows traders to speculate on the
794 | movement of an asset price without owning the underlying. A buyer and
795 | seller devise a contract to exchange the difference in the current value
796 | of the underlyings.
797 |
798 | **CMF:** A “coin managed fund” is the crypto-equivalent of an actively
799 | managed investment fund, where the portfolio manager chooses the fund’s
800 | investments.
801 |
802 | **CTF:** A “coin-traded fund” is the crypto-equivalent of an ETF; it is
803 | a passively managed basket of different cryptocurrencies.
804 |
805 | **CTF Constituents:** The constituents of a CTF are the holdings of the
806 | fund.
807 |
808 | **Creation Basket:** A creation basket is the exact list of assets that
809 | need to be sent to the CTF to create a PoA Token.
810 |
811 | **Creation File:** The Creation File contains the details of the
812 | creation basket.
813 |
814 | **Custodian:** A custodian holds the assets for a fund. The assets (cash
815 | and securities) of a fund must be maintained in the cash/securities
816 | account opened in the name of that fund.
817 |
818 | **Dapp:** A “decentralized app” is an application that runs
819 | predominantly on the blockchain.
820 |
821 | **DVP:** “Delivery versus payment” is a securities settlement procedure
822 | in which the transfer of the securities and payments occur
823 | simultaneously and no party holds both at the same time.
824 |
825 | **ERC20 Token:** The ERC20 token is a widely tradable token that
826 | implements the ERC20 standard. [@ref21]
827 |
828 | **ETF:** An “exchange-traded fund” is an investment fund traded on
829 | exchange, which passively tracks a rule-based index.
830 |
831 | **LP:** A “liquidity provider” provides liquidity for proof-of-asset
832 | tokens on exchanges. The LP can create and redeem CTF tokens against the
833 | portfolio holdings.
834 |
835 | **NAV:** The “net asset value” is the current value of the fund holdings
836 | divided by the number of shares. The NAV therefore, is the price of one
837 | of the fund’s shares. The NAV is calculated on a daily basis at a fixed
838 | time.
839 |
840 | **OTC:** “Over-the-counter”, within a trading context, means that the
841 | trade is not executed on an exchange, but privately in a dealer network
842 | or over the phone.
843 |
844 | **PoA Token:** A “Proof-of-Asset” Token represents a real-world asset in
845 | the form of securities or, in the case of CTFs, the right to Coin funds
846 | on a certain secured trading account
847 |
848 | **REF:** A “real estate fund” invests directly in commercial and
849 | residential property. Most REFs focus on a specific type of assets (e.g.
850 | luxury housing) or region (e.g. Europe).
851 |
852 | **REIT:** A “real estate investment trust” is a company that, in most
853 | cases, owns and operates income-producing real estate assets. Some REITs
854 | provide loans to the owners and operators of real estate.
855 |
856 | **RFQ:** “Request for quote” describes the process of sending
857 | standardized quote requests to select brokerage firms. The quote is
858 | constantly updated and the processing can be fully automated.
859 |
860 | **Smart Contract:** Smart contracts are computer protocols that have
861 | fixed if-then relations, therefore facilitating contract design and
862 | enforcement.
863 |
864 |
865 | DISCLAIMER: This Brickblock whitepaper is for information purposes only
866 | and is subject to change. Brickblock does not guarantee the accuracy of
867 | or the conclusions reached in this white paper, and this whitepaper is
868 | provided “as is”. Brickblock does not make and expressly disclaims all
869 | representations and warranties, express, implied, statutory or
870 | otherwise, whatsoever, including, but not limited to: (i) warranties of
871 | merchantability, fitness for a particular purpose, suitability, usage,
872 | title or non-infringement; (ii) that the contents of this white paper
873 | are free from error; and (iii) that such contents will not infringe
874 | third-party rights. Brickblock and its affiliates shall have no
875 | liability for damages of any kind arising out of the use, reference to,
876 | or reliance on this white paper or any of the content contained herein,
877 | even if advised of the possibility of such damages. In no event will
878 | Brickblock or its affiliates be liable to any person or entity for any
879 | damages, losses, liabilities, costs or expenses of any kind, whether
880 | direct or indirect, consequential, compensatory, incidental, actual,
881 | exemplary, punitive or special for the use of, reference to, or reliance
882 | on this whitepaper or any of the content contained herein, including,
883 | without limitation, any loss of business, revenues, profits, data, use,
884 | goodwill or other intangible losses.
885 |
886 | Copyright (c) 2017 brickblock.io Without permission, anyone may use, reproduce or distribute any material in this whitepa- per for non-commercial and educational use (i.e., other than for a fee or for commercial purposes) provided that the original source and the applicable copyright notice are cited.
887 |
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