On-chain alternative investments
Alternative investment is funds invested in alternative asset classes, i.e., asset classes other than equities, bonds, and cash. Besides their diversification benefits, these investments have other advantages, such as being an inflation hedge. Alternative assets include, but are not limited to, commodities, real estate, collectibles, hedge funds, and private equity.
Alternative asset classes have not been popular with retail investors. Being opaque, unregulated, and illiquid didn’t help either. DeFi and NFTs can change all this by tokenizing alternatives and making them more affordable and accessible to small investors like us.
The largest of all financial markets, real estate has been available to institutional investors and high net worth individuals for a long time. Fractionalized real estate platforms are going to change this. They increase liquidity and accessibility in otherwise illiquid market.
Fractionalization can revolutionize the real estate investment market by allowing small investors to have a share in high-end real estate or other high-value real assets, such as jets and yachts. Several platforms have been launched recently where any investor can purchase a share of a listed property.
CitaDAO is a fractional real estate platform developed on the Ethereum blockchain. It works in the following way. After verifying the ownership of the property, the landlord lists it through the process called Introducing Real Estate On-Chain (IRO). If the IRO is successful, i.e., if the received funds are enough to buy the property, an SPV (special purpose vehicle) will buy the real estate. After which the property is tokenized, and IRO participants will get RET (Real Estate tokens). Any NFT holder can use Buyout Provision and buy out all other RET holders, thus being the only owner of the property.
If the IRO fails, all the accumulated funds will be redistributed to the investors who sent them.
LandShare makes real estate investing as affordable as it can be: the minimum investment amount is $50. How does it work? For each to-be-tokenized property a legal entity is created which converts its shares to special tokens (Asset Tokens). Investors receive their cash flows from the real estate in the form of BUSD, the stablecoin issued by Binance (LandShare has been built on the Binance Smart Chain).
LandShare intends to offer crowdfunded house flipping services, too. House flipping is buying a house, renovating it, and selling it for a profit. However, since most investors cannot afford to buy a house, even a distressed one, with cash, crowdfunding will make it more accessible to small investors.
Another feature that can make LandShare more attractive to investors in the future is auto-compounding. If you don’t cash out your rental yield but buy more Asset Tokens with it, your rental yields will compound over time.
Another marketplace which facilitated the purchase and sale of real estate is Lofty.ai. Once the property is listed on the platform, investors can buy part of it; and once it is sold, investors will start to receive return which is equal to (sale price of the property — selling fees) / investor’s percentage in that property. If the property is not sold out until the deadline, the listing will be cancelled, and investors will get back their investments.
Lofty.ai is built on the Algorand blockchain. Algorand has low fees for transfers and high transaction throughput rates.
Farmland is a stable, low-volatility asset class which tends to appreciate over time. Thus, it’s also a good hedge against inflation. Besides capital appreciation in land value, farmland also offers landowners to earn regular cash flow by renting it to farmers.
Though there are multiple agricultural commodity futures traded actively in financial markets, it’s very difficult for lay investors to get “real-world exposure to farmland”. LandX is a DeFi protocol bringing agricultural commodities to retail investors. They link farmers with investors through perpetual commodity vaults.
LandX benefits farmers by providing them with capital. Once farmers commit crop share of their land, xTOKENs are minted corresponding to the crop quantity they committed. Farmers can sell their xTOKENs to investors thus getting capital to fund their business. Investors receive daily yield from xTOKENs than can be converted to USDC anytime.
This is how LandX works in a nutshell. For a very good coverage of the protocol, you can refer to the article below.
Mettalex is a decentralized exchange bringing commodity markets to DeFi. Mettalex will benefit holders of physical assets hedge their price risk, and speculators take leveraged positions in the otherwise illiquid markets. Other beneficiaries of the exchange will be liquidity providers who will receive fee and market maker spreads for supplying liquidity to autonomous market makers. The protocol will hopefully solve some problems, such as liquidity and transparency which traditional commodity markets have.
Exotic alternative investments
Getting more popular as an alternative investment, wine has a number of advantages:
- Its low correlation to traditional assets, such as equities. Over years, wine has exhibited low correlation to S&P 500, the benchmark for US stock market and most investor portfolios.
- Low volatility. Wine is a moderately stable investment being not as volatile as stocks or commodities. The chart of Liv-ex Fine Wine 100 Index reflects this. Liv-ex Fine Wine 100 is the most popular benchmark of the industry tracking the prices of 100 most coveted, highly regarded fine wines on the secondary market. Though during COVID-19, the Index did fall, its drop was much lower than, for example, S&P500 which lost about 30% of its value; Brent fell to 20-year low during that period.
- High demand (and limited supply). Climate change affects soils which in its turn impacts wine production. This makes fine wine scarcer. Add to this increased demand which is what Liv-ex index shows, and we get an asset class which has a good profit potential.
There are a few problems with buying high quality wine. To spot a counterfeit wine is hard especially you purchase it online. Fake wine sales are estimated to account for 20% of all wine sales worldwide. Even if you believe that wine you’ve purchased is genuine, logistics and storage can cause problems for the buyer. Wine can easily lose its flavor if they are transported and/or stored at bad temperatures.
These problems are what the technology startup Vinsent aims to solve. Their mobile app directly links consumers to wineries effectively disintermediating the process. The blockchain technology guarantees “what you get is what you see”: buying wine through the app means that you will get the wine you have purchased. Besides directly buying wine from wineries, Vinsent creates a secondary wine market where you can resell your bottled wine, and wine futures. Wine futures are what their name suggests – the wine still in the barrels that is not yet “ready to ship”.
The platform will benefit investors by providing them with verified, genuine wine which can be authenticated by a token. The main advantage for the producers (wineries) is the sale of wine futures. Receiving funds from customers early in the production cycle helps wineries finance their operations and better predict which vintages will be profitable. Furthermore, cutting off intermediaries from the supply chain will result in more cash per bottle for winemakers.
Winechain is a platform for authenticating and tracking the supply chain of wines from the vineyard directly to the customer. The platform is simple to use. Once you sign up and connect your wallet to the platform, you can purchase wine with your wallet which will display an NFT that is backed by your physical wine order. You can choose to store your wine. Or you can order it to be shipped to you in which case you burn the NFT authenticating the bottle. Like Vinsent, Winechain also has a secondary market where you can trade your wine if you choose to do so.
The advantage of Winechain, other than mentioned above in the Vinsent section, is that it generates data for winemakers. Since there are a number of middlemen between a customer and a winery, winemaker usually doesn’t have any data or profiling of his customer. Protocols such as Winechain changes this by bringing the customer data onto the chain. Wineries can make use of the data in several ways. For example, customers burning their NFTs, thus receiving their bottles instead of trading them in the secondary market can be rewarded.
Litigation finance is the practice of providing capital by the third party to a plaintiff covering some or all of their legal expenses in return for a part of financial recovery from the lawsuit. Think of it not as a loan but an investment in the result of the lawsuit.
Litigation finance is a risky business given the non-recourse nature of funding legal disputes. The claimant you financed can lose the case. But high risk usually implies high return which is true for legal disputes. Litigation finance can be a very profitable asset class. Burford Capital, one of the largest players in the space, reported that it generated 93% ROIC (return on invested capital) since it was founded in 2009. Manolete Partners, UK's leading insolvency litigation financing company, made an even higher, 176% return on its invested capital.
Despite its advantages, such as high returns and low correlation with most asset classes, litigation finance remains available only to accredited investors. Tokenizing it will make it more affordable to retail investors.
With the law firm Roche Freedman LLP and investment platform Republic, Avalanche pioneered tokenization of litigation finance investments by creating Initial Litigation Offering (ILO). ILO is a blockchain-enabled product to fund individual legal cases which is open to all investors. ILO tokenize litigation financing in cases when a claimant (or their legal advisor) seeks to raise more capital to release the burden of legal expenses.
When you invest in an ILO, you’ll get tokens equal to your investment. If the lawsuit has been resolved successfully, you’ll get a multiplier which depends on two factors: your investment and how long it has taken the settle the case. Those participating in the first ILO, Apothio LLC vs Kern County, will lose all their investment if the claimant loses the case; they will make between 2X and 3.5X returns on investment if there’s a recovery in litigation. If the case is dismissed, investors will get 80% of their funds back. Needless to say, the ILO tokens are not governance tokens – they don’t give investors any right in the settlement of the legal dispute.