Use Case: Vertical Markets

As part of our IF ONLI launch presentation we as the question:

If only you could find a way to get liquidity for excess inventory.

One of our clients  posed the same question and in this article we take a took a look at a problem they use ONLI and ONLI.ONE to solve it. 

The Problem

In looking at any economic problem the first thing we do is identify the stakeholders and detail what each of them want. The client in question was a shipping company who inherited a large quantity of inventory, which were 2.2 kg aluminum bars stored in shipping containers in ports all around the world. This company, referred to as seller from here on, wanted to be able to get liquidity from this newly obtained asset yet they had a bit of a problem. First, they weren’t in the aluminum trading business. Secondly they would incur a massive cost to assemble the inventory in one place. This would necessitate taking a huge loss on the asset to facilitate a single transaction.  Obviously the seller would like to avoid this scenario. Now let’s consider the needs of the other stakeholder: the buyer. The buyer for the inventory is also located all over the world and many in the very ports in which it was stored. Buyers would want some assurance as to the current quality and quantity. What is most important to them is not to have to pay to ship it back from a central source, as the time and expense adds an unwanted premium to the inventory. There is also a third stakeholder, market traders. Since this was a well documented commodity, traded on major exchanges, there are traders who look favorably on a new source and would like to participate in the market fluctuations without taking delivery.  The ultimate objective would be for the client to leverage our technology in a way which would meet the needs of all the stakeholders. Let’s look at how they did it.

The Solution

We use a model  for asset backed coins called the securitization pyramid. 

  • Origination : “origin of ownership”, establishing and securing / documenting the claim of ownership.
  • Binding : “to tie up”, method for the distribution of benefits and reporting thereof, in accordance with the rights of ownership.
  • Segmentation – “breaking up”, fractionalizing a larger claim of ownership into smaller segments.
  • Tokenization – A token is unique representation of ownership. In digital form it is easily transferred at a near zero cost.
  • Exchange – a market where a token holder can buy/sell/xfer “unique representations” of ownership.

The first step, using our securitization pyramid, is origination. By origination we mean the relevant legal documentation that can be trusted to provide proof of asset.  The inventory was first catalogued, documented and certified as to quality and condition. This documentation is step one. The second step of the pyramid is segmentation. The key to creating any market is homogeneity – the quality or state of being all the same or all of the same kind. Segments can then be traded with confidence that each is the same as another. In this particular instance you also want the option of being able to take delivery of the underlying asset. This feature needs to be built in to each segment. Tokenization (Minting a coin) – which in this case is making a digital representation of each segment, a token or coin, that can be moved around digitally, is the next step. Finally a coin is not a business so you need a market, a place where buyers are matched with sellers. You also need an on/off ramp where buyers can exchange currency for the coin/token. 

We used three technologies to implement the solution. Onli is a data capsule that behaves much like a real coin. Onli.One is a complete trading platform in a box. A conventional blockchain network would be far to slow and add unnecessary expense and performance burden. Also since the issuer, the seller, is already a trusted entity with it’s vendors, adding an elaborate mechanism to eliminate trust is also unnecessary. The cost of providing dedicated infrastructure is low compared with aggregating resources through an incentive scheme. Onli therefore made for a better solution. The Onli™ solution addressed the needs of all the stakeholders. The seller would have a vertical market where it can consolidate buyers. Buyers would even be willing to pay a premium for the benefit of instant incontrovertible possession and no transportation cost as buyers could take delivery of the asset directly nearest to their factories.  Traders would have a fast and secure method of trading. The solution therefore is to use the Onli™ container to create an asset backed digital commodity and Onli.One to create a vertical marketplace. 

How it works

We used three pieces of mature technology to accomplish this goal. The first is called Vescel®. Vescel is a cryptographic container that allows for information to be locked inside it and freely moved around or stored. We take the origination documentation and an on demand delivery receipt and store them in the Vescel. This container is bound to an Onli™ capsule or coin. The Vescel is stored safely in a third party provider that insures and warrants the proof of asset. The second piece of technology was Onli™. Onli is a data capsule which can be bound to an individual Vescel in such a way that only by presenting the coin can one unlock that particular vessel. The third piece of technology was Onli.One which provided an instant marketplace for buyers and seller. The Onli™ coin is traded on an Onli.One powered exchange. This new digital commodity could then be bought and sold instantaneously around the globe and when a party wanted to take delivery of the asset they simply presented the documentation at the port and picked up the asset. Onli.One rapid deployment means that the market was up in less than 90 days. The customer did not have to move a single container. All that was left to do was to market the value proposition to the vendors.

The Process

The first step was Origination. First an independent third party orgainaztion was brought in to verify title and ownership of the inventory, which was all stored in licensed bonded warehouses, placed in containers and originally shipped to a client, whose project went bankrupt. Establishing clear title was important in this case. As to segmentation, this process was easy as the aluminum was already stored as nice individually serialized 2.2kg bars. Once the inventory was all accounted for and inventoried to each serialized aluminum bar, container number, and location. This information was then used to create digitized PDF versions of the proof of ownership and combined with the delivery receipt. Both of these documents were then stored in a unique Vescel container for each and every individual bar of aluminum. The containers were then secured. The Marketplace issued a unique Onli and binding it to the Vescel, each representing a single bar. A pricing algorithm was developed to establish a price. This pricing algorithm was used to set market prices for each location. The Onli™ coin would be listed, bought and sold on the Onli.One exchange. When a buyer would like to retrieve the inventory they redeemed their coin, that is send their coin to the Treasury part of the Marketplace, which would return to them the Vescel container with the documents. The owner of the Vescel could then open the Vescel and retrieve the proof of asset. The proof of asset could then be presented to the applicable location and in so doing take delivery of the asset. 

What we learned

The ability to create a vertical market for inventory, in a fast and efficient manner. The significance of  using Onli™ technology was not only speed to market but being able to create a whole new asset class backed by physical assets. Not only does this free up a seller to participate in a market unfamiliar to them but it also enables an entirely new possibilities for the market, including derivatives products, as well as traders ability to take advantage of locational arbitrage and this really only scratches the surface. Using Onli™ to create Vertical Marketplaces, opens a world of opportunities. Producers of raw materials could partner with bonded warehouses and leverage vertical marketplaces to enable them to sell their products in a manor where demand actually controls supply in such a way that enables dynamic self optimizing supply chains. This is no longer a question of IF.  Now there is Onli™ and Onli.One way to do it quickly and efficiently. You can now turn opportunity into economic advantage.

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