How tokenized diamonds can create a separate asset class for storing value
When applying two of the most important innovations of blockchain — smart contracts and tokenization — to the billion dollar diamond industry, it morphs this stagnating sector into a diverse asset class. Now a much larger group of investors can easily participate in this attractive store of value. Already in 2018, pioneer projects from diamond veterans like KGK Diamonds and Alrosa tokenizing 17 million dollars worth of diamonds made the headlines to cope with the lack of growth in diamond purchases equaling around 68 billion dollars annually. While these early approaches were crucial first steps, Amazing Blocks now offers the chance for every diamond owner to turn their precious gem into a 24/7 tradeable asset for portfolio diversification. — Author: Nicolas Weber
Opportunities of applying blockchain and tokenization
In the diamonds market, the search for a seller or buyer is not really a trivial task, as this tends to be conducted by mere professionals. These “professionals” (e.g. pawn shops) though, charge excessive commissions ranging from 45% to even 70%. After the tokenization, the unique peer to peer features paired with a decentralized consensus mechanism of blockchain and strong encryption will make commissions superfluous, thus fostering a liquid diamond trade. Not only that, tokenized diamonds also enable a standardized pricing tool with automated and guaranteed credit verification through smart contracts. As a result, complete transparency, security, tradeability, fairness and accountability are given, therefore transforming diamonds into a commoditized asset. If we combine these attributes with the possible transparency in the supply chain and the transparent transaction features of blockchain, we have the perfect preconditions for the creation of a secondary market in this space. The monetary value is already in place, as the diamond industry itself is worth hundreds of billions of dollars. Conversely to the earlier mentioned supply decrease, a substantial influx of capital in the industry will come from a prospering demand, as seen in figure 2 below. This will lead to an ever growing demand-supply gap from around 8 (in million carats) in 2018 to 292 in 2050.
“Money looks for silence” is an often referred to quote which also finds its utility in the gem-sector. The dominating cryptographic features of ERC20 tokens (e.g. tokenized diamonds) deliver the perfect framework in providing security and privacy when investing into diamonds — something many established players are eagerly aspiring to do. Additionally, tokens inheriting the function of a special purpose vehicle (SPV) allow the safe, secure and cost efficient storage of diamonds without the need for cross border transportation when acquiring these tokens. Another key aspect here to mention is the ability to fragment the ownership of the diamonds through “partial tokenization”. This will subsequently mean that investing in diamonds will not be limited to aficionados, but now the seamless acquisition of tokens is provided to investors in the standard way of security investing. Tokens here can be referred to as “Equity Tokens”. A standardized blockchain specific pricing algorithm that could be implemented determines the price at which crypto and regular investors alike can redeem any tokens (e.g. digital Euro, Bitcoin etc.) at every time for selected tokenized diamonds. A newly founded asset class in the investment market is available to portfolio diversifying investors all around the world. It could be included as an alternative asset in funds and in overall the disruptive blockchain technology delivers yet another example of providing new purchasing opportunities for a stagnating industry.
The ambivalent diamond industry
Diamonds are without a doubt still relevant in today’s society. Societal perspective changes and more scrutiny regarding the infamous “blood diamonds” may have contributed to declines in demand, but on the other hand box office hits like “Uncut Gems” on Netflix definitely stressed their substantial role in terms of cultural value. This is further emphasized by an increased interest in smaller, fragmented diamonds, making this sector predestined for retail investors. Nevertheless, the beforehand mentioned “blood diamonds” continuously dampen investor and consumer sentiment significantly. In response to this, patent-leader and tech conglomerate IBM developed a private blockchain to efficiently track the origin of mined resources such as diamonds and to provide defintite supply-chain assurances. South African diamond producer De Beers, one of the most established players in this space, successfully implemented this to track 100 diamonds through their entire lifecycle. Generally, the global mined diamond supply is set to experience a significant decline in the upcoming years, as illustrated in figure 1 below. Subsequently, the value of each diamond will increase in line with a supply decrease, applying the regular economical supply and demand principle. Therefore diamonds will transform from primarily jewelry use cases to also a financial instrument, enabled by tokenization.
The core problems today are (1) no liquidity, (2) no transparent pricing and (3) the market demonization. Common issues with these types of assets like transportation and securely storing diamonds are obviously also present in this sector. The prevalent lack of liquidity stems from the fact that diamonds generally are not attractive to investors yet, since they are often described as “non-commoditized commodities”. Access to investing is very difficult to gain and mostly wealthy, established individuals dominate the market. Moreover, the large variety of specifications when determining a diamond’s value deliver another constraint and hence boost illiquidity. In addition to this, logistical hurdles such as heavy paperwork, transportation costs and dual taxation (when acquiring in the origin country and when crossing the border of the investor host country) make it barely impossible to economically offer diamonds as an investment. The intransparent pricing originates from the key benchmark RapNet, which only forms data according to the price of the largest player, but not the actual market price. Parameters like shape, carat, cut and more are not implemented in the pricing metrics transparently or even at all, as mostly trade is done peer to peer with cash. This leaves tremendous room for individual “creativity” when stating the price demanded. Furthermore, a secondary market does not exist at all in this sector — leaving substantial room for tokenized diamonds to fill this gap. Last but not least, throughout the last decades a population demonization has been taking place, especially in developed and industrialized countries. Increasingly lower amounts of cash are in circulation and the function of private means ownership are gradually eliminated. However, the diamond industry is very cash reliant and owners frequently want to stay unrecognized, consequently this contradictory development seriously harms the trading frequency.
How to tokenize diamonds with Amazing Blocks
Tokenizing a diamond is an unprecedented way to provide liquidity to diamonds and expose them to a global marketplace. After tokenization, the diamond still belongs to the owner, but is physically stored in a secure location at the lowest possible cost. The owner will receive an Ethereum-based digital token that represents the rights to the diamond. First of all, legal hurdles have to be taken out of the equation. Amazing Blocks efficiently leverages the renowned TVTG (Liechtenstein Token Act) enabling the establishment, disposition and administration of digital legal entities (e.g. tokenized diamonds) in Liechtenstein with EU-wide validity. On the other hand, Amazing Blocks utilizes Ethereum as a technological layer for its client oriented software. The consequential emergence are equity tokens, which are represented on a blockchain. They consist of a legal part (the articles of association) and a technical part (smart contract). Both are perfectly integrated — tech and law.
Future outlook and conclusion
The remote and efficient tokenization of diamonds through startups like Amazing Blocks will reshape this slowly evolving industry. Not only these tokens are legally compliant through the TVTG, but also now anybody, not just established and wealthy investors, can participate in diversifying their portfolios with diamonds easily. This will especially be attractive for institutional investors, who are constantly searching for chances to enhance the diversification of their offered funds. Often only gold has been considered a safe haven in times of sharply declining markets, but now with tokenized diamonds, yet another (in times of crisis) to stocks negatively correlated asset class becomes available. Investors now have the opportunity to much better prepare themselves for falling markets. First Bitcoin established itself as a store of value and alternative to gold, now other asset classes with this same purpose are evolving thanks to the innovative approach of tokenization through startups like Amazing Blocks. The beforehand mentioned demand-supply gap further strengthens the case for diamonds as one of the financial instruments of the future. The gates to a billion dollar market for investing are now open to the public and not solely to a few wealthy individuals dictating the market of diamonds. Only with this approach the stagnating sector will be suitable for the age of Web 3.0 and the fully digitized “tokenomy” of the future.
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Amazing Blocks offers a tokenization solution that enables its clients to tokenize various assets according to the Liechtenstein Token Act (software-as-a-service). The software covers both the issuance of tokens and investing in tokens. It suits the needs for tokenizing all kinds of assets (e.g. machines, cash flow generating contracts, trademarks, real estate, cars). Imagine that some asset should be tokenized. For this asset various tokens would make sense: Equity tokens, debt tokens, participation rights as tokens, ownership tokens, or any mixture of these tokens. The software of Amazing Blocks helps issuers to handle multiple assets and to issue multiple tokens for these assets. This is possible by integrating blockchain technology with the law (that is, the Liechtenstein Token Act). At the core, there is the “digital legal entity in Liechtenstein” based on “tokenized shares” which allows a very efficient foundation, a very efficient operation of the company and, thus, an efficient and flexible possibility to tokenize assets. This should now make a wide variety of tokenization projects possible, because the costs for tokenization are significantly reduced.
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Author
Nicolas Weber is Head of Business Development at Amazing Blocks and is your direct contact for any regards. You can contact him via email or connect with him on LinkedIn.
