On the 27th of April, an “ultra-rare” rookie LeBron James trading card was bought for $5.2m, tieing the all-time record for any card with the 1952 Topps Micky Mantle card sold this past January. This is only the tip of the iceberg of the sports memorabilia market. A market that has outperformed the S&P 500 by 232 percent following the 2008 recession (1) and is projected to exceed the $15 billion mark by the end of this year (2). Despite its explosive growth the market does not come without its problems. The often very expensive collectibles are only accessible to those who can afford them, excluding a large and very important group for sports teams, the fans. Furthermore if you are one of the lucky persons able to actually afford a card or a game worn jersey, trading infrastructure is merely existent leading to high illiquidity premia and low participation rates among potential investors. In this article you will learn how blockchain technology is able to solve those problems and thereby make the sports memorabilia market more accessible and liquid. — Author: Nicolai Klutke
Introduction and current state
Let’s say one evening you decide to clean out your attic when you stumble over an old box. You are curious and take a little peak to see what’s inside. What you find surprises you, it is a binder full of old sports cards of basketball players. Every single card is thoroughly wrapped and arranged by team. You have no idea who these athletes are as you are not really into basketball but you have heard the massive numbers that get thrown around when it comes to old trading cards. As your mothers birthday is coming up and you are low on money you decide that you want to sell the cards. After a bit of research and calling a few friends it turns out selling these cards is not as easy as originally thought. (Although the story is far-fetched and seems very unlikely, such stories have happened a few times (3), so maybe next time you will be the lucky person).
In the following we are going through the process one has to take in order to sell their sports memorabilia items step-by-step. Afterwards we have a look on how the blockchain technology can be used to improve this process.
First you have to prove that the item you own is real, there are different ways to do that. Maybe you still have the purchase certificate, but who guarantees that you have not forged it. Another option is to have a certificate of authenticity issued by a specialist, a third party that is reputable and specialized in the field. But you would have to pay for that, which results in upfront costs you might not get back if it turns out that the item is not real or just not worth as much.
The next step would be to list the item on a two-sided market like ebay. Two-sided-markets are notorious for their high number of dubious offers and for someone on the demand side it is often hard to distinguish between real and fake offerings. Leading to high information asymmetries between buyer and seller. Thus to reduce those asymmetries a third party like PSA has to be introduced into the process. They check the card and prove their authenticity and their condition. Additionally in order to exploit the reservation price of the demanders, it is advisable to sell the card at an auction otherwise the price of the card is determined by the last price paid for a similar card.
After the card is sold it has to be delivered to the respective buyer, the buyer himself has to transfer the money via a bank or pay in cash. Problems arise especially when there is no physical contact between the buyer and the seller. Both have to rely on trust that the other side delivers their part of the deal and measures that were installed to prevent scams often do not work as intended.
Let us assume that for our case something went wrong, after we graded the cards and sold them via auction we sent them to the buyer and never got the money in return. This is very unfortunate but happens many times every day to millions of people all over the world.
Opportunities of applying blockchain and tokenization
Now after we have gone through the traditional selling process we go over how the blockchain technology could have prevented what happened to us.
There are two possibilities how the blockchain might be leveraged in the sport memorabilia market.
The first option uses NFTs as authenticity certificates rather than paper certificates which can be forged easily. The NFT is sent to the wallet of the buyer of the real world item, giving him the chance to prove the authenticity whenever someone asks. It is important that every time the item is sold the token is also transferred to the buyers wallet and vice versa. Otherwise the ownership on-chain and off-chain are separated leading to a whole lot of problems. This option therefore connects the on-chain world with the off-chain world. The selling process would change in the following way. Instead of being listed on a two-sided market with pictures and a description the NFTs (authenticity certificate) is listed on an NFT-Marketplace like OpenSea. As the NFT always belongs to the person who actually owns the item, the bidders are ensured that they bid on the real authentic underlying asset. Although this solves the first problem, securing that the actual item is delivered for the payment is still a hurdle. However this could also be solved and this is how to do it: With the end of the auction both the NFT, which proves the authenticity and the bidding amount are tied up in a smart contract as long as the buyer has not received the item. The buyer then acts as an oracle, as soon as he receives the item he gives a signal to the smart contract, which in turn releases the NFT to the buyer and the bidding amount to the seller. This works because the item is worth nothing without the NFT so the buyer is incentivized to signal that he received the object. On the other side the seller is also incentivized to send the item, as he wouldn’t receive the money otherwise. If after a certain time period, which is determined in advance, the buyer has not received the item the NFT is sent back to the seller and the money is sent back to the buyer automatically.
The second possibility is to only use NFTs without attaching a real world item to them, eliminating the payment for delivery problem completely. The economics of NFTs are fascinating and have led to a lot of hype recently. One example of sports memorabilia in the NFT space are NBA Topshots. Small moments from NBA games that can be bought by fans.
However both of these approaches do not solve the problem of accessibility and liquidity on the sport memorabilia markets. There is one solution that lets fans participate in the performance of sport memorabilia markets and it is called tokenization. Tokenization is comparable to securitization and allows fans to buy fractions of sports memorabilia articles without owning the whole thing. This reduces the entry prices for investors and hence makes it easier for sports fans with limited resources to participate in the sport memorabilia market. One could speak of a democratization of the market. A small drawback of this approach is that the physical item always has to be held in custody so no one actually has access to it. But in an environment where inflation is a rising problem, giving everyday people access to investment opportunities that typically act as an hedge against inflation is a huge win.
In the next section you will learn more about tokenization and how sports memorabilia articles can be tokenized leveraging the Lichtenstein Token Act .
Tokenizing with Amazing Blocks
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 fractional ownership rights over sport cards) in Liechtenstein with EU-validity. On the other hand, Amazing Blocks utilizes Ethereum as a technological layer for its client-oriented holistic software. The results are equity and ownership tokens 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. Initially, a legal entity in Liechtenstein has to be established. Typically, setting up an entity can last up to 4 months. However, thanks to the experience and expertise of Amazing Blocks, the time can be reduced to a minimum thus saving time and money. The entire process can be executed fully remotely.
After the establishment period, the software of Amazing Blocks finds its use case. The Tokenpad functions as the base for administering the tokenized entities and is ready to be utilized for investor onboarding, subsequent issuance of equity, debt and ownership tokens as well as further management decisions. The owners receive Ethereum-based digital tokens that represent the ownership rights to the industrial capital assets. On the other hand, the Investor Suite functions as the frontend through which investors can manage their holdings, conduct KYC, AML and have a dashboard enabling them to invest with just a few clicks. Of course custody has to be taken care of as well. But this is not an issue, as any ERC20 compatible wallet like Metamask can be used to store the tokens. Custody can also be fulfilled with any other ERC20 compatible third-party custodian. Now stored in ERC20 wallets, the machine’s ownership can be fragmented, traded, sold and bought on the secondary market. All whilst enjoying the instant, peer-to-peer features of Ethereum. Additionally, capital gains can be automatically distributed. Thus the final result is an alternative, dynamic asset class.
Future outlook and conclusion
The remote and efficient tokenization of memorabilia 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 memorabilia 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 memorabilia, 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 memorabilia 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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Nicolai Klutke works in the department of Business Development Europe at Amazing Blocks and is your direct contact for any regards. You can contact him via email or connect with him on LinkedIn.