Decentralized Investment Funds: Equity Ownership on the Blockchain

Decentralized Investment Funds: Equity Ownership on the Blockchain

Glossary

Definition of TermsDecentralized Investment Fund (DIF)An investment fund that operates according to consensus code on a shared ledger and raises funds by issuing ownership tokens on the shared ledger. Shared LedgerA decentralized database maintained by multiple participants in a network. BlockchainA shared ledger that stores transaction data in a chronological order in the form of blocks. Smart ContractsCode stored on a blockchain that automatically executes when certain conditions are met.TokensA digital unit that represents an asset or utility on a blockchain.Ownership TokensA token that represents a share of ownership in a decentralized investment fund.Dividend PreferenceTokensA digital asset in which token holders choose to receive dividend payments.On-chain refers to transactions or operations that occur within a blockchain network.Cross-chain refers to transactions or operations that involve multiple blockchain networks.StablecoinsA cryptocurrency that is pegged to the value of another asset (such as the U.S. dollar) and is designed to maintain price stability.Accredited InvestorsInvestors who meet certain financial criteria (such as high net worth or high income) that allow them to invest in certain regulated investments, such as certain decentralized investment funds

Short Answer Questions

How do decentralized investment funds raise funds?

What are two potential advantages of decentralized investment funds over traditional investment funds?

What role do ownership tokens play in the operation of decentralized investment funds?

What is an “accredited investor” and why is this concept relevant to decentralized investment funds?

How can decentralized investment funds use smart contracts to automate dividend payments?

Explain the difference between “on-chain” and “cross-chain” dividend payments.

Why might decentralized investment fund token holders prefer to receive dividend payments in the form of stablecoins?

How can decentralized investment funds use blockchain technology to increase transparency in their operations?

What problems associated with traditional investment funds are solved?

Publicly available cryptographic methods for distributing fund documents to token holders.

Short answer questions

Decentralized investment funds raise capital by issuing ownership tokens to investors on a shared ledger. This process is often managed through smart contracts, which automatically execute the issuance of tokens when certain conditions are met (such as receipt of investor funds).

Decentralized investment funds offer several potential advantages over traditional investment funds, including: increased transparency, as transactions are recorded on a public blockchain; reduced costs and increased efficiency, as automation through smart contracts reduces the need for intermediaries; and enhanced security, as blockchain technology is inherently secure.

Ownership tokens represent a share of ownership in a decentralized investment fund. Token holders are entitled to a share of the fund's profits in proportion to the tokens they hold, and may have voting rights over fund management decisions.

Accredited investors are individuals or entities that meet certain financial criteria that allow them to participate in investments that are not normally open to the public. Because decentralized investment funds may be subject to securities laws, they may need to verify that a potential investor qualifies as an accredited investor before selling tokens to them.

Decentralized investment funds can utilize smart contracts to automate dividend payments. Smart contracts can be programmed to automatically distribute dividends to token holders when predefined conditions are met (e.g., a specific payment date is reached or fund profits exceed a certain threshold).

On-chain dividend payments are payments made within the same blockchain network, while cross-chain dividend payments involve the transfer of funds from one blockchain network to another. For example, if a decentralized investment fund operates on the Ethereum blockchain, but a token holder wishes to receive dividends in the form of Bitcoin, a cross-chain payment will be required.

In the volatile cryptocurrency market, stablecoins provide a relatively stable way to store value. If the performance of a decentralized investment fund is denominated in a volatile cryptocurrency, token holders may prefer to receive dividends in the form of stablecoins to reduce the overall risk exposure of their portfolio.

All transactions are recorded on the blockchain and can be viewed by anyone with a copy of the network. This transparency reduces the possibility of fraud and mismanagement.

Aims to solve several problems associated with traditional investment funds by leveraging blockchain technology, such as lack of transparency, high fees, and inefficiencies associated with transfer of ownership and distribution of income.

A method is described that first encrypts the fund file using a symmetric key, and then encrypts the symmetric key using a public key unique to each token holder. The system then distributes the encrypted symmetric key to the corresponding token holders, who can decrypt it using their private key, thereby gaining access to the decrypted fund file.