- April 4, 2021
- Posted by: admin
- Categories: Altcoins
I have used Convergence Protocol as the name of the project in the headline of this blog post because this post is about Convergence Finance (https://conv.finance/), and not about convergence.finance, which is a different company.
The headline of the article is clickbait – I don’t think Convergence is an intentional scam. But reading their Litepaper, I am doubtful their proposed solutions are feasible.
The issue I have is not with the technical solutions. The issue is with the legal side. Here’s the core premise of what Convergence plans to do (in their own words):
“Tokenization is the process of representing real-world assets with security tokens. Leveraging blockchain technology, we believe this will usher in a new age of capital market innovation.
DeFi and utility tokens benefit from high liquidity, radical innovation, and creative composability. The Convergence Protocol will enable seamless interchange between wrapped security tokens and utility tokens to converge real-world assets with DeFi liquidity.
We build the convergence layer to allows swapping of Utility Tokens(UTs) to Wrapped Security Tokens (WSTs). Convergence strategically collaborates with the industry-leading asset tokenization players to facilitate a paradigm shift in the security token space.”
The problem they’re solving is real. There is no liquidity for security tokens. But security is still security, whether it’s wrapped or not. And regulations allow securities to be traded on licensed platforms. It can be a stock exchange, ATS (alternative trading system), MTF (multilateral trading facility – ATS equivalent in the EU), or any other type of licensed platform depending on the jurisdiction.
Obtaining these licenses is a long and expensive process, which requires a highly experienced team.
I am wondering how Convergence will connect to these licensed platforms. If it will at all. I know that DeFi solutions aren’t currently regulated and it’s difficult to evaluate how to regulate AMMs, lending protocols, etc. But at the end of the day, I am doubtful the Convergence team is banking on this regulatory uncertainty, as it’s not a long-term solution. I am not even sure it’s a short-term solution, as to why would a company that’s raising capital take a risk with regulators by issuing and enabling trading of its securities without regulatory certainty.
But to be clear, the issue could be with me. Because I simply don’t understand how they plan to solve the trading part of their promise from a legal angle. I am not claiming that it’s impossible – but as an investor, I would definitely want to know how it will actually work. Litepaper gives too little and too vague information about this.
Built on Ethereum and being EVM-compatible with other chains (ie. Binance Smart Chain, Moonbeamand more), Convergence AMM enables trading WSTs 24/7 and real asset price discovery. The feature intelligently finds the best order routing from aggregated liquidity sources to give traders the best prices. It eliminates complexities and allows ease of access for retail investors, fund managers, and digital-native investors around the world to freely provide liquidity and trade amongst the pools.
This all sounds super sexy, but what are these aggregated liquidity sources? Who is the licensed party that can facilitate the trading of securities?
We have designed a proprietary token wrapping module that ensures both from an on-chain and off-chain perspective, economic benefits will be transferred to WST holders subject to token holders’ views via DAO. For example, the assurance for WST holders that they can monetize from the proceeds of a company’s (e.g.SpaceX) IPO.
This is again a bit confusing when I try to think about the details. Will each issuer of security tokens set up a DAO? I assume that the wrapped token enables the issuer to know who is the token holder at all times to stay compliant with the regulations. And how are the economic benefits transferred to WST holders from the off-chain perspective? What does the off-chain perspective mean in this context?
Convergence Pools gives asset owners the flexibility to easily create and manage their own market-making strategies. By creating their own pools, asset owners can perform initial WST offerings alongside providing liquidity for further trading for DeFi users. It eliminates complexities and allows ease of access for retail investors, fund managers, and digital-native investors around the world to freely provide liquidity and trade amongst the pools.
I am a bit lost about who is the asset owner in this context. Is it any person who holds security who is able to tokenize whatever amount he or she holds, and create small pools? Or is it the company that wants to issue security tokens? A myriad of questions come up with both scenarios, and I would really like to understand how it’s meant to work, as it can be a genius solution. But just to give you an example – if it’s companies issuing their security tokens, then what about prospectus requirements? And some jurisdictions require a licensed registry (for example, Nasdaq) to keep the registry of the securities and investors. Don’t forget that public offerings are also heavily regulated.
To be fair, my understanding of the solution is limited. My knowledge of both regulations and technology is limited. I am not saying the proposed solutions are not feasible.
But I do have plenty of questions before I would consider Convergence as a viable solution to the problems they claim to be solving.