Web3 tools: When NFTs become Corporate Bonds
Bonds are financial instruments that issuers use to raise capital today in exchange for a promised set of actions later. Investors in a bond exchange today’s capital for the likelihood of the later benefit(s) from the issuer.
The price of the bond reflects the investors’ confidence in the issuer’s ability to fulfill the future commitments, including but not limited to future payment(s). After issuance, the bond holder can sell the bond to others, allowing the price of the bond to fluctuate through time up until the final commitment from the company is made (or written off by the investor). During the period of the bond, the bond holders also have specified rights with the issuer, allowing them to keep track of the issuer’s prospects in order to inform their investment, and support the issuer in meeting the conditions of the bond.
The above is widely known. What may be new is that all of the above could equally apply to a digital non-fungible tokens (NFTs). NFTs allow companies to complete a similar transaction, at a fraction of the cost. Just replace the word ‘bond’ with ‘NFT’ in the above two paragraphs, and the section reads the same.
An NFT is specific (non-fungible) digital asset that can include commitments from the issuer embedded as contracts to the holder. Because transaction costs for NFTs are a fraction of bond issuances, when companies finance with NFTs the market won't just replicate the same structure, there will be new innovation. Micro-bonds are the first example that comes to mind.
Digital token issuance means that instead of raising $50M+ for general corporate expenses through a bond sale, companies can issue a digital bond instrument for as little as $1. Why would an investor want to buy a bond for $1? If the payout is significantly greater based on the performance of some task or service to the company.
Let's use an example.
Companies often have discrete binary tasks where expertise, network or time is better found outside of current company resources. For example, sourcing candidates for hiring.
Acme Inc wants to hire a new VP of Marketing. The hiring manager looks to her network, and perhaps engages with an outside recruiting agency. But, in addition, the company issues a NFT which has tied to it a contract that commits Acme Inc to pay a fee to the holders of the NFT is when the new VP of Marketing is hired. Let's say the fee is $5,000 - with no pre-conditions or limitations to the contract (one could imagine a higher payout, with more limitations such as the candidate needs to be sourced by the NFT holder, 'exclusivity' in the language of the modern day recruiting industry.)
The NFT (or corporate bond?) provides a total liability to the company of $5,000 (minus whatever it is issued for). In return, Acme has just created a global public market for hiring the position.
The NFT could be auctioned in the secondary market to anyone in the world with an internet connection, who would now have a strong incentive to help Acme find the talent it would need to fill the position. The sooner the role is filled, the quickly the NFT owner is paid.
The incentive structure generalizes from recruiting to any discrete task a company needs completed. Hiring a crucial role is an event that likely will happen anyway, so here the incentive provided by the company is designed to speed up the effort, but NFTs could be issued for any range of tasks, whether certain or not.
NFTs will create open global markets for services previously bundled within corporate structures. Organizations of all sizes will temporarily benefit from highly specialized external resources. I have been using corporations as the example here, but that is also likely an anachronism. DAOs could orchestrate the same functions through tokens within a broader community without the legacy corporate structure.
NFTs as micro bonds are just one application. The non-fungibility and low cost transferability of these new digital assets will open a wide range of new uses for individuals and companies globally.