Verifiable Credentials And Price Discovery Mechanisms In Private Markets

Verifiable Credentials And Price Discovery Mechanisms In Private Markets

Verifiable credentials (VCs) are digital certificates which can be used to confirm the authenticity of information regarding an individual, organisation or asset. These credentials are securely stored and can be presented and verified in an instant. Verifiable credentials help achieve cryptographic trust while maintaining privacy. VCs can be applied in various ways:

• Authentication Of Asset Ownership: Our VCs are compatible with various trusted platforms, enabling certification of assets including trail of ownership. These credentials can be cryptographically verified by any party, ensuring that the ownership claim is legitimate and reducing the likelihood of fraud.
• Streamlining Asset Transfers: During asset transfers, VCs can be used to verify the identities of the parties involved, as well as the authenticity of ownership claims. This significantly reduces the time and cost associated with the transfer process, as it eliminates the need for extensive paperwork and third-party verification.
• Resolving Disputes: In situations where property ownership disputes arise, VCs can serve as tamper-proof evidence of ownership history. The use of VCs expedites the resolution process by providing clear, verifiable records of ownership, thus reducing the duration and complexity of litigation/mediation.
• Enhancing Transactability: By employing VCs, all parties in a property transaction gain access to verified current information. This transparency enables faster business decisions, such as those involving property-backed loans, home loans, credit, and more.
• Integration with Smart Contracts: VCs can be linked with smart contracts to automate agreement execution based on verified conditions. For example, a smart contract could automatically release payment upon verifying a property transfer credential, ensuring all parties meet their obligations.

Price Discovery

Real-time valuation of property investments becomes possible through tokenization, where market trades of property tokens provide continuous price discovery rather than relying on infrequent, expensive professional valuations. Traditional real estate investing suffers from opaque pricing due to infrequent transactions and limited market data, making it difficult for investors to determine fair value and for property owners to optimize timing of sales. Tokenization solves this by enabling more frequent trading of whole property units in liquid secondary markets, providing transparent and accurate property valuations based on actual market demand rather than theoretical appraisals.

Private Markets

Private markets, which encompass investments in private companies, venture capital, private equity and even real estate, have witnessed impressive growth in recent years as investors seek higher returns and diversification beyond conventional public markets. However, despite their growth, private markets remain inaccessible to many investors. Two of the most significant obstacles preventing private markets from becoming mainstream investment vehicles are the lack of verifiable data and inadequate price discovery mechanisms. These challenges impact the transparency, accessibility and overall attractiveness of private markets, making them a complex environment for average investors to navigate.

Lack of Verifiable Data in Private Markets

A critical issue hindering participation in private markets is the lack of verifiable and readily available data pertaining to investments. Unlike public companies, which are legally required to disclose financial data on a regular basis, private companies face fewer regulatory mandates to do so. This data opacity limits the ability of investors to make informed decisions and increases the risk of misinformation. In private markets, data regarding a company’s financial health, growth projections and risk factors is often disclosed selectively forcing investors to rely on limited information made available by the firms themselves. This opacity, in addition to restricted liquidity, not only limits investor confidence but can also lead to mispricing and valuation errors.

Further, private market data is often inconsistent in format and quality. Private companies use various accounting standards and valuation methodologies, making it difficult for investors to compare companies or conduct thorough due diligence. Unlike public markets, where standardised financial statements and disclosures are regulated by central authorities, private markets lack a governing body for disclosure, leading to significant data inconsistency and unreliability.

For institutional investors or those with significant resources, there are ways to partially mitigate this issue. These investors often have the capital and connections to gather insider information or conduct extensive due diligence. However, for retail investors, this lack of standardised and verifiable data limits their investment abilities. Additionally, the lack of verified data leaves the door open for potential fraud or misrepresentation, which undermines trust in the market and discourages new entrants.

Inadequate Price Discovery Mechanisms

Inadequate price discovery is another major issue which tarnishes the appeal of private markets. Price discovery refers to the process by which buyers and sellers arrive at an asset’s market price. In public markets, price discovery is efficient and instantaneous, driven by high trading volumes and constant market information flow. Public stock exchanges allow participants to buy or sell shares at transparent prices, with price fluctuations reflecting real-time supply and demand. However, private markets do not have comparable mechanisms in place.

Private companies are not frequently traded, and when transactions do occur, they are often negotiated privately between investors. These transactions are typically conducted with little or no public visibility, leading to prices which may not reflect true market values. The lack of a liquid secondary market for private assets exacerbates the challenge, as price changes only become apparent during rare events like funding rounds, acquisitions or initial public offerings (IPOs). Consequently, valuations in private markets can be influenced by the specific objectives or expectations of investors involved in these transactions rather than a broader market consensus.

The implications of inadequate price discovery mechanisms in private markets are far-reaching. Without reliable pricing information, it becomes challenging for investors to assess the value of their investments accurately or to determine when to buy or sell. For instance, in venture capital, investors often rely on a startup’s “unicorn” status or its valuation based on the last funding round rather than on real-time, market-driven pricing. This approach can lead to overvaluation, and when a company eventually goes public or seeks additional funding, the actual market price may differ significantly from its private valuation, potentially leading to substantial losses for investors.

Public markets enjoy a liquidity premium which compensates investors for investing in securities with low liquidity. For this reason, public markets (with set standards for data verifiability and valuation, along with higher levels of transparency) are much more liquid than private ones. For instance, owners can often demand a higher price for an asset than its fair value, due to the presence of other takers for the same. Conventional private markets on the other hand, often carry an illiquidity discount which leads to investors losing precious money. .e.g. In real estate, it is very common for people to slash property prices because of infrequent updates to circle rates by the government. Also, black money, fear of property disputes/bad papers and a lack of transparent data around transactions are all factors which lead to bad deals. 

Addressing These Challenges

Elysium has emerged with a solution which tackles the issues discussed thus far. Powered by blockchain technology, the Elysium platform allows investors access to aggregated private market data, enabling improved decision-making. Cumbersome processes pertaining to proving identity and validating complex assets like property and funds have been made swift and seamless courtesy of standardised verifiable credentials. Both people as well as assets can be instantly authenticated, their records shared with any counterparty while remaining tamper-proof. 

From complex property reports to simple identity checks, Elysium has formed a network of trusted validators issuing verifiable credentials; a secure ecosystem where proving eligibility and completing transactions is effortless. 

Investors in private markets now gain comprehensive due diligence performed by accredited third parties, enabling efficient price discovery. This platform enables investors to buy and sell private securities within a liquid marketplace which makes for the kind of price discovery seen in public markets. By way of instant verifiability of data through VCs and on-demand due diligence and price discovery reports which can be shared with investors, the Elysium platform unlocks a host of new financial possibilities. Through trusted fintech innovations, the firm is conferring higher accessibility and reliability on private markets around the world, transforming the landscape of alternative investments.