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Structuring and issuance
Correct. Within the smart contract, you define the “pre-tokenization” capital stack structure and then update it according to your token issuance plans.
In theory, 100% of the property can be represented by tokens, however, it is more likely that a property will also have a senior debt layer next to the tokenized part and perhaps even a layer of traditional non-tokenized equity.
In any case, the token structure is very flexible and can accomodate any capital stack structure.
In short, yes, it is possible to structure the tokenization to be debt-like. The following terms in the resolution need to:
- 1.be fixed to a repayment date (mandatory buyback date).
- 2.the buyback threshold needs to be set at 100%, meaning 0 token holders need to agree with the buyback price.
- 3.The revenue based returns should be replaced by a fixed interest rate on total value of all issued token.
Note: at the same time the minimum buyback price is always equal to the primary token offering price.
If the primary lender doesn't strictly prevent silent secondary mortgages, a property with senior debt in place can be tokenized with our protocol.
Our smart contracts hold information of the various layers of the capital stack, which always needs to amount to 100%. For example, a property valued at USD 1,000,000 with an outstanding senior debt statement of USD 700,000 implies that 30% is owner's common equity. If 10,000 tokens are to be issued, the capital stack would therefore look like:
- 1.Cap (tokenization): 10% = 10,000 units
- 2.Senior debt: 70% = 70,000 units
- 3.Junior debt: 0% = 0 units
- 4.Mezzanine: 0% = 0 units
- 5.Preferred equity: 0% = 0 units
- 6.Common equity: 30% = 30,000 units
Note: As a general practice, the pre-tokenization capital stack of the asset is always registered on-chain before any issuance of tokens takes place.
To keep transparency and accountability on a very high level, we suggest issuers register any major changes in the capital stack like debt repayment to develop an on-chain track record.
At Blocksquare we see that maintaining high standards could in time result in the creation of various reputation or "credit scoring" subsystems that might help DeFi lenders evaluate risk exposure.