Creditcoin Q&A | December 2023

This month we discuss AI for Creditcoin, how tokenization can boosts liquidity, and wCTC support...

Creditcoin Q&A | December 2023

Welcome to the regular Q&A, where we answer the communities most burning Creditcoin questions!

If you'd like to have your question answered next month (and win some CTC for getting selected), then make sure you follow us on Twitter and tap the bell icon to get notified when the Q&A survey goes live!

Otherwise, feel free to drop into the Discord, say hi, and ask any questions you may have. And in case you missed it, check out our recent Creditcoin 2.0+ highlights to discover more about the protocol's biggest upgrade yet. Let's jump in.

In what ways can tokenization of real world assets enhance liquidity in traditionally illiquid markets?

It’s a great but complex question. I’ll start by giving a quick introduction to the topic, outline the main advantages, and finally, highlight some important caveats we need to remember.

For the best answer, make sure you check out our full RWA guide here:

At its core, tokenization is the process of converting rights to an asset into a digital token on a blockchain through the use of both legal and technological wrappers.

Illiquid markets, on the other hand, mainly refer to asset classes that cannot be easily sold or exchanged due to a number of reasons, for example, associated exchange fees, minimum asset valuations, or just market complexity. Examples might include real estate, fine art, and certain types of private debt.

Now, when talking about the advantages of tokenization, the most important concept to understand is asset fractionalization, or put simply, how tokenization allows for an asset’s ownership to be broken down into ever smaller fractions.

It’s not hard to see how this can be helpful in illiquid markets. Take a Picasso painting for example. Buying an entire Picasso is likely out of many smaller investor’s price range. However, buying a fraction of a Picasso, say just 1%? Now we’re talking business.

By reducing the capital requirements to partake, asset tokenization and fractionalization can thereby help boost liquidity in illiquid markets.

There are a number of other advantages too:

Reduced Settlement Fees: With blockchain, transactions can be executed swiftly and securely, reducing time and costs. This efficiency attracts more participants, thereby increasing liquidity.

Global Accessibility: The blockchain operates globally. By tokenizing assets, you're not just opening the doors to local investors but to a worldwide audience, boosting market liquidity.

Enhanced Transparency and Security: One of blockchain's key features is its transparency and immutability, reducing the risks of fraud and mismanagement. This ensures trust and encourages more market participation, which in turn increases liquidity.

As we can see, tokenization offers a variety of real-world asset markets some pretty huge advantages when it comes to improving liquidity. However, as with most things, the real answer is actually a bit more complicated.

Whilst this all sounds great in theory, there are risks. We’ve outlined some key ones below:

  • Regulatory Challenges: Diverse and evolving local regulations conflict with the global nature of blockchain, creating a complex legal environment for asset tokenization.
  • Scalability and Interoperability: Blockchain's limited scalability and cross-chain interoperability can restrict tokenized asset markets to specific chains, hindering liquidity.
  • Security Concerns: Despite robust security, blockchain is susceptible to cyber threats, requiring continuous advancements in security measures to protect tokenized assets, potentially spooking investors.
  • Limited Investor Rights and Control: Tokenization democratizes ownership but often limits investors' decision-making power and control over assets.
  • Last Mile Problems: Ensuring digital assets are accurately backed by real-world assets presents challenges, necessitating off-chain verification and regulatory frameworks, which introduce centralization risks.

Are there any plans to introduce AI (artificial intelligence) into Creditcoin’s business sectors in the future?

Artificial Intelligence (AI) is a fascinating technological advancement with the potential to radically alter the fabric of the global economy (much like blockchain itself). For us, what’s even more exciting is the vast opportunities for synergy between AI and distributed ledger technologies such as blockchain.

In a world where AI is increasingly churning out bad information (‘hallucinations’), providing misleading answers, or being manipulated to harm users, blockchain's inherent security and cryptographic capabilities can provide a great solution to the trust-related challenges of AI.

The synergies go far beyond trust too. Advanced data collection and analysis, simplification of development tools and user interaction, streamlining of education, the possibilities really are endless.

However, at Creditcoin, our primary focus remains on delivering robust blockchain infrastructure. Our goal is to establish the technological foundation for a new global economy that is powered by AI.

Many of our institutional partners have already integrated machine learning technologies (AI) into their credit risk assessment models. This synergy is evident: AI can predict credit risk (this works best when using reliable data), while blockchain can encode and enforce agreements (and also provide cryptographically reliable data to the AI models themselves).

While we are actively exploring ways to leverage AI to enhance the broader Creditcoin ecosystem, such as improving user information and query tools, it's important to note that the direct integration of AI tools into the Creditcoin protocol is not a current development priority. Our core mission remains centered on building a strong blockchain infrastructure.

How does Creditcoin’s token burning system work?

Creditcoin has a simple fee-burning mechanism in place. Whenever CTC is spent as a transaction fee, it is burned and permanently removed from CTC’s total supply. This means that whenever a loan transaction is recorded on Creditcoin, the total supply of CTC is being reduced.

This doesn’t mean that Creditcoin is necessarily net-deflationary, as this depends on the relative rate of token issuance (CTC supply growth) vs token burning (CTC supply reduction). As a general rule, the more transactions being processed, the more deflationary pressure there will be.

What are the main advantages of this?

Scarcity Increase: By permanently removing a certain number of tokens from circulation (i.e., 'burning' them), the total supply of the token decreases. This scarcity can potentially increase the value of the remaining tokens, assuming demand stays the same or increases.

Inflation Control: By reducing the total supply, burning can help maintain a healthy balance of CTC supply by mitigating the token’s inflationary pressure, much like a central bank controlling the money supply.

Is the WCTC <-> CTC swap tool just a temporary solution?

Long-term, it is likely that the swap tool will be deprecated once its primary purpose (facilitating mainnet liquidity) has been better achieved through other means.

In the short term, we will maintain the swap tool as long as required to ensure users have access to CTC (mainnet) trading options.

About Creditcoin

Creditcoin is the world’s leading real-world asset infrastructure chain, with over 3 million credit transactions recorded to-date. By matching borrowers, lenders and investors on-chain, the protocol is paving the way for a new generation of globally interoperable credit markets.

Having integrated with various fintech lenders and connecting them directly to global DeFi investors, the Creditcoin network has helped thousands of borrowers, businesses, and investors secure capital financing, build credit history, and make global RWA investments.

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