Swarm Fund: The Future Of Investing

Tokenization is a HUGE topic these days, but to be honest, I didn’t realize just how big a deal tokenization was until I interviewed @TheSwarmFund .

I won’t ruin plot for you, but basically, Swarm plans to change all investing forever, and has built the infrastructure to do so.

Please enjoy this interview with Philipp Pieper, CEO of Swarm Fund.

What does Swarm Fund do? Why does Swarm Fund exist?

Swarm initially began as a response to the increased concentration of access and opportunity in the financial landscape over the last three decades.

Following the 2008 Global Financial Crisis – where established institutions and high-wealth investors in fact benefitted from the misfortune of others – and the emergence of bitcoin and the distributed ledger, for the first time it was possible to envision a future where anyone, anywhere, regardless of means, could freely participate in the investment economy.

Swarm is a non-profit that is building infrastructure that enables fractional ownership via tokenization. What this means is that now, investment opportunities that were previously available only to high-wealth individuals and institutions, can access a far wider base of investors, creating a new class of investment asset for individuals, and a new source of investment funds for those seeking capital.

What industries do you expect Swarm Fund to most disrupt?

The most likely disrupted industries will be those who have traditionally been the most exclusive from an investment perspective.

“The potential to access funds that were previously locked behind minimum investment requirements, long-term commitments, complicated legal hurdles and geographic boundaries is sure to be a catalyst for the complete rethinking of the flow of capital and the concept of ownership and governance.”

Specific industries which are already being targeted for disruption are real estate, infrastructure, pre-IPO tech, and impact opportunities. The use cases are varied, and it is virtually certain that we cannot foresee them all. To detail a few potential situations:

  • Chinese Family Offices accessing premium investment opportunities like US venture & real estate.
  • Crypto Insiders hedging their portfolios by diversifying to investments in real assets but without going back to fiat.
  • Retail Investors gaining access to global, regulatory compliant, investment opportunities they’ve never been able to participate in previously.
  • Private groups of investors (both institutional and individual) will be able to collectively pool funds into “wallets” that are transparent, immutable, and decentralized, where the deployment of funds is determined by governance functions, and that also possess the flexibility to grow into publicly offered investment opportunities.

$SWM was built to function as the currency that powers the investment functions being carried out on the Swarm blockchain, being required to be paid as a transactional and operational gas. It also acts as the reward for incentivized third-party services performed on the Swarm blockchain, as in the example of auditing, tax assessment, marketing and other compliance necessary investment-related functions. SWM is not a payments-centric currency like Dash or Flash, which are focusing on solving a different set of problems.

We are, however, big fans of both projects and their community-centric approaches.

In the world of cryptocurrencies/ blockchain, who are Swarm Fund’s primary competitors? Allies?

We very much subscribe to the “all ships rise” spirit of collaboration, particularly given how much opportunity lies ahead for all of us in this space.

Swarm’s structure as a non-profit, coupled with the design of the SWM token model, means we are incentivized to prioritize access. The more our infrastructure is used, the better it is for all involved. To that end, other players in the security token issuance space like Polymath, Securitize, and Harbor could be great partners to Swarm down the line, as we all work to grow this ecosystem.

The focus and structure of Swarm is unique to others in security tokens. We are not designed as a centralized, for profit organization, and we believe no one player in the space can build an end-to-end security token solution that is regulatory compliant. It will take interoperability on standard protocols, and Swarm is bringing those protocols to market in a way that will be beneficial to all participants in the ecosystem.

In the meantime, we’ve found strong alignment and allegiance with so many great projects. Some we are working with directly, others are tackling similar goals collaboratively, others are just good people with shared values. MakerDAO, Dash, Flash, Decred, CityBlock Capital, Decentral, just to name a few.

What are some common misconceptions about Swarm Fund that should be cleared up?

Swarm is not a fund. We know we haven’t done ourselves any favors with the name, which is part of why we’ve moved more and more towards simply ‘Swarm.’ The Swarm in this case is a group of investors who come together to access investment opportunities not readily available in legacy finance. Anyone can join the Swarm and fund investments together, thanks to fractional ownership.

Swarm is not an exchange. Swarm is positioned to support the security token issuance process, rather than trading of security tokens. We believe the scalability of the approach is far higher to integrate with other liquidity pools with user reach and enable them to extend their utility token business models into the security token world. We’ll be sharing this strategy later this month.

How is Swarm Fund improving and innovating blockchain technology?

Every member of the Swarm core team feels strongly about the power of decentralization, and the importance of prioritizing access. We believe the only way to bring investments from the legacy finance world to the blockchain is to do so in a decentralized way, which is why our organization is structured as a non-profit and our infrastructure is designed to be put into the hands of the community, in a way where everyone shares in the value creation.

We’re proud to be innovating through collaboration. The Swarm blockchain is based on Stellar’s protocol, and we’re better for it. Our stablecoin option within Swarm is powered by MakerDao’s Dai, and we’re better for it. SRC20 tokens are interoperable from the Swarm blockchain to other chains, starting with Ethereum.

SCR20 tokens on the Swarm blockchain, with SWM as gas are to DApps on the Ethereum blockchain, with ETH as gas. It’s an ecosystem designed to maximize security token availability in a regulatory compliant way. We think it will be additional collaboration, on Swarm’s infrastructure, which pushes innovation the furthest. Building open infrastructure on top of which others can build their businesses and services is the only way security tokens can scale globally and be compliant with regulations. Swarm’s blockchain will provide the base layer for a the future of investing.

Tell me about SRC20 tokens. Is there a limit to the assets that can be tokenized?

SRC20 is Swarm’s implementation of a protocol for the regulatory compliant issuance, trading and transfer of security tokens.

It is an ecosystem which codifies the rules of participation by all stakeholders in a tokenized economy, being Token Issuers, Investors, AML/KYC Service Providers, Exchanges and Regulatory Authorities. The SRC20 standard will be implemented in the Swarm blockchain as a multi-layered “black box” that only permits transactions (a) between “wallets” that meet the regulatory requirements defined in a “compliance contract” by token issuers, and (b) that successfully pass through a series of checks consisting of pre-defined transfer restrictions.

“SRC20 will provide a transparent, open and evolving data ledger that will be able to qualify any security token transaction as being compliant, and meet the reporting needs of regulatory authorities.”

Other projects have started down the road of tokenizing assets. Few (if any) have looked far enough into the future to understand that the largest hurdles are going to be regulatory, and the most important step in powering the tokenized economy is to build the infrastructure that makes the issuance and trading of security tokens simple and accessible, while being potentially complex “under the hood”.

There is no limit to the number, type or value of assets that can be tokenized. Any asset, real or virtual, that can be conceived of being “owned” and that would benefit from transparent governance can be tokenized and offered as an opportunity for fractional ownership by a distributed cohort of “investors”.

How do you see tokenization evolving and how will the global economy will be shaped by tokenization?

We’re definitely in a nascent educational phase in the development of tokenization, in which its central concepts are still being discovered, defined, and communicated. A moment in time will occur when a critical awareness of the possibilities provided by tokenization becomes mainstream.

While this awareness is already growing at an ever-increasing pace, there is still a sense of hesitation and uncertainty partly due to a lack of clarity around regulation, limited by adoption, and overshadowed by some of the lesser informed negative press which mainstream outlets are propagating. We foresee a global economy that is characterized by greater access to the financial opportunities provided by decentralization and fractional ownership. We see a breaking down of barriers that hindered cooperation across geographical borders by people who traditionally required “trust” to unite with a common purpose.

“Swarm will play a central role in the evolution of tokenization, with the aim of building and growing the decentralized infrastructure that will enable its mainstream adoption.”

What makes Swarm Fund special, different, unique?

We like to say that with Swarm, the future of investing is now. The future of investing is decentralized. The future of investing is democratized. The future of investing is on the blockchain.

Swarm’s differentiators are many. Core to Swarm’s vision is that only a non-profit organization can build the infrastructure required for a ubiquitous network on top of which are built the tools for democratizing finance. Swarm has already iterated on these ideas since its first inception in 2014, giving us a deeper understanding of the regulatory landscape, the technological hurdles, and the markets we need to engage with.

Our clear path towards decentralization is what will keep Swarm as a leader in the long term. We are continuously exploring the ways we can accelerate the governance of Swarm as a whole by its community, coupled with enabling governance over investments as well as their underlying assets.

Core to delivering that infrastructure to the community is the team launching it. Our team is already decentralized, with an organized core of team members and collaborators all over the world. Our team members bring deep experience in finance, tech products, online communities, and management of organizations of all shapes and sizes. The women and men who comprise our team and advisors range in age from 20-60+, hailing from and residing in countries all over the world.

We think this diverse set of experiences and perspectives will keep us focused, humble, and aware as we do our part to democratize investing.

What does Swarm Fund look like in 5 years?

In 5 years Swarm will be a fully decentralized network that works behind-the-scenes to enable the tools for interacting with the security token economy. Swarm Masternodes, continuously rewarded by our 100-year incentive model, will provide the backbone of infrastructure that performs the countless transactions representing fractional ownership of all types of assets.

  • Millions of jointly-owned and governed wallets (groups of individuals) will be established to deploy funds for any purpose.
  • A myriad of blockchains interact with Swarm’s Market Access Protocol to verify and confirm compliant transacting.
  • Marginalized individuals that were previously financially underserved now coalesce into communities of investors with agency, purpose and means.
  • Premium investment opportunities are listed on Swarm’s Invest platform, yet countless more simply interact with Swarm at the blockchain level, self-managing their own fundraising, marketing, and regulatory requirements.
  • AI technology allows for the creation of funds of funds, robo-investing, custom portfolios and fluid asset management via Swarm’s Liquid Democracy.
  • The idea of the Swarm coming together for a common purpose in a trustless environment is fully comprehended and fulfilled.

What’s the selection process for new investment opportunities?

At this stage, the Swarm team has spent a lot of time identifying, vetting, and launching investment opportunities on our infrastructure. In order to bootstrap the platform, validate investment verticals, and drive investor trust and confidence, we’ve played the necessary, but temporary, role of curators. Investment Opportunities wishing to list on Swarm must have experienced teams with proven track records. In some cases this will take the form of an existing private equity fund tokenizing one limited partner (LP) position. In other cases it will be an experienced team starting a new opportunity, and in other cases there will be opportunities to bring the community access to something with established demand, like fractional ownership of Dash Masternodes.

Over time, and this work is already well underway, automation and community governance will limit the need for us as middlemen in this process.

I see Swarm recently announced​ ​support for Dash​ – offering fractional ownership of a Dash masternode. Are masternodes going to be a focus for Swarm Fund?

We wanted to bring the Dash Masternode Token (DMN) to investors because we like and respect the way the Dash community and core team have grown, and we know there is consistent demand from the community for broader access to Dash Masternode ownership. The combination of block rewards and voting rights was a perfect match for Swarm’s infrastructure. Its such a great use case of our liquid democracy voting module.

Where nodes on Swarm goes from here will be driven largely by the crypto community. Our team put together the Dash offering as an example, but anyone could tokenize any masternode. We’d love to see something like EOS, with only 21 supernodes, tokenized on Swarm.

A portfolio is a great idea as well. Someone like yourself could bring that to Swarm! The opportunity for community extension with passive income is huge.

What are the advantages of Stellar’s blockchain over Ethereum’s for Swarm Fund?

Swarm is already running on its own blockchain, which is built as a custom implementation of Stellar.

We recently published a blog on why it makes sense to be built on top of Stellar, here: https://medium.com/swarmfund/how-swarm-is-working-toward-a-more-stellar-blockchain-ffa6a5279f98

To summarize:

  • Stellar has native support for KYC/AML compliance: The Stellar Compliance Protocol: https://www.stellar.org/developers/guides/compliance-protocol.html
  • Scalability – The Stellar consensus protocol allows for faster and cheaper transactions: https://www.stellar.org/papers/stellar-consensus-protocol.pdf
  • Stellar supports assets which can be traded and exchanged with any other: https://www.stellar.org/developers/guides/concepts/assets.html
  • Stellar has a built-in distributed exchange: https://www.stellar.org/developers/guides/concepts/exchange.html
  • Stellar’s Horizon API is a simple interface for querying and sending requests to the network which is very useful for building new applications: https://www.stellar.org/developers/reference/

The main reasons why we selected to run our own blockchain instead of Ethereum’s are:

  • Better control of fees (gas)
  • Governance functions
  • Better control of incentive mechanisms within the Swarm ecosystem
  • Not dependent on Ethereum’s scalability solution
  • Faster deployment time

What is Swarm Fund’s plan for adoption?

Democratizing Investing is an ambitious goal, and building the infrastructure to do it will involve many core constituencies. Before any code was written, long before a token sale, we started by validating product-market fit. Are there investors who would participate in tokenized investment opportunities? Are there funds who would want to list their opportunities to access these investors? Are the benefits of building blockchain based infrastructure differentiated, impactful, and achievable? Can the global regulatory landscape co-exist with blockchain based financial infrastructure? Our research said yes.

For the model to gain traction and ultimately be self sustaining, Swarm will need infrastructure, supply, and demand.

Infrastructure is the most important thing. A viable underlying product, and the structure, token economics, and community to scale it into the future. This is why our largest focus and expense, by far, is on product. Next largest is legal and regulatory. To us, it is about delivery. Delivery of viable infrastructure. Delivery of decentralized infrastructure where others can build with us, and the community shares in the value creation.

The timing for this interview is perfect, as we’re right now taking a huge step to scaling our infrastructure. Swarm Masternodes are being announced this week, charting a course for decentralization of Swarm, and putting into market a very compelling incentives and governance model.

“In addition to generous block rewards, Swarm Masternodes will manage the Swarm Market Development Fund. This Fund’s sole purpose is to invest into security tokens on Swarm, the deployment of those investments will be managed by our Masternodes, and they will be paid 30% of the returns from those investments.”

The other 70% of returns will be put back into the fund, for a lovely compound interest J Curve. We believe this will help kickstart our infrastructure and community.

Then layer on top of this the SWM token model itself, required:

  • For the creation of each new SRC20 security token
  • As Gas for every investment made into each SRC20 security token
  • As Gas for fund operations (1% of AUM for each fund, annually)
  • For all voting and governance on Swarm

With scaled infrastructure and the right community rewards and incentives, the next step is to bring supply. When we launched our alpha in January 2018, we started a pilot to build out our infrastructure with 3 inaugural funds. We knew we would learn a lot, but one of the most surprising things has been the interest people have in bringing supply to Swarm. There has been overwhelming interest from fund managers in tokenizing their assets. Bringing in supply and demand are next, and we’ll keep that strategy closer to the vest for now.

We’re always as transparent as possible, aaaaand we’ve had times where our go to market messaging ends up verbatim on a ‘competitor’s’ website. So we’ll stop there.

How does Swarm Fund incentivize token holders?

The Swarm token is designed to be used to operate Swarm’s infrastructure, in creation of each SRC20, as gas for each transaction, and as the payment vehicle for services on the platform. The design of Swarm is that most of these SWM transactions go directly to other participants in the ecosystem, so everyone is incented to participate.

But to your question, there are three ways SWM hodlers are incented:

  • Stake and operate a masternode. (or buy into a fractional one) and enjoy block rewards PLUS 30% of returns from all funds invested via Swarm Master Fund.
  • Governance. SWM token holders will be rewarded for voting on foundation level decisions.
  • Of course, the buy and hodl scenario is a real one for any token with real utility. There is a fixed supply, and self-sustaining infrastructure is being launched which requires SWM and rewards its use. If you believe demand for SWM will increase as security tokens take off, acquiring tokens to use later could be a way to share in value creation as the ecosystem grows.

How does Swarm Fund deal with privacy, KYC, and AML? Is there a way to invest anonymously?

Private data is stored off-chain to allow us to be compliant with GDPR and other privacy regulations. We are currently architecting our masternode program alongside our Market Access Protocol, part of this involving the separation of personal data from the public blockchain. We will have more on this soon. Due to regulatory requirements concerning security tokens, it is not possible to invest anonymously. Each prospective token purchaser must create an account and go through KYC verification before they are permitted to invest. US residents have a further option to verify their status as an Accredited Investor, which then allows them to participate in all investments.

We work with established service providers for KYC, AML, and accreditation checks.

Swarm Fund has the fiduciary duty of protecting investor capital, at least morally. How does Swarm Fund ensure proper use of investor funds?

Swarm is a provider of technical and legal infrastructure to security token issuers and is more similar to a Fund Administrator in the Hedge Fund world. In this sense it is appropriate to suggest that Swarm has a moral obligation to set policies and processes that ensure investor funds are employed properly.

In this first launch phase of the Swarm platform, when reviewing a new token issuance and fundraising, an internal Investment Review Team undertakes a due diligence process into the personnel and corporate backgrounds involved with the venture. To ensure quality opportunities and establish a pattern of selected investments, we have been focusing on curating opportunities offered by managers with a proven track record, and in most cases, projects with existing revenue streams that need funds to scale.

From a legal perspective, token holders (investors) are further protected by the legal obligations set in each Token Purchase Agreement, which provide the typical protections and avenues for reparations should there be a case for it. As mentioned above, these relationships are persistent even in the case of Swarm as an organization disappearing overnight.

Long term, as Swarm fully decentralizes, one of the responsibilities of the SWM community will be to collectively review and curate investments as they see fit. It is important that Swarm as an organization moves towards a more agnostic position regarding individual investments, without being seen to be endorsing one over another. To replace some of the checks and controls we’re currently doing, we will introduce a reputation model to funds managers and individual projects that will provide a further level of possible review and comparison. Funds that negligently underperform or misappropriate funds will have relevant action taken against them (as defined by the community), including being delisted from the platform.

We are also considering building further functionality that codifies how a group of token holders may propose to replace a fund manager who is considered to not be taking good actions.

How is Swarm Fund taking advantage of current market conditions?

“The message that asset backed tokens offer a way to de-risk crypto portfolios is well received, particularly in a bear market. Additionally, our recent integration of MakerDAO’s Dai stablecoin into Swarm offers a further break from volatility. Now investors can convert into Dai at the time of initial commitment, rather than be subject to the volatility of crypto throughout the rest of the security token’s funding period.”

Soon they’ll be able to optimize this, converting all or part of their investment to Dai when a specific floor or ceiling is hit.

De-risking their crypto portfolio without returning to fiat is a common motivation for many we’ve spoken with in the community. We’re excited to bring this message to the world.

Are the devs compensated at industry standard levels, or better? Is Swarm Fund the only project the devs work on, or do the devs work for other projects as well?

Almost 20 developers work on Swarm; a mix of full time team members, part time devs including graduate student interns, and blockchain devs who work on multiple projects including Swarm. Technology is our largest expense by far, followed by legal, and we don’t see that changing as we build out this regulatory compliant tech. We aim to provide compensation at or above technology startup comp, but with the extra element of tokens, which many are finding more attractive than startup equity.

How is Swarm Fund focused on fair distribution, decentralized coin supply, and good governance?

We are shortly going to announce the Swarm Masternode program, with the Foundation setting aside a total of 20 million SWM tokens to be distributed to Masternodes for processing transactions as well as for deploying funds to investment opportunities listed on the platform, via vote.

Running a Swarm Masternode requires a stake 50,000 SWM tokens, qualifying them for a share in these rewards.

This program serves multiple purposes, an important one being to distribute the large token holdings owned by the Swarm Foundation amongst those who are helping us build the decentralized infrastructure we need to scale. In line with our message of democratizing finance, we are simultaneously launching the Swarm Masternode Token (SMN) – which will tokenize a Masternode – and offer it as an investment opportunity for anyone who cannot afford to stake 50,000 SWM individually.

Masternodes also provide an example of the type of decentralized governance we are adopting, shifting the decision about which funds to invest into from the Foundation to the community.

Currently, due to the large holdings still held by the Foundation, we have a fairly uneven distribution of the token. The top 10% of wallets hold about 97% of SWM tokens. This needs to change dramatically, and we expect masternodes to spark the first significant redistribution.

How is Swarm Fund focused on and developing good governance?

Governance has been core to Swarm throughout our development. We are partnered with SecureVote, a leader in blockchain governance, to build our Liquid Democracy Voting Module, a decentralized stake-weighted delegated voting concept, which is implemented into both Foundation Level and Investment Level decisions. Immediately following the close of the pubic token sale in October 2017, Swarm held the first ever Liquid Democracy vote for SWM token holders to decide on a drip liquidity release schedule.

Going even further, as we also agree and understand that governance will be crucial to the development of blockchain projects, Swarm will incentivize participation its users in all levels of governance, via a reward system, also allowing the delegation of votes to others who may be more knowledgeable regarding specific matters.

The spectrum of governance decisions that the community will be invited to make include, but are not limited to:

  • Swarm Foundation Directorships
  • Masternode Policy Decisions
  • Approval of new Investment Opportunities
  • Changes to Incentive/Reward models