Financial systems are integral to the daily lives of individuals worldwide, serving as the foundation for meeting essential economic needs. To address these demands, structured processes and systems have been established, enabling the exchange of resources through markets driven by supply and demand.
These markets which include banking systems, stock exchanges, and foreign exchange markets are collectively known as capital markets. In traditional capital markets, Active participation in capital markets requires monetary capital: the financial capacity to exchange assets for value or acquire assets through monetary transactions.
Historically, capital markets operated as centralized entities, with exchanges and financial institutions serving as gatekeepers of access. However, the landscape has evolved significantly, towards distributed markets now termed as internet capital markets where decentralized finance platforms and blockchain-based systems facilitate broader, yet still stratified, participation.
It's a movement from a rigid capital market to an open market participation.
In every market, depth of liquidity matters, but certain constraints were inevitable in this era such as:
Slowly, capital markets evolved from its centralized form to enabling a system where individuals could:
With this, the capital market became more distributed but this was the first problem which it solved. But forever since ideations would always roll out, since people would always create,have absolute control over what they can trade and when they could trade, people would always bet on other participants of these markets who build products that would possibly reach product market-fit (PMF). Different aspects and entities took part in this.
To reach distribution which is in contrast to traditional market, various forms of investing into products were introduced:
ICO Sales: This model gained significant traction in 2017. Fundamentally, it provided a robust framework for broadening access to investment opportunities. Nonetheless, it faced notable challenges, including legal oversight stemming from varying regional regulations which limited individuals in countries with constraining jurisdictions.
Furthermore, margin requirements were also a substantial barrier to individual participation in these offerings as it was more equivalent to buying into a private round but your size relative to the margin size of other participants matters before you can get an allocation.
Private/Public Sales: Private investment opportunities of this sort are often circulated within exclusive channels on platforms such as Telegram, requiring significant social capital for participation. While this enables distribution as well, access is constrained by the need for social influence. Public sales, by contrast, frequently involve purchasing at peak valuations, with retail returns typically averaging around 1.5x
Different tiers of investment at different valuations and stages (series A,B, etc.): This as the upper chamber of the echelon are for individuals with higher monetary value.
The upper tier of this structure is reserved for individuals with substantial financial resources. While the funding secured at these stages can support product development by enhancing burn rate and extending runway, the subsequent token distribution typically offers greater potential benefits to the public compared to the associated risks.