Transcript:
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Mark Eckerle:
Hello, listeners, welcome to this episode of Cryptonomix. Before we jump into today’s discussion, please keep in mind this recording is for general education and is not intended to constitute investment advice. Any opinions expressed are those of the participants and do not necessarily represent those of Withum. In the constantly ever evolving landscape of crypto, there always seems to be new financial instruments and concepts continuing to emerge. One such innovation that has been around for the last few years and gained a decent amount of traction is the concept of token warrants, a fusion of traditional finance derivatives and the decentralized nature of blockchain tokens. Token warrants bring a new dimension to the world of cryptocurrencies, offering unique opportunities for investors, traders, and project teams. Hello everyone, and welcome back to this episode of Cryptonomix, brought to you by Withum. As always, I’m your host, Mark Eckerle, and today’s episode, as you can probably tell, we are diving into token warrants.
Mark Eckerle:
This episode is to really serve as your comprehensive guide to understanding and utilizing these crypto based warrants. In this episode, while diving into the world of token warrants, we explore their definition, mechanics, some use cases, and potential advantages and risks. So first, let’s understand what they are. A token warrant is a financial instrument that grants the holder the right, but not the obligation to buy or sell a specific amount of a cryptocurrency token at a predetermined price within a specified timeframe. This concept draws parallels to traditional warrants in the stock market, which provide investors with the right to purchase a company’s stock at a fixed price before a certain expiration date. However, token warrants leverage the transparency, security, and programmability of blockchain technology to help offer unique features and other possibilities. So, diving into the mechanics of what token warrants are, it’s really made up of about four components.
Mark Eckerle:
One, exercise price, two, expiration date, three, token quantity, and four, blockchain execution. So what does that all mean? For exercise price, the exercise price is also known as the strike price, which is the predetermined price at which the warrant holder can buy or sell. The underlying token, this price is fixed when the warrant is issued at grant date and remains constant throughout the warrant’s lifespan. For the expiration date, all token warrants have a specified expiration date beyond which the warrant becomes null and void. This deadline serves as motivation for the warrant holders to exercise their rights before the opportunity window expires. Or if it’s never in the money, then it wouldn’t be advantageous to exercise their right within the specified time range. Most commonly, like we see with traditional warrants, we see an expiration date of around 10 years from the date of grant, but this is always subject to the issuer.
Mark Eckerle:
Just for context, that’s what we typically see. Now, the third component is the token quantity. Each token warrant specifies in the terms the quantity of the underlying token that can be bought or sold upon exercising. And then fourth, understanding the blockchain execution and what protocol the token will be built and or launched on is key token warrants are commonly programmed as smart contracts on blockchain platforms such as Ethereum, for example. These smart contracts automatically execute when predetermined conditions such as the exercise price being reached are met. But it’s important to note that not all token warrants that are issued must be done via smart contract. That is just something that we commonly see as well, where it makes the execution of the token warrant a little bit easier on the users as well as the company. So let’s understand some of the use cases of token warrants.
Mark Eckerle:
We see there are four core uses of why token warrants could be or would be beneficial and issued by a company one investment purposes, two risk management, three, liquidity provision, or four as project funding. So for investment and speculation purposes, investors can use token warrants, speculate on the price movement of particular cryptocurrency without actually owning the asset by purchasing warrants. Investors can potentially profit from price increases or decreases without committing significant capital upfront. As it relates to risk management, token warrants can be utilized as a hedging tool to mitigate risk. For instance, a cryptocurrency project team could issue warrants to lock in a certain price for their tokens, thereby protecting themselves against the market volatility. As a liquidity provision, warrant holders who believe in the long-term potential of a cryptocurrency asset can provide liquidity to the market by offering to buy the tokens at a fixed price.
Mark Eckerle:
However, at a later date, this can stabilize the tokens price and enhance market liquidity. And then finally, as a means for project funding, cryptocurrency projects can issue token warrants as a means of fundraising or as a add-on benefit to traditional financing rounds that we see with fiat currency. This approach allows projects to raise capital without immediately selling their token, giving them more control over their token circulating supply. Additionally, when you think of the add-on benefit, we have seen investors and companies grant token warrants on the basis of a potential future token to be issued before it’s even created. This concept, while it is very, extremely novel, gives investors some potential early access to a token if and when it were to ever be created in the future. There’s no obligation on the company to create that token at a future date. It’s again, one of those add-on benefits that we see for investors that if a company is potentially diving into the crypto industry, could be a early access to that project’s token.
Mark Eckerle:
Now, let’s understand the advantages and risks of this financial instrument. So some of the advantages include flexibility, price protection, and market efficiency. For flexibility, investors have some flexibility as they can potentially profit from price movements without owning the underlying asset. If the warrant is in the money with price protection, warrant holders can secure a favorable price for buying tokens, protecting themselves against potential future price increases, and with market efficiency, token warrants can enhance market efficiency by adding liquidity and providing price discovery mechanisms. Conversely, some of the risks kind of go hand in hand with the advantages potentially. For investors, the price volatility, it’s a, it’s a inherent risk. Also, regulatory uncertainty and smart contract risks. So for price volatility, the volatile nature of the cryptocurrency market can lead to significant risks for warrant holders as price fluctuations may result in unrealized losses, and that token may ultimately never end up in the money.
Mark Eckerle:
So you’re kind of playing that, that hedging game. For regulatory uncertainty, as with many aspects of the cryptocurrency space, regulatory uncertainty could impact the issuance and trading of token warrants as well as the future, the future of the project and or token. Um, we’re continuing to see the regulatory involve regulatory environment evolve, but the future is always unknown. So that’s one of those risks, risks that we commonly see as it relates to the digital asset community as a whole. Then finally, smart contract risk. So token warrants typically rely on smart contracts and vulnerabilities or bugs in these contracts could lead to unintended consequences. That is one of the things when you’re working with technology while you’re removing the human error component. There’s always a technological risk that could be embedded with some of these smart contracts. In conclusion, token warrants introduce a very novel approach to combining traditional financial derivatives with the technological innovation of blockchain technology and cryptocurrencies.
Mark Eckerle:
As the cryptocurrency ecosystem continues to evolve, token warrants offer investors and project teams unique opportunities for speculation, risk management, liquidity provision, fundraising, all the things we previously mentioned as advantages. However, like any financial instrument, they come with their own set of advantages and risks that participants must carefully consider As the market matures and regulatory clarity improves, token warrants could play a significant role in shaping the future of decentralized finance. Thank you everyone for listening to this episode of Cryptonomix to help better understand the complexities of token warrants, you’d like to learn more about Withum’s Digital Asset Practice, please visit our [email protected]. That’s W I T H U m.com. Thanks everyone and have a great day. All views expressed in this podcast by Mark Eckley or his guests are solely their opinions and do not reflect the opinion of Withum. This podcast is for informational purposes only.
