tokenize/acc
Austin Adams
Whetstone Research
austin@whetstone.cc

Figure 1: A typical Kansas Blue Sky from the Volland Store in Alma, Kansas. In 1911, Alma was
the birthplace of the Blue Sky Laws, the precursor to modern securities laws. The Volland Store,
where this photo is from, is around an hour from where I grew up and is currently run by a friend
of mine from college.

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Summary

Markets have evolved with technology over time. To date, the internet has had the greatest
technological impact by lowering barriers to connect, interact, and utilize markets. Early pioneers
leveraged the Internet to lower barriers to initial offerings, which were previously gated to only
investment banks. Internet-based exchanges, such as the Uniswap Protocol, are the next natural
extension of this historical pattern, and the future of finance will be built upon them.

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An Intro to Internet DPOs

In December 1995, Spring Street Brewery, named after the same street that is now one of the
crypto-hubs of New York, raised $1.6m in a direct public offering (“DPO”) to support its growth, a
first of its kind offering.

The offering was completed via a prospectus on the internet with buyers literally mailing checks
with signed forms to purchase shares. Despite the onerous process, the brewery had significant
uptake, with users from around the world buying shares of the fledgling micro-brewery.
Even after the DPO, Spring Street Brewery noticed significant demand for its shares and
realized it could set up a secondary market to trade them. One of the creators of Spring Street, a
Harvard-educated securities lawyer named Andrew Klein, started Wit-Trade - a clearing house to
facilitate its DPO and the infrastructure needed for secondary market trading. Utilizing an online
bulletin board, trades were matched over email, showcasing an early version of a central limit order
book (CLOB) two years before CLOBs were approved for trading on the NASDAQ.
Over the next few years, Wit-Trade supported several offerings over the internet, including
MicroStrategy, the (then) Cleveland Indians baseball team, and 1-800-Contacts, all of which
democratized their offerings to include internet users on their cap tables.
While Wit-Trade improved the existing IPO model, which only allowed investment banks to
take part in the offerings, there were a few key problems with the model.
First, the limitations of financial technology at the time meant Wit-Trade had to custody both
funds and shares for all users trading on their platform. This meant Wit-Trade was a central point
of failure for the entire system, had no safeguards, and could not be audited easily.
Second, this structure lacked significant liquidity, as there was no sophisticated online exchange
or access to a large online capital base. For context, this was two years before PayPal opened its
doors as one of the first online payment processors.
Klein, the creator of Wit-Trade, said the main reason for creating this innovation was to lower
fees. He took a $5,000 fee instead of the 7% of funds raised that underwriters took. For context, if
an offering raised $100m, then underwriters take a $7m fee. While the cost of trading (the spread
and brokerage fees) on online exchanges has plummeted by more than 80% since 1996, underwriters
have continued to take a 7% fee on each dollar raised from IPOs from then until now.
However, there is an additional 20% loss that the average IPO takes from underwriters. Underwriters have a structural incentive to underprice IPOs, so the initial offering generally captures less
value than the market clearing rate for that firm. This underpricing results in around a 20% loss for
companies compared to a fair market value, which is an indirect form of underwriter compensation.
This loss is driven by a minority of IPOs which lose substantial value.

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Figure 2: Source: Initial Public Offerings: Underwriting Statistics Through 2023 by Jay R. Ritter

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Failure of IPO Market Structure

Crypto-based markets take an even larger cut. Although the rates vary from exchange to exchange
and from token project to token project, Binance can charge 8% of the total supply1 , which is much
more than the 7% gross spread taken by traditional underwriters, as the total supply of the token
is not sold during the listing process. The gross spread is only taken on the funds raised in the IPO
process, meaning that “gross spread” from a Binance launchpad would be around 40%. If $100m in
tokens were hitting the market, then Binance would be taking a $40m fee.
In traditional markets, fixed costs from regulatory overhead and centralization of underwriters
have significantly slowed down the number of IPOs2 . These barriers disproportionately impact
smaller companies, who are less able to bear the burden of regulatory costs and struggle to attract
underwriters (who prefer to support fewer but much larger IPOs).
Additionally, companies no longer need to IPO to raise funds using their equity. Non-bank
private credit, which allows companies and individuals to underwrite their loans with private shares,
has exploded in recent years. As a result, there is less need for founders and companies to raise
capital by selling equity, instead preferring to collateralize it. This gives less access to users to invest
into products they care about and want to support.
Using this product, companies can continually capture the upside of their private equity until
there is no longer any benefit (or they cannot roll their debt any longer). This allows companies
Some online commentors argue that this is not an accurate picture, but there is evidence of single digit commitments
for the launchpad (5.5%). This is not just done by Binance, but Binance is the largest/most critiqued centralized
exchange.
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Other authors argued that the impact of the regulatory burden on small IPOs is overstated. They contend that a
continued desire for MA, a structural shift in the economy for centralization, and the centralization of underwriters
may be the primary drivers of the lack of IPOs.
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to delay their IPO until they can only issue on public markets, effectively ensuring that private
markets will have structurally higher returns than the public markets.
A key question is: Are IPOs even worth it? For employees, they clearly are. The ability to sell
these previously illiquid assets gives employees more capital. Well-capitalized employees are much
more likely to launch startups after their firm IPOs, which grows overall innovation and redistributes
valuable human capital to new firms in the broader economy.
For companies, raising money via public markets is beneficial, because subsequent offerings are
both cheaper and more accurately priced. Additional offers are executed at a near-market price
(after the new share issuance filling) and thus lack this previously discussed systemic underpricing
(around 27%)3 .
Literature also shows that raising relatively more money via public markets (with all else equal)
likewise increases the subsequent liquidity of that product, the probability that the company remains
operating, and the value captured by companies/employees for issuing equity.
All of this is to say that the underlying IPO market structure is fundamentally broken despite its
benefits for society and companies, because of underwriter incentives, regulatory burden, and broader
economic market changes. However, all of these issues hastened by path-dependent structural failures
caused by skeuomorphic adoption of technology in financial markets.
Financial markets have mostly innovated on small stepwise changes based on the current
technology at the time, with leaps coming during times of crisis4 . This generally means that bad
market structure that was previously optimal may be surprisingly Lindy.

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What are we to do?

A key benefit of onchain financial markets is that they allow nascent financial technology to flourish
and overtake incumbents. Creating abstracted, simple, and standard base layers like Ethereum,
tokenization standards, or the Uniswap Protocol allows builders to create on top of them as opposed
to reinventing the standard every time a new use-case is introduced. These abstractions and
standards supercharge innovation, which closes the innovation cycle, leading to more rapid market
feedback.
Two examples are pool-based over-collateralized lending (like AAVE and Compound) and
automated market making (like Uniswap Protocol), which were first-principles approaches to desired
actions in financial markets (lending and exchange of assets, respectively). These buck the slow and
iterative innovation in financial markets by placing financial primitives on a more even playing field.
Doppler is the next step in the evolution of blockchain financial structures. Just as automated
market makers and over-collateralized lending removed middlemen from exchanging and lending,
Doppler allows projects to bootstrap liquidity without the need for middlemen or market makers solving the issues identified with both DPOs and IPOs.
In a financial system where Spring Street Brewery and Wit Trade weren’t plagued by technological
limitations, their business could have taken off even faster than it did. When underwriters aren’t
There are also marketing benefits, as the IPO process brings significant eyes to a company, but the internet has
decreased the marketing benefits from an IPO, which is an additional reason for the lack of IPOs.
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A few examples of this are
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• Check 21 which approved electronic checks due to transportation fluctuations as a result of 9/11.
• Dematerialization acceleration in response to Hurricane Sandy flooding a securities vault

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taking 27% – or even 40% in the case of Binance – of a project’s capital, founders have better
liquidity to invest in their talent and technology. Providing an improved system of offerings keeps
the important legacy of equity incentives for employees and favorable liquidity standing, while
ensuring that the opportunity to invest doesn’t only live with private capital.
The broad tokenization of financial markets will help solve standardization issues that have
plagued traditional financial markets since their inception. It also fully realizes the vision of
democratizing access to public offerings that started with the dawn of the internet.
DPOs in the 1990s were a first attempt at rethinking issuance by decentralizing issuance
marketing (the roadshow) and offering shares at the same price that investment banks traded for
them. The Wit-Trade team was just limited by the technology at the time.
However, a 2004 piece looking back on DPOs stated that a “bona-fide internet exchange for
offering and exchanging Internet DPOs” is “one key to achieving broader use of DPOs”. As an
industry, we should accelerate towards that future by making it simpler and faster to create and
compose tokenized assets.
We believe that onchain decentralized exchanges are the definition of “bona-fide internet exchange”
and that the future of finance will be built on top of them.

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