Is 2022 Year of NFTs and Fractional Ownership? -Private Aviation POV
Wishing everyone an incredibly Happy and Prosperous 2022. In an earlier post, I had discussed the steps to take to be successful in implementing transformational projects especially those involving blockchain. Click here.
The intention of this post is to explore the application of “fractionalization and tokenization” to enterprise use cases. At Chainyard, we help customers navigate concepts, educate, embrace, and adopt the technologies to solve their use cases.
Recently, I was at a social gathering with a friend who runs a private charter aviation enterprise. They have light business jets that fly on premium profitable routes. Travelers can buy flying hours and use them at their convenience subject to seat availability.
There are several private aviation businesses, and a simple search can produce a lot of results. Flexjet offers both fractional ownership and a jet card program. Jettoken is a membership based charter flight business, operates a fleet of light aircraft and offers “jettokens” for fractional ownership. Sentient offers Jet Cards that lock blocks of flying hours and assures availability to travel with 24 hours’ notice.
Most of these companies have survived the pandemic due to the flexibility, privacy and safety they offer elite travelers. These companies follow traditional business approaches that can be rigid and inflexible, and their business models vary but some common themes appear:
- Fractional ownership in the asset’s business
- Cards that lock in blocks of hours
- Pay-as-you-go
- Added concierge services and leisure destinations
Now this is a perfect use case for crowdfunding through token offerings and fractional ownership using public blockchains and decentralized exchanges.
Basic Concepts
Assets
An asset is anything of value and can be physical like a computer or digital like a piece of music. Some assets depreciate over time and others appreciate. Two assets of the same family may have different value. Assets can be classified as fungible or non-fungible.
A Fungible Asset is one where the asset is interchangeable with another asset or assets with identical value. For example, a $10 bill has the same value as $1x10 bills.
A Non-Fungible asset is one where the asset has unique attributes and cannot be substituted with another asset having identical characteristics or value. Both physical and digital assets can be non-fungible. For example, an identical TaylorMade Stealth driver used by Tiger Wood is not the same as another and will have more value than the one used by anon.
Fractional Ownership
Assets may be too expensive for any single investor to own, hence fractionalizing the asset ownership allows it to be affordable to ordinary investors. The asset is collectively owned by all fraction owners and its value is the total value of all the fractions. Obviously, if a single investor intending to own the asset must own all the fragments associated with the asset.
Blockchain
A blockchain is a democratic-decentralized p2p technology platform that provides a secure transparent and immutable record of an asset’s life cycle. Public blockchains support the notion of tokens via smart contracts. The most common standards advanced by Ethereum are
- ERC 20 — A contract that enables the minting and governance of fungible tokens
- ERC 721 — A smart contract that enables the minting and governance of non-fungible tokens (NFT). A minted ERC-721 token is unique and can have a different value than another token from the same Smart Contract. This type of token is associated with non-fungible assets.
There are variations and extensions to the two smart contracts that one can research and use.
A Token is a piece of data minted and managed by an instance of the smart contract. Tokens have an id. Fungible tokens belonging to the same contract instance have the same id e.g., ETH, BNB, DOT. Non-Fungible tokens each have their own unique id.
Publicly written articles appear to associate NFTs to digital collectibles whose value appreciates as interest grows in the asset and investors are willing to pay a premium to buy them. However, ERC-721 does not have any implied restrictions for tokenizing non-fungible assets of any kind including those that depreciate.
How can this apply to Private Aviation?
A plane is a non-fungible asset and can be modeled and tracked as an NFT using an ERC 721 contract on an EVM supported blockchain. Typically, this is done by setting up a non-profit or a private entity that has ownership of the asset. The token can help track ownership and provide transparency about the asset’s life cycle such as flight history, maintenance logs and profitability.
The token can be traded on NFT marketplaces, DEX’ (Decentralized Exchange) such as Uniswap or Pancakeswap, and its value would be determined by numerous factors including its life cycle, the travel industry, the market for personalized travel, price of jet fuel and new technology. The value of a plane depreciates over its life and must be factored into the valuation of the NFT. Sometimes, its value may appreciate as in a resale when demand for private travel is high and flying capacity is limited.
Fractional ownership — Given that an average plane costs anywhere from 2 million to 4.5 million USD, one could take tokenization further. Fractional ownership is an approach whereby the business entity can mint fungible membership tokens equivalent to the asset value and make available to a vast pool of investors.
Traditionally, investment in high value assets has been outside the realm of the small investor. Liquidity is another issue as investor’s money is locked up in an asset that is not easily liquidated.
For example, the total plane value of 2 million USD could be minted into 10,000 MYCOMPANY membership tokens with an issue value of $200. Investors in this model would become members of the business entity like how an HOA operates where all the residents within the neighborhood are members of the HOA and operate within the bylaws. Additionally, these tokens could be made available to investors on an EVM supported DEX and blockchain.
How would the token holders’ benefit?
- First, the investors would earn dividends based on the profits generated by the plane. Like a traditional business, the business entity would oversee the business which includes travel booking, flight operations and aircraft maintenance.
- Second, investors would be able to trade and transfer the tokens within the DEX and hence, they have liquidity at will. This gives them the flexibility to buy as the price becomes attractive or and sell when the price appreciates.
- Lastly, token holders could participate in liquidity pools on the DEX to earn fees, trading or swapping tokens based on price fluctuations, and staking tokens into lending protocols to earn interest know as yield farming. Many articles on this topic can be found in Medium.
Utility Tokens for Business Operations
Tokens could play a role in the operations aspects as well. ERC 20 tokens could be minted as utility (e.g., FLYTOKENS) tokens pegged against a stable coin like USDT. A portion of these tokens could be held by the corporation to fund operations such as payment to ground crew, maintenance operators and even the airport fees. The rest could be sold to the public at large to be used to purchase flights or upgrade seats or trade it to others.
Sometimes these tokens could be issued by a holding company that manages multiple business entities as shown in Fig.3. In such a model, the tokens can be used across all the entities managed by the parent entity.
Token holders could be rewarded for holding tokens for longer periods in the form of discounts on fares and upgrades, and possibly a portion of the fees collected.
Summary
Though this post presents a very simplified view of the use case, the actual implementation will require deeper understanding of the business model and rules, governance, regulatory compliance and reporting requirements and the technical platform. The concepts discussed in this post can be applied to real estate, rental cars, smart parking and many other use cases.
We at Chainyard have been helping clients through the strategy phase as well as end-to-end solution implementation. The thoughts expressed in this article are not necessarily the views of Chainyard or its leadership. Please send us email to provide feedback or engage us in an opportunity.