Why Tokenizing Diamonds Makes Them Viable Assets For Diversification

Embrace Fungibility

Icecap uses the Ethereum ERC721 Non-Fungible Token standard to give diamonds their own digital tokens. That unique token represents the rights to a single diamond, and enables that diamond to function as a tradeable asset.

To date, attempts to eliminate the problems inherent with using diamonds for asset diversification have focused on ways to overcome the lack of fungibility.  This has given rise to various “schemes” to make diamonds fungible.  These, in turn, have typically relied on pools of diamonds, or collections.  Either the collections are designed to all be essentially the same as each other (which is impossible) or the pool of diamonds functions as a mutual fund, and shares in the pool are issued.

The mutual fund approach to diamonds solves the problem of fungibility, but does so at the expense of robbing diamonds of their unique value in asset diversification: their portable and concealable nature, and their ability to be enjoyed for their own inherent value (adornment). 

Even if one owns a share of a mutual fund based on diamonds, you don’t own the diamonds themselves.  There is significant third-party risk in how the fund is managed, how advantageously it’s able to buy/sell diamonds, its solvency, and other factors.  You can diversify into gold by buying shares in a gold mining company, but that’s very different than actually owning gold.

The Icecap approach is not to try to suppress diamond’s lack of fungibility, but to embrace it.  The Ethereum ERC721 standard was created specifically to permit trading in non-fungible assets.  Diamonds are non-fungible assets. 

Icecap was created to use this disruptive ERC721 technology to finally unlock the asset-diversification value of diamonds—something never before possible.  It may be the best use-case for ERC721 yet invented.

A Global Marketplace

Once tokenized, diamonds can now be traded on any crypto-exchange in the world that supports the ERC721 standard. A diamond can be bought and sold as easily as a CryptoKitty.

One of the primary values of crypto-tokens is their ability to be traded.  Increasingly, trading
platforms are being built to accommodate Non-Fungible Tokens as well.  Opensea and Pixura are two examples, but more are coming online all the time.  A diamond represented by an ERC721 token can be traded on any of these platforms.

Minimal Buy/Sell Spread

Buyers and Sellers of Icecap tokens incur only the OpenSea 1% exchange fee on their transactions. Assuming a willing buyer and willing seller, the diamond should be able to be sold at very close to the price it was purchased—plus any underlying price movements with diamonds generally.

Icecap’s key innovation is to give the diamond investor a convenient way to buy and sell at the same price level, rather than having to “buy at retail” and sell at “below wholesale.”

Since it is the token being traded, not the actual diamond (which stays safe in a vault), any crypto/token trading platform that supports the ERC721 standard (Non-Fungible Tokens) can be used for selling an Icecap Token.  Investors can now sell their tokens at the same market level at which they bought them. 

Worst case, if there are no investor-level buyers for a given token, Icecap itself—and possibly other bidders from the wholesale diamond industry—are always bidding on these tokens.  Specifically, Icecap itself maintains a policy of always having a bid on every token offered. Icecap generally marks up its diamond tokens 5% above wholesale and maintains a bid floor of 5% below wholesale.  But if another investment buyer is found, the buy/sell spread—other factors equal—would be only the 1% OpenSea exchange fee.

Give Diamonds Liquidity

Once tokenized, diamonds can be kept in a secure vault, sold on a crypto-exchange, or withdrawn and kept in their owner’s safekeeping.

Once a diamond has been tokenized, its token can be traded on any ERC721 supporting crypto-exchange.  The prices on those exchanges cannot move greatly above or below the real wholesale diamond market, as explained above, which has very thin margins.  Because the diamond market itself is both deep and relatively (these days) efficient, offering a diamond token even a few percentage points below normal wholesale, means the wholesale market itself will snap that diamond up.  Thus liquidity is achieved by enabling diamonds to be traded in an environment with a steep demand curve: a small change in price, creates a huge change in demand. 

That is how the actual diamond market works, and Icecap merely lets the owners of diamond tokens participate in that market, through the innovation of non-fungible tokens.

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