Our Liquidity Reserve
We’ve taken a fresh look at how to distribute gains to holders of Hunit’s smart security
Find out why we think it fits our vision of a financial service provider for a decentralized economy
what’s a liquidity reserve?
A central pillar of the Hunit Foundation’s operating model is to regularly distribute all operating gains to the Foundation’s beneficiaries. But we also wanted our smart security holders to benefit from potential long term capital appreciation and token price stability.
If the Foundation made a simple dividend distribution, the value of the token would fluctuate up and down as it would represent the gains generated in the previous dividend period. This fits our goals as long as the Foundation enjoyed continuous revenue growth, but the global market doesn’t always provide conditions where that’s possible.
So instead we’ve put in place a liquidity reserve - it stockpiles all of the Foundation’s net operating gains that remain after paying the semi-annual operating commission (see right) and the Foundation’s operating overhead.
As an organization seeking to lift itself above national or regional economies, the liquidity reserve stores its gains in its own global index fund covering thousands of companies across nearly every well functioning capital market (*fund in formation).
Unlike a normal Exchange Traded Fund, the liquidity reserve is evergreen in that it receives continuous contributions of new principal without increases in the supply of Hunit smart securities. This means that the per token value of the fund has the potential to grow via the compounded growth of its underlying investments and continued contributions from the Foundation's operating activities.
Why use one?
Our liquidity reserve structure offers a number of advantages to holders of the Foundation’s smart security.
Operating gains are invested (and compounded) pre-dividend tax
Based on an average Euro-zone dividend tax rate, this could result in as much as a 15% gain in net investment liquidation value over 10 years (compared to investing full dividend distributions in a comparable external ETF).
The liquidity reserve doesn’t charge management fees
Since the Foundation’s operating costs are covered by its financial services unit, no deductions are made against the liquidity reserve’s principal. Even small percentage fees result in a large delta in principal balance when compounded over time.
Lower security price volatility and higher capital appreciation
Security pricing is a function of the liquidation value of the underlying asset base plus a multiplier of annual cash distributions. In a full dividend distribution model, pricing is only related to annual cash distributions - which will undoubtedly vary over time. With the liquidity reserve, a portion of the security’s market value is based on the balance of the reserve fund (which is designed to be increasingly large over time) and the remainder made up of a multiplier of the semi annual operating commission (see right). This means that in the down years of the business cycle, the Foundation’s smart security is structured to deliver slower price development, not losses.
Lower early stage security pricing means higher returns Euro for Euro
Because of the pricing dynamics described above, early stage investors in the Hunit Foundation (before the underlying liquidity reserve asset pricing is larger than the cashflow component) have access a lower price security than would be the case in a full dividend distribution model, increasing the total return on capital. This encourages early participation and long term investor horizons - something we’d like to see more of in today’s financial markets.
The redemption pledge is how the Hunit Foundation connects its smart security’s market value to the underlying principal in the liquidity reserve.
Based on certain terms specified in the security’s smart contract, holders of the Foundation’s smart security have the right to return their tokens to the Foundation in return for their respective ownership of the underlying liquidity reserve. We refer to this as the ‘liquidation value’ of the smart security.
As the Foundation’s financial services unit makes regular contributions of fresh capital and as the fund’s principal balance grows over time (*both subject to market conditions outside of the Foundation’s direct control), the per-token liquidation value is designed to increase over time. To create transparency, the per-token liquidation value is displayed in selected currencies in near-real time via the Foundation’s investor dashboards (*feature under development).
Our goal is to make sure that the redemption pledge is never called upon by the market by using cashflow from the operating commission to drive a market pricing that is consistently higher than the liquidation value. But if the Foundation is unable to do so for whatever reason, the liquidity reserve provides the fallback protecting long term investor interests.
Semi annual operating commissions
Holders of Hunit Foundation’s smart security receive a semi-annual operating commission, settled in Euros.
The operating commission is based on two sources of contributions to the commission pool.
15% of the financial services unit’s net operating gains
This represents 15% the net gain of the financial services unit after directs costs and related taxes.
100% of all cash events in the liquidity reserve (corporate dividend and share buy-back programs)
One of the liquidity reserve’s weighting criteria is based on historical dividend performance by the underlying individual companies. An important feature to our long-term vision is to use the liquidity reserve to create an increasingly large contribution to the operating commission pool as the fund grows in size.