Hands On With Linq, Nasdaq's Private Markets Blockchain Project

Nasdaq formally debuted its blockchain product, Nasdaq Linq, last month at the Money20/20 conference in Las Vegas, the launch coming nearly six months after Nasdaq announced it would be the first major global stock exchange to publicly trial blockchain technology.

The wait may be worth it. Linq is the first platform from an established financial services firm to demonstrate how asset trading could be managed digitally through the use of blockchain-based platforms. It's a management tool for shares in private companies, and it's part of Nasdaq Private Market, the exchange's suite of services for entrepreneurs and venture investors.

Indeed, Fredrik Voss, Nasdaq's head of blockchain strategy, believes that the efficiencies provided by blockchain technology could give Linq the edge that finally encourages increased use of private-market trading platforms.

In a new interview, Voss and global software development director Alex Zinder emphasized the blockchain’s ability to remove the need for pen-and-paper or spreadsheet-based record-keeping as the tech's biggest benefit for the private shares trading market.

Zinder told CoinDesk:

"There hasn’t been a huge amount of adoption [among startups] of moving away from paper and we want to make sure [blockchain] tech can help us move forward. Right now, the process is highly manual and it leaves a lot of room for human error."

Nasdaq communications specialist William Briganti called the technology’s potential to remove this pain point a “key driver” of the initiative due to its ability to provide immutable recordkeeping and a chain of custody for users.

“We polled a number of startup executives, and the overwhelming majority were using spreadsheets at every fundraising round,” he said. “We’re trying to apply our standards on transparency and auditability.”

Nasdaq Private Markets was launched in 2014, and it's the latest in a long line of attempts by the stock exchange to enter the secondary market for pre-IPO share trading, following efforts that date as far back as 1990. But today, more companies are choosing to stay private longer, and that means there's renewed attention on pre-IPO trading as investors seek liquidity events that may ease management pressures on early-stage firms.

Under the hood

A closer look at Linq reveals a sleek product with an intuitive user experience for both investors and entrepreneurs.

Linq share issuers log in to find a cap-table management dashboard complete with valuation, the price of shares issued in each investment round and the percentage of available stock options.

Digital representations of shares are visualized as colored blocks representing unspent outputs on the Linq blockchain. Nasdaq calls the presentation of this data its 'Equity Timeline View', which illustrates who owns the shares on a flowchart.

Transactions that are spent appear as "void" on the timeline, and turn gray. Users can also see arrows that illustrate how such shares were transferred and divided.

Zinder and Voss explained:

"What we’ve done is we’ve superimposed different corporate events on a time horizon. Every single bubble here is a representative of a live certificate. The color represents a specific asset type, and asset types are defined by the issuer, class of share and the round."

The color-coded approach serves to underscore visually how blockchain technology is used underneath to create unique assets with corresponding terms and conditions through use of the Open Assets protocol.

"We’re able to visually represent that and it’s readily available as it would be on the blockchain itself," Zinder said, adding:

"The Equity Timeline is the most valuable thing we show, it’s able to visualize this information, and have clear representation of transactions and provenance."

Wealth of details

Linq also seeks to enable entrepreneurs to more easily gain insight to their business through an analysis of data related to their cap table that may otherwise be buried in spreadsheets.

For example, entrepreneurs can click on the interactive Equity Timeline to display an individual share certificate issued to an investor. Valid certificates and cancelled certificates both have a different visual display, the former showing information such as the asset’s ID, value per share and price.

Startups using the platform can also view certificates by date of issuance, viewing the most or least recent new certificates, and by overall ownership, drilling down into which investors hold the most shares in the company with a single click.

Elsewhere, startups can evaluate a single investor’s ownership stake in the company. Investor-facing details like transaction IDs, in turn, provide transparency to those who want to track a startup’s progression while also serving to underscore the new technology on which the certificates are built.

“We wanted something that was presentable that we could explain the functionality under the covers to some of our customers,” Zinder said.

Controlled experience

In interview, Zinder and Voss further hinted at some of the non-technical work that has so far gone into the creation of Nasdaq Linq, noting that the end product is more than design.

Right now, Linq is being trialled with six startups and their investors. The limited number of participating firms is a reflection of the need for companies to be able to legally electronically represent the ownership of their shares and what Nasdaq described as the complex equity profiles of some startups that can make migrations lengthy.

Nasdaq said the legal process requires startups in some states to communicate with shareholders that they will proceed with issuing “uncertificated shares”, meaning shares with no physical certificate of ownership.

As for more wide-scale testing by current users, liquidity events remain at the discretion of the startups, who have the right – but not the obligation – to initiate a liquidity event for investors, which they could now do through Linq.

"If you wanted to sell your shares, the issuer would have to have selected the liquidity program with us," Zinder explained. "Once they have chosen to do so and defined it to us, we create the program, [investors] would log into a portal and [they] would be able to sell a certain percentage of those holding."

The goal, according to Zinder and Voss, is to make this process easier so that such events, as well as the technology that can facilitate the activity, are more widely used.

"We’re in the business of creating structured liquidity, and the less friction we can bring to this process, the customer has more liquidity events," he said.

However, Zinder hinted that Nasdaq Linq could one day evolve into a product that more closely mirrors its public stock exchanges, concluding:

”It’s not a 24/7 market, there’s no peer-to-peer transactions right now.”

Images via Pete Rizzo for CoinDesk