Smart contracts enable automation of certain aspects of a platform’s functionality. These digital agreements self-execute predetermined actions upon receiving a digital asset or cryptocurrency. Today, smart contracts are used everywhere in the blockchain space, but this wasn’t always the case. Let’s take a second to examine how these helpful protocols first came to be, and how they function without the need for any third-party intervention.
The original smart contract concept predates cryptocurrencies by fourteen years. Ironically, the man credited with developing smart contracts is no other than well-known Bitcoinist Nick Szabo. Many people believe Nick to actually be Satoshi Nakamoto because of his previous works.
Nick famously theorized about value-storing bits utilizing a proof-of-work system five years before Bitcoin existed. He has always been a pioneer in the cryptospace. In 1994, Nick released his smart contract code to the public. He also coined the phrase “smart contract”.
What Do I Need to Create a Smart Contract?
Every smart contract contains four core principals. First, you need the subject of the contract. The subject is what gives your contract access to the goods or services that the contract governs. Second, you need digital signatures (private keys) from everyone involved in the contract. These signatures are what initiates the contract. Next, comes specification of the contract terms. This part is where you lay out the exact sequence of operations that commence when the contract executes. Finally, you need a decentralized platform. A blockchain network keeps the smart contract stored in redundancy and safe from alterations.
Smart Contract Components
- Subject of Contract
- Digital Signatures
- Contract Terms
- Decentralized Platform
How Do People Use Smart Contracts?
There are endless smart contract uses. Smart contracts help you to exchange digital and real-world assets. Smart contracts live on the blockchain and cannot be altered. This added security makes these digital agreements ideal for many business scenarios.
Smart Contracts in ICOs
Initial Coin Offerings (ICOs) utilize smart contract protocols during their crowdfunding events. The smart contracts automatically track, calculate, award, and distribute the funds sent between the company and the investor. The smart contract programming enables the automation of the entire process.
This automation allows companies to accept funding from a wider audience. The workload of the company is not increased, but the company’s fundraising exposure expands. The all-inclusive nature of this strategy helped push ICOs to record numbers this year. One report shows that ICO volume already doubled lasts year’s numbers by May.
Traditional Firms Look Towards Smart Contracts
Traditional firms continue entering the smart contract arena as blockchain integration continues. Today, platforms exist that utilize smart contracts for nearly everything including real estate, investments, royalties, elections, logistics, and much more.
Ethereum – Smart Contracts
The cryptocurrency, Ethereum, is best known for introducing the smart contract concept to the cryptospace. Ethereum’s ERC-20 protocol utilizes smart contracts to help automate token creation and distribution. ERC-20 is by far, the most widely used token issuance protocol in the market.
Vitalik Buterin, Ethereum’s developer describes smart contracts as a program that “automatically validates a condition and determines whether the asset should go to one person or back to the person who sent it or some combination.” Ethereum utilizes a second-layer protocol to accomplish smart contract capabilities without creating additional blockchain congestion.
Smart Contract Development
Since Ethereum raised smart contract awareness, more complex and advanced smart contract models entered the cryptospace. Platforms such as EOS, Steller, and NEO utilize less wasteful consensus mechanisms when compared to the Proof-of-Work system in place with Ethereum.
Say Good Bye to Lawyers
Smart contracts are removing the middleman from many of the most used business systems today. The trustless nature of these protocols allows businesses and investors the ability to increase efficiency and security simultaneously. You should expect further integration of this technology into traditional business systems as more platforms enter the market.
Security Tokens to Headline the Crypto World Summit
In another sign of the times changing for the better, this year’s Crypto World Summit will focus heavily on the security token market. This year also marks the 4th consecutive year for the forum which focuses on the most important blockchain-related issues globally. The news marks a shift by the Crypto World Summit from traditional blockchain projects, over to heavily regulated digital assets.
According to a recent press release this year’s event will commence at the world-famous Sheraton New York Times Square Hotel. The event’s official start date is February 20th, 2020. Event coordinators confirmed that the majority of speaking sessions will focus on a number of movements related to security tokens and STOs.
As such, speakers will discuss the major roadblocks to adoption in detail. These primary concerns usually fall into three main categories. Firstly is a lack of understanding of the existing SEC laws, rules, and regulations regarding tokenized assets. From here, discussions will include a synopsis of the lack of regulatory framework specifically tailored to these new financial tools. Finally, speakers will discuss how to address these primary issues in a logical manner.
Crypto World Summit Sessions
The Crypto World Summit will feature some amazing insight into the current state and future of the security token sector. One of the most exciting sessions listed on the event is a forum called -The Revolution of Tokenization. This discussion will touch on the overall benefits achieved through tokenization, and how they can improve the overall health and security of markets.
Additionally, there is another session labeled the Securitization of Illiquid Assets. This discussion will touch on how tokenization creates new forms of liquidity in the market. Importantly, the discussion will explain how these new markets will affect the overall global economy and investors in general.
Security Token Offerings
From there, conference attendees can gain some valuable insight into STOs. STOs are seen as the natural evolution of the ICO sector. These fully-compliant token offerings are now more popular than ever. Developers hope to shed some light as to why these crowdfunding campaigns surpass traditional IPOs and ICOs.
Blockchain and Real Estate
No security token seminar would be complete without an in-depth discussion on the effects of tokenized real estate in the market. Tokenized real estate is one of the fastest-growing security token sectors internationally. Tokenizing properties provide some huge advantages over traditional real estate sales such as lowering the entry threshold. Additionally, this strategy allows for global investor participation and crowdfunding of single properties.
The Digital Banking Industry
Another session labeled, The Digital Banking Industry is sure to touch on the development of new-age banks focused on catering to digital asset holders. Already, a number of these organizations have sprung up across the globe. These unique banking institutions seek to provide digital asset holders with many of the benefits and features found in the traditional banking sector.
Perhaps the most interesting forum to be held at the Crypto World Summit is the tokenization workshop. Here, visitors will learn exactly what it takes to tokenize a real-world asset. The workshop promises to provide valuable insight into the technical aspects and legal ramifications surrounding the tokenization of particular assets such as debt-equity.
Join the Crypto World Summit
For those interested in participating in this monumental event, but are unable to visit New York, there are options. The entire conference is set to be live-streamed via Fintech World Media. In other words, there really is no excuse to miss out on this exciting event.
What are Digital Securities?
Digital securities continue to see further adoption by traditional investment firms for many reasons. These tokens remove many of the barriers encountered by investors and streamline the entire security process from issuance to oversight. Additionally, they provide new market opportunities to nonliquidable investments. For all these reasons and many more, security tokens are here to stay.
Digital securities, or security tokens, come in many forms. All of these forms share one thing in common, they are digital representations of securities, and therefore, subject to traditional securities laws. Importantly, not all digital assets are security tokens.
Security tokens emerged at the tail end of the 2017 bull market run in response to the rising amount of fraud in the space. Investors lost billions on Ponzi schemes such as Bitconnect. Real projects needed a way to distinguish their tokens from the scamsters and traditional investment firms needed to utilize blockchain technology in a regulated manner.
Digital Securities are Born
Digital securities can represent all types of assets including investment contracts, shares of a corporation, a portion of a note, debt security, or even a fractionalized interest. Basically, any electronically registered and transferable debt, equity, or asset that issues or trades using blockchain technology is a security token.
Benefits of Digital Securities
The benefits blockchain technology brings to the sector are immense. For one, ownership is verified and recorded on a distributed ledger. This provides a more secure alternative than traditional methods. Additionally, blockchain technology allows for the transfer of private and non-listed alternative assets. Consequently, security tokens provide more opportunity, efficiency, and liquidity in the market.
Security tokens wouldn’t exist if smart contracts never entered the scene. These preprogrammed protocols can be developed directly into the token. This strategy allows for the automatic enforcement of all regulations. Basically, smart contracts help eliminate much of the redundant paper-based processes currently in use.
Types of Digital Securities
Today, there are more types of security tokens than ever before. The market continues to develop as more advantageous tokenization concepts emerge. You should expect to see this trend continue as security tokens lend themselves perfectly to many markets. Below are the most common types of digital securities in use today.
The real estate sector experienced an explosion of tokenization strategies over the last year. Both developers and tokenization platforms went all-in on tokenizing property. Tokenized real estate has some clear advantages. For one, it allows for the sale to be fractionalized. This strategy lowers the entry-level for investors and provides more opportunities for diversification.
The tokenization platform Polymath made headlines in September 2018 after inking a partnership with the real estate development firm BlockEstate. As part of the strategy, the Block Estate Alpha Token, or BEAT was born. This token utilized Polymaths unique Ethereum token standard ST-20 to ensure that the project remained compliant. Each token represented a share in the ownership of the fund.
Perhaps one of the most popular ways in which digital securities see use is venture capital. Security token offerings (STOs) provide business with all the benefits of blockchain technology such as global reach, added security, and instant trackability. Additionally, STOs allow companies to stay within the regulatory guidelines of their industry and region when hosting a crowdfunding event.
Private equity is another type of security token that continues to see more adoption in the space. These security tokens can also go by the name equity tokens. Equity token offerings (ETO) are more popular than ever before because tokenized equity provides more liquidity in the market.
One of the best features of tokenization is that it can be applied to so many types of assets. Real assets such as gold or diamonds already live on the blockchain. Not surprisingly, these tokens were among the first type of security tokens to emerge.
While the concept of tokenizing assets like gold isn’t anything new to the market per se, the ramifications of these maneuvers are evident. For one, tokenization platforms now seek to not just tokenize gold but to utilize the gold tethered token as a new form of stablecoin.
Stablecoins are coin tethered to real-world assets such as the USD, or in this scenario, gold. These tokens allow users to get the benefits of cryptocurrency but avoid all of the volatility found in the market today.
Tokenized hedge funds are another perfect example of digital securities. Hedge funds are a great way to diversify your portfolio. Traditional hedge funds are restricted in their trading times and the methods used to transfer these assets are outdated. Tokenized hedge funds create a frictionless experience for investors.
The Protos Hedge Fund includes a number of the top cryptocurrencies in existence. The fund sold $6.5 million during its primary issuance. Notably, Protos was the first licensed tokenized hedge fund to trade on an Alternative Trading System (ATS) in the US.
Digital Securities – A Bright Future
Now that you understand what digital securities are, its easy to see why they continue to see adoption in the market. These new-age financial tools provide more investment opportunities and reduce the workload and costs usually associated with these transactions. You can expect to see security tokens become more popular as these advantages become common investment knowledge.
Titles and Designations Among Industry Participants
Those that follow developments within the digital securities sector may have come across a variety of titles/designations given to industry participants. While a select few companies have set their sights on attaining a full scope of designations, most specialize in one area or another. This necessitates a high level of cooperation among companies, as issuing digital securities requires utilizing various services.
With Securitize recently attaining the title of ‘transfer agent’, now is as good a time as any to take a brief look at what positions, such as this, entail. Here are a few designations typically associated with digital securities, and a superficial look at the roles which they play.
Companies tasked with completing the roles of a placement agent typically function as a conduit for raising capital. A placement agent is usually hired by a company looking to raise capital through an STO/DSO or some other means of fundraising. Throughout this process, the placement agent will attempt to connect appropriate, and interested, parties (issuers & investors). In doing so, investors gain access to pre-vetted opportunities in their ‘wheelhouse’, while issuers benefit from access to a larger pool of investors.
Beyond simply providing token issuers access to their contact book, placement agents are able to provide certain levels of clout to relatively unknown companies through mere affiliation. In addition, they are often tasked with helping develop marketing strategies for token issuers, to more efficiently connect appropriate parties.
The following companies are examples of participants within the digital securities sector which hold the title of a placement agent.
The entire process of selling and distributing digital securities is contingent on finding a competent issuance platform. Digital securities require specific traits to be built into their coding, as they are required to be compliant with securities laws imposed by regulatory bodies, such as the SEC. This is done when they are created, using issuance protocols based on blockchain technologies, such as Polymath’s well known ST-20.
The following companies are examples of participants within the digital securities sector which act as issuance platforms.
A broker-dealer refers to a licenced company which buys and sells securities. A broker-dealer has the ability to act on behalf of, either, themselves or a client. This is a fluctuating designation which is broken down as follows:
- When securities are traded on behalf of a client, the company is assuming the role of a broker.
- When securities are traded on behalf of the company, itself, the company is assuming the role of a dealer.
The following companies are examples of participants within the digital securities sector which hold the title of a broker-dealer.
In a world which is becoming increasingly connected, new challenges regarding security measures are arising every day. This places increased importance on companies assuming the roles of custodians.
Custodians within the digital securities sector are tasked with safely storing digital assets. While their means for achieving this may vary, their presence within the sector is extremely important.
Warranted or not, blockchain based assets are often viewed together. This means that when an unregulated exchange with poor security measures is hacked, it paints a bleak picture of similar assets. To continue the upwards trajectory of blockchain based assets (digital securities), regulated custodians are of key importance. Through stringent security measures, they are able to provide a safe home for valuable assets, as well as piece of mind for their holders.
The following companies are examples of participants within the digital securities sector which provide custodial services.
For participating parties to benefit from the oft-touted liquidity associated with digital securities, these assets need a place to call home. Marketplace providers offer this, as they facilitate secondary market trading of digital securities. By facilitating the buying/selling of digital securities, investors can now easily enter and exit their positions.
The following companies are examples of participants within the digital securities sector which act as Marketplace Providers.
For companies which undergo the tokenization process and distribute tokens, a transfer agent is vital. Companies which assume this role are typically tasked with accurately tracking the activity and ownership of distributed assets. This means providing token issuers with an accurate picture of who is in possession of their digital assets, and in some instances doling out dividends to holders.
The SEC breaks down the roles of a transfer agent into the following 3 main categories.
- Issue and cancel certificates to reflect changes in ownership.
- Act as an intermediary for the company.
- Handle lost, destroyed, or stolen certificates
The following companies are examples of participants, within the digital securities sector, which hold the title of a transfer agent.
Jockeying for Position
While there are many roles and designations within the sector, these are a few of the most prominent and important found in digital securities. With the digital securities sector still in a nascent stage of growth, there are various companies jockeying for position as the ‘go-to’ entity for their specialities.
In time, we will eventually see the cream rise to the top, as select companies stand out from the pack with the services they offer.