A Security Token focused chain
In general I am not a big fan of reinventing the wheel, however security tokens are a completely different beast as compared to regular ERC20 tokens which means that investigating the establishment of a chain specifically geared towards supporting security tokens is worth considering.
While similar arguments have been made by others, and there is some work being done in this direction by a few players, I believe that much of it is not in the right direction.
In this article we will explain the following things
- Why we have the audacity to claim that we know more than others.
- What the issues a securities focused chain (STO chain) should address (and how existing efforts are missing the mark).
- How a STO focused chain should be architected.
Why we have the audacity to claim that we know more than others
Konkrete is an evolution of an existing equity crowdfunding platform. We have been making full retail IPOs for several years and have over 50,000 potential investors signed up on the platform and have helped raise more than 45 Million for 25+ issuers till date. We have fully built institutional grade tech and our team members have worked on complex stock market listings and built back office software for some of the biggest financial institutions worldwide.
We live and breathe securities and the technology infrastructure it needs.
What issues a securities focused chain (STO chain) should address
I will start with the usual suspects, but there are at least 2 factors that no one is focusing on and which are also the absolute critical requirements towards a truly viable STO chain.
- Baked in KYC, AML, CTF
- Restrictions or controllable transfers of tokens (You can read about how we handle them here)
- Issuance
- Fast transaction processing and lower costs
KYC, AML, CTF is well understood. There are a few chains which are doing some work on this. Also it is fairly straightforward to work with existing providers to build a layer on top of an existing chain like Ethereum or others for this purpose.
Control of token movement can be achieved through various means. Walled gardens and other mechanics we have described earlier all help achieve these goals.
However issuance is something most chains do not offer in house.
The reason ERC20 and Ethereum took off is because anyone could do an ICO in a fairly simple number of steps themselves in a seamless manner. An STO on the other hand requires you to issue a disclosure document which, depending on which jurisdiction you are in, and which investors you are targeting (retail vs accredited etc), can become quite daunting and costly.
What is needed is a solution that combines the tech along with the issuance as a one stop shop solution. There are various ways to do this including Wraps and Master trusts that we are already working on at Konkrete.
Only when STOs become as simple as an ICO will we start approaching the true potential of them.
Simplifying Issuance is a big part of the solution.
The next one is speed and cost of transactions. Let me explain why this is important and also why some of the existing solutions such as lightning network and state channels won’t work here.
A company may have thousands of shareholders, who all buy shares at different times, which isn’t a big problem in the number of transactions that need to be recorded on the chain at the same time.
But when a company does a corporate action that generates transactions that impacts all its shareholders at the same time, it starts getting hairy.
Imagine a company with 5000 shareholders issuing a dividend where cash (in the form of a stable coin) goes from issuers wallet to each investors wallet. There are 5000 transactions at one shot, all of which need to be recorded on the chain.
Another example is rebalance of an index tracking fund which has thousands of underlying assets. This often generates tens of thousands of transactions as portfolios sell out holdings that are exiting the index and buy the new incoming ones. Even existing centralized systems get overloaded when a rebalance occurs.
Recording all these on the chain, at the same time can be a time consuming and costly endeavour.
State channels like lightning network are more focused on scenarios where 2 parties make repeated transactions between themselves. Instead of recording each transaction on the chain, a tab is opened and only the last balance is recorded on the chain.
This does not work for securities as every transaction is an auditable event and needs to be recorded in a decentralised manner. Instead of many transactions between the same 2 parties, it is more akin to bursts of transactions from one issuer to several investors making it unsuited for use by state channels.
How an STO focused chain should be architected
Any effort for this should include baked in decentralized identity efforts, AML and CTF. Restrictions on token processing should be part of the chain architecture itself. And to achieve speed and lowering costs its best to have a master node and sharding approach.
The master nodes should be selected based on the issuance capabilities they bring to the table. For instance ideal master nodes will be entities that can help with the regulatory aspect of issuing the offer in their respective jurisdiction. A buy in from parties that have the ability to issue the security in their region would mean that any one considering a STO offering has a global audience of investors on such a chain and in a manner that handles the legals in a seamless manner.
These master nodes would also reduce the latency required to achieve consensus and speed up the transaction processing. Use of master nodes would also mean that movement of tokens can be controlled far more easily and kept within the boundaries as dictated by the offer.
At Konkrete we will continue to work within existing infrastructure and partner up with any parties that are working on efforts that help meet the above requirements. If we find that no one is actually working on solving the true issues hindering the adoption and take off of STOs we will take that up on ourselves in due course as resources materialize.
