The recent (and ongoing) downfall of the seemingly unshakable Bitcoin has created a trust gap that’s not easy to close. Where do we go from here? In my opinion the answer is clear: security token.
Edited by Anton Shmerkin
Security tokens are huge right now, and they’re going to get bigger. The reasons are plenty, but we’ll start with a relatively simple one: security tokens are backed by real assets — equity, shares, real estate, fixed assets or commodities, which means that they’re subject to securities regulations in a number of countries. Scammers hate it, but for a trained and purposeful investor, the fact that pertinent laws protect their portfolio is music to ears. Let’s talk about why is that, what are the reasons for the security tokens’ meteoric rise, the differences between ICO and STO and the key properties of STO (Security Tokens Offering) platforms that make Stellar network such an attractive proposition.
The statistics are well-known and widely publicised but let’s recap. According to CoinScedule, there were more than 700 ICO’s launched in 2018 raising over $18 billion in USD. It would have been good news, had it not been for the New York-based Satis Group LLC claiming that approximately 81% of them turned out to be scams, another 6% failed, 5% just died out in some weird way, and only 8% went on to trade on exchanges.
Back in the day, ICOs were thought of as the most advanced mode of crowdfunding. But, since ICOs mostly crowdfund ideas, and not very good ones at that, 90–95% of those ideas never make it past the money-grabbing stage of an offering. The question of accessing real value behind an invisible or imaginary product was never answered. Investors speculatively plugged their cash into various shiny objects until the shine would inevitably rub off denuding an ugly corpse of a mere scam.
The beauty of STO
Security tokens, on the other hand, allow for a correlation of their value with the value of the assets backing them collateralizing a transaction almost to the extent of a good ol’ swap meet. And, even though ICOs are somewhat similar to STOs in form, securities being securities, STOs require much more due diligence on the part of both issuer and investor then regular digital coins, especially in the realm of accountability and transparency. For instance,
- A security token holder has the same rights as the asset owner;
- A company that plans an STO has to undergo Legal due diligence, technical and financial audit
- Security tokens trading oversight committee is in place to fight pump and dump strategies, reveal insider trading and other price manipulations;
- STO requires compliance with KYC (Know-Your-Customer or identification procedure) and AML (Anti-Money Laundering) procedures as well as other actions and disclosures required by relevant legislation that protect investors;
Finally, STOs run on specialized platforms, which is a crucial point for the entire concept of a Security Token Offering. The platform has to be 100% compliant with any and all legal requirements of a specific token while maintaining a perfect balance between the quality of tech used in architecture, profitability, affordability, cybersecurity, and the level of digital democracy brought to us by the blockchain technology.
Just look at Ethereum and compare it to Stellar. Although the versatility of Ethereum is unchallenged by far, developing on Ethereum is getting more difficult every day, the popular demand causes the platform to run slow and drives up costs. By comparison, Stellar is lightning-fast, cheap, simple, and (another stone thrown at Ethereum) instantly scalable, meaning, of the two projects simultaneously developed on Ethereum and Stellar, the latter would cost much less yielding better profits:
Further, the asset issuance on Stellar is a simple two-step process (once you have two Stellar accounts) that can be performed by a crypto-beginner. It is also possible to limit access to asset ownership on the Stellar network through requiring trustline authorization by an issuing account (one action). This feature helps implement KYC easily and reliably as opposed to Ethereum that allows the overcomplicated smart contracts run things.
It is also possible to freeze assets on the accounts by revoking trustline authorization if an account holds stolen tokens, or the account owner has violated the rules of the platform in some other way.
The proprietary Compliance Protocol is another jewel in the Stellar crown. The platform handles things like Anti-Money Laundering (AML) requirements by exchanging compliance information and pre-approving transactions.
The Stellar decentralized exchange allows tokens to trade instantly with no intermediary and additional transaction cost directly on the Stellar blockchain, unlike ERC20-based tokens. With that comes the unparalleled level of security currently available, which is crucial for large investors. The Ethereum’s Turing complete programming capabilities produce the code that’s less auditable and is at a higher risk of exploitable vulnerabilities. By comparison, the Stellar’s, atomic transactions comprised of simple operations lead to a more auditable code and create fewer security pitfalls. Additionally, a user can choose own validators for transactions.
A consensus protocol (an agreement between nodes on a blockchain to approve a new block or transactions) is the heart or every distributed system. Every blockchain needs consensus protocol to prevent double spending, ensure viability and consistency of the entire network, validate the participants, etc. Ethereum currently runs the slow, expensive, and, all in all, obsolete Proof-of-Work consensus protocol, may it someday rest in peace. The Stellar low-latency consensus protocol architecture employs the Federated Byzantine Agreement (FBA) and is the first provably safe and fault-tolerant fully decentralized consensus mechanism based on flexible trust and asymptotic security. From here, let’s unpack a few things.
The term “Flexible Trust” comes from the insurance industry and refers to “a legal arrangement which allows the owner of a life policy (the settlor) to give their policy to a trusted group of people (the trustees), who look after it.” Extrapolating this principle on a blockchain, we’re observing the same way a network validates a group of nodes, which agree about the state of transaction blocks. This type of consensus radically differs from protocols utilized in Bitcoin and Ethereum where nodes reach a consensus by competing in solving a complex computational problem. In sports, competition is exciting to watch and participate because each ‘node’ (your body) is completely isolated from the ‘network’ (the rest of the world), but on the blockchain, the proof-of-work method signifies astonishing wastefulness and enormous gaps in the performance (think CryptoKitties).
Hmmm, this one is tough to decipher in layman’s terms. Have you heard of “Pyrrhic victory”? It refers to a victory that comes at a cost so great it ceases to be beneficial for the victor. Asymptotic security is the way of layering a network in such a way that it’s no longer beneficial for an attacker to charge, so cracking it would be a “Pyrrhic victory” for the assailant.
To penetrate a non-asymptotic Proof-of-Work (PoW) system head-on requires “51%” of the total amount of computing power on the network. It’s not easy, but theoretically, it can be done, think of all that computing power that has been drained by hackers from your browser. Additionally, in PoW the latency issues greatly affect security. Stellar possesses the built-in security capabilities (easy payouts, universal global compliance, complete trading history upon request, etc.) that allow the network to act as a decentralized registry for all security tokens faster, cheaper, and in a more precise manner.
Rest assured, Stellar has a library of basic limited abstractions/transactions that can generate sophisticated behavior (those are typically called “smart contracts”). However, the majority of blockchains require only a basic token, therefore, smart contracts on Stellar are much more straightforward, they facilitate much faster and cheaper transactions than the Ethereum’s sophisticated programming language for smart contracts. This is a huge benefit for many investors: while Ethereum, no doubt, has extensive programming capabilities, Stellar is the best choice for STOs that do not require complex smart contracts. Smart contracts on Ethereum are immutable by nature; this property is needed for a trustless approach. But in case there is a need for a bug fix or a new feature, or a contract update that requires a token swap is necessary, you’d be looking at a colossal pain in all the right places.
Current Stellar network capability (1000 transactions per second) has an artificial limitation for the number of transactions per ledger and number of operations per transaction, kind of like limited top speed on a supercar. The limitation is derived by the necessity to reduce hardware costs to run a validator on the Network (mostly disk and RAM costs) so that a Stellar network node could run on a low-tier cloud.
According to tests conducted by Barclays Africa, without restricting the number of transactions per ledger, a network can reach a performance of about 10,000 tps combating the Google Cloud Servers infrastructure for supremacy and leaving Ethereum far behind with its obvious design limitations (rising costs, longer settlement time, etc.).
Stellar has designed a scalable solution for distributed payment networks by creating Lightning Network that allows users to make off-chain payments through routers and hubs. Lightning network’s primary objective is to unburden the Stellar network from simple, frequent payments (like payment processing in stores) so that the network can process more complicated operations (SDEX offers, smart contracts, etc.)
Although there are plenty of illustrious projects created and represented on Stellar, the one success story that truly stands out is Smartlands. The new CEO, Arnoldas Nauseda and his team have really hit the ground running by putting all available resources into building the global legal compliance mechanism, which is vital for tokenizing Stellar-based projects. As a result, the company will offer a unique way of investing in low-risk, high-value assets through its proprietary security tokens — ABT by the end of the year.
In a strategic move to once and for all get away from ICOs, the company has eliminated all trust issues so characteristic of regular crypto, taking a unique approach to a Security Token Offering by automating all audits, closing legal gaps, lowering costs for investors, and motivating traders to expand their scope of operation to a better quality security.
It’s pretty fun to compare Ethereum to Stellar because of the glaring advantages security tokens have over ERC20-based digital trinkets. Stellar’s base abstractions such as accounts, multisig (with different threshold levels and signers’ weights), tokens, trustlines, payments, path payments, offers (to exchange one asset for another), and atomic transactions consisting of multiple operations enabling dedicated developers and purposeful investors to make right decisions switching from fun but less and less relevant ICOs to more meaningful for the real economy security token.
Unlike Ethereum, Stellar empowers digital entrepreneurs to create projects without highly skilled developers unless some specific complicated function is explicitly required. They can combine these simple abstractions in complex ways to get a wide array of behaviors, similar to building custom structures with simple lego blocks. Moreover, Ethereum employs Solidity — an internal software development language for programming smart contracts whereas Stellar is an open book for virtually any computer mind. We could go on, but we’re sure, you get the idea.