From Github to See the Future of STO standards
By Krypital Blockchain Institute | Author: Wanfei Wang & Mark
Currently, Security Token Offering (STO) is one of the most popular concepts in blockchain industry. Discussions about STO’s Issuance service providers and the Security Token Exchange have become hot topics in the industry. However, due to this concept is relatively new, the major service providers are still in the early stage, and many infrastructures for the STO ecology need yet to be further refined and improved.
You may have already read some articles about STO concept or service providers in the market. This article will not go into details about them again. We will explore the current STO mainstream technology through white papers and Github codes published by major issuance technology service providers. We will further guide everyone from the initial technical solutions, implementation framework, speculative their completion level, and their vision of ecology to know the current status of the STO issuance platform protocol standard.
Main Security Token Issuance Platform
Before we dig into deep analysis, let’s first take a look at some common background. At present, most of the blockchain mainstream protocols are based on ERC-20, while the ERC-20 interface has only the following functions and events.
Since STO is still in the early stage, only the regulation for investor qualification is clear (for example Reg D in the United States, which restricts only accredited investors can participate and lock for one year). The design of regulatory rules after the investment is less involved.
Therefore, transfer() and transferFrom() have become the most areas of change for major service provider agreements.
Of course, there are a lot of people said about ERC-1404 just added two functions. From the interface point of view, there are only two new functions, but actually the implementation inside requires a lot of code support.
Securitize
The goal of Securitize is to create an ecological environment, so it not only provides the DS protocol system on chain but also provides the RFE-API interface under the chain and the partner institutions such as external exchanges. This point is better than other platforms, because the lock-in of the primary market does not mean that during the lock-in period trade cannot happen at all. Actually, trading will be allowed after the first three months between accredited investors.
Note: We did not find Securitize’s GitHub code. This section is referenced from its Whitepaper.
DS Token is based on the ERC-20 standard. The changes to the ERC-20 agreement are as follows:
- Rewrote the two interfaces transfer() and transferFrom() to provide checksums that conform to the regulatory rules during the Token transfer action. (including the verification of the identity of both parties, the saleable attributes of the Token itself, etc.) Rewriting these two interfaces is also adopted by other protocols.
- Increase the functionality of block wallets and freeze tokens (in order to comply with regulatory requirements), but how to achieve these function is still unknown.
- Iterate will return the list of all Token holders. This function is not only for dividends but also complies with many rights and regulatory requirements to know all the Token holders at any time.
The DS ecosystem provides built-in smart contracts for some basic core services. The two most important services are:
- Registry Service — completes the investor’s information authentication and chaining (KYC status of each whitelisted user, accredit investor certification status will be stored on chain), this is not available from other technical service providers or not mentioned in their white paper. Most of the personal understanding is off-chain management. For the white list, it is only the uplink of the address information.
- Compliance Service — Built-in regulatory compliance verification rules (eg, signature of documents, number of different types of investors, frequency of transactions over time, recovery of lost tokens, etc.), but not yet good, depending on the release strategy Implementation, also requires partners to develop.
The Trust Service is mainly used to authenticate management partners, and individuals understand API key distribution similar to that in traditional system docking.
Comms Service is a service used to send notifications to Token holders.
At the same time, throughout the ecosystem, the platform encourages developers and platforms to implement a variety of DS Apps and enrich the capabilities of DS Token, such as repo, dividends, voting, special regulatory rules, and more. In the white paper, these are explained only by way of example and have not yet been implemented. But in terms of architecture design, these features can be added quickly. — Highlight the importance of good architectural design!
In order to complete the lifecycle management of this Token (primary distribution, to secondary circulation), DS Eco provides the RFE-API of the docking exchange, through which the exchange completes the investor’s whitelist and calls DS during the Token transaction. Checking rules.
Securitize is divided into four categories for the exchange’s categories, which explains in detail the difficulty of docking different types of exchanges and DS Token. The essence of docking with the exchange is how to add whitelist users, because in the blockchain world, the address represents identity. So for a similar centralized wallet exchange (the user’s wallet address is not the user’s own), support will be more difficult.
Summary: It is speculated that Securitize only implements the definition of DS Token and the contract development of Registry Service. Other rules depend on more DS Apps developers.
At present, Securitize has docked Openfinance, AirSwap, BnkToTheFuture, Blocktrade.com, SharePost, HYPERION, ERCdex exchanges, including the emerging ST exchanges, traditional equity exchanges, and the layout is relatively complete.
Among the several service providers mentioned in this article, Securitize’s white paper is relatively complete and considers the issue from an ecological perspective. Securitize itself is separated from financial funds, and the financial background is relatively strong. For STO, the design protocol architecture and system architecture can’t just stay at the technical level, but also from the perspective of financial products business.
It is not feasible to break away from the business and simply talk about technology, which is similar to closed doors.
Harbor
Our analysis of Harbor is based primarily on GitHub code and white papers.
- Rewrite the two interfaces transfer() and transferFrom(), and check() during the Token transfer.
- The check() method is added to verify the transaction rules during the Token transfer process. The actual logic of the method is written in the Regulator Service to facilitate continuous escalation of the rules.
Two Services:
- Regulator Service — By interacting with the off-chain TraderController to determine if a transaction can be allowed, there is only one interface check().
- Service Registry — mainly used to bind the Regulator Service version relationship used by R-Token. This registrar has basic mainstream protocols, mainly to facilitate the upgrading of various currently unresolved rules.
R-Token provides two types of verification:
Participant
- Send permission
- Receive permission
Token
- Locked/unlocked (used to control trading lock time)
- Allow split sale/disallow split sale (used to control the total number of investors)
The trading of the core trading rules is in the Trade Controller under the chain, and the result of the verification is synchronized to the Regulator Service. The implementation of this part is relatively transparent to other service provider agreements. From the content of the white paper, we found that the implementation of Trade Controller is currently controlled by Harbor itself and is not open to the public.
Summary: Compared to Securitize’s ecosystem, R-Token is slightly immature, especially the information of investor certification and transaction supervision logic is actually implemented under the chain. The interface docking speculation for the secondary market should be done under the chain.
The highlight is the layered design for transaction verification, which clearly proposes a two-layer check.
Insufficient: Harbor’s system is relatively closed, there is no mention of the introduction of third-party developers to do the ecology, unlike Securitize to do more planning and design in the ecological aspect.
The partners of Harbor are also gradually established, and the cooperative exchanges tend to be more centralized, mainly 0x protocol, SWAP agreement.
Polymath
Our analysis of Polymath is based primarily on GitHub code, and its white paper focuses on the ecology of the POLY platform currency, rather than on the implementation of specific STO protocols.
Polymath’s GitHub code is very large and constantly updated, so we only look at the information from their readme.md. So the interpretation of the Polymath code level may be incomplete.
ST-20 is based on the ERC-20 protocol:
- Rewrite the two interfaces of transfer() and transferFrom(). During the process of Token transfer, verifyTransfer() is used to perform whitelist verification.
- Added mint(), verifyTransfer() interface
- Provide an interface to freeze transactions
- Provide an interface to get a list of investors, easy to pay dividends
- Added interface for N multi-module registration
- Increase the forced transfer interface
By adding modules to the Security Token, you can enrich the functions of various STO controls. Several modules that compare the core are:
- Transfer Manager module: mainly controls the whitelist and lockout period
- Security Token Offering module: mainly defines the distribution rules of Token, similar to the traditional CO Crowdsale contract
- Permission module: Controls participants in different roles, permissions on contract functions
- And all kinds of modules that add Module rich Token control, this design gives endless possibilities
Polymath’s investor whitelist is managed under the chain and interfaces with the secondary market. It is not mentioned in detail, and it is speculated to be similar to Harbor.
From Polymath’s white paper, we can see that Polymath is not only determined to do a set of STO currency and management agreements, but more focused on the document trace of the relevant process, as well as various three-party suppliers (law firms, developers) in the ecosystem. Crowdsourcing service platform.
Summary: Polymath’s consideration of document traceability is a bright spot. Polymath’s code is updated the fastest, and the design of transaction control and STO tokens (dividends) has been taken into account. There are many proprietary interfaces defined in the Security Token, but for the secondary market users. There are not many management interfaces mentioned.
In addition, in the ecology of Polymath, planning relies on external smart contract developers to provide a rich Token contract code that meets the regulatory requirements of the release. Therefore, Polymath itself only provides the core base code and expands the interface for adding various types of contracts. For each project, the currency is to find a custom contract for outsourcing development on the platform. Perhaps in the future, Polymath will degenerate into a basic protocol + crowdsourcing platform.
From the development direction of the platform itself, the core of STO is the law firm compliance and financial product design, which requires countless rounds of offline communication, including final contract development. The outsourcing development is too poorly controlled, so the idea of the crowdsourcing platform, we think is not very suitable for this industry.
Start Engine
This company may know little about people in the industry. This is a traditional equity crowdfunding website. In fact, there are two types of STO players, one is pure blockchain technology company, and the other is the transformation of traditional equity crowdfunding companies, each with its own advantages.
StartEngine proposes the ERC-1450 protocol, and the following analysis is based on its GitHub and white papers.
ERC-1450 is based on the ERC-20 protocol:
- A strict role classification was introduced for the rights of triggering methods and events in the contract,, and a new role RTA (Register Transfer Agent) was introduced.
- Validation control for transactions and trading operations (transferFrom, mint, and burnFrom) are performed by the RTA role.
- Transfer, allowance and approve are disabled
Investor information and certification information is stored off chain.
The entire architecture design, the management of the primary market currency and the secondary market transactions are all done by controlling the permissions in the role of RTA. Information such as qualified investor certification, lock time, etc. are controlled by the RTA off chain.
In the secondary market design, the RTA needs to interface with the ATS, and the RTA implement the transfer of the token.
ERC-1450 proposes a regulatory design to recover lost securities from investors.
Summary: Start Engine is an equity crowdfunding website, so their design of the agreement and architecture had traditional financial marks. The application of the blockchain technology itself is limited to giving the RTA a control right, and the transaction operation must be performed by the RTA.
There are too many modifications to the ERC-20 interface, they can be used for reference in the business model design.
Swarm Fund
Unlike the previous platforms, Swarm is more like an investment platform, by entering funds and other assets into the market. Individual investors can use SWM, BTC and ETH to invest in real-world assets. Investors receive SRC20 tokens and acquire ownership and governance rights that enable them to legally share the benefits of the underlying assets and compliance with the regulation to trade these tokens legally. The project also plans to allow using legit currency to invest soon.
There are two types of tokens on the Swarm ecosystem. One is the practical token, the Swarm token (SWM), which forms the basic element of the Swarm ecosystem. It is used as a fuel token to implement token control on Swarm. The second type is the securities token. Each securities token on Swarm represents an investment opportunity to support the SRC20 token standard.
The Swarm Fund code is located on GitHub. The code update is relatively frequent and scattered. There is no specific technical introduction in the white paper or related articles, only there is a relatively easy-to-understand description for their ideas.
Summary: Swarm Fund is more like an investment platform. The white paper mainly emphasizes the characteristics of its democratic voting. Except for the code on GitHub, there is basically no technical description. The purchase of SWM and several major currencies, SWM voting, and SRC20 currency are their main models. They do have some reference value at their business level.
There are currently many projects on Swarm Fund platform already, which is relatively mature compared to other service providers that are still in development phase (except Securitize).
SUMMARY
All major STO service providers are constantly improving and developing their own agreements, through the scalable design of the architecture to achieve the pre-issuance of the token, and then gradually improve the trading rules, and fulfill the purpose of the equity contract. In general, let the system runs first and then slowly iterates afterwards.
At the same time, major service providers basically need to introduce third-party outsourcing development to help improve the development of more contracts.
If someone tells you that their platform has developed a certain Token’s STO issuance standard and is compatible with ERC-XXX, then we need to carefully study the authenticity of its white paper to see if it is just combine different pieces together version. Then focus on which exchanges it docked, and ask in detail if you have questions.
About 1400(#1411)
At present, 1411 is still in the drafting stage, and only the definition of the interface is discussed. For practical application implementation, the maturity is much lower than that of other commercial companies. Other commercial companies have simpler and more scalable STO implementation models, and have not made many changes on the standard interface of ERC-20, rather by binding other contracts to achieve the implementation of relevant rules and iterative upgrades. Therefore, we do not recommend to fall into the complex financial model in the early stage.
STO Smart Contract Structure and Its Future Development
Above listed a brief introduction to the smart contract framework of these STO issuance protocol, then we want to share some of our views and market forecasts in the issuance of securitization tokens and the development of relevant STO smart contracts.
First of all, we can see that the current STO smart contract framework is mostly designed for securitize equity. Most of these smart contracts focus on transfer of tokens (transfer and transferFrom) or provide access to a list of holders. But for the foreseeable future, debt securities, even convertible bonds, including more complex hybrid capital bonds, may be the next wave of regulatory breakthroughs. So we can actually target these types of securities tokens as well, functions such as automatic dividend payouts, convertible bonds and conversions, even trading fluctuations, debt-backed bonds, and the combination of a bunch of securities tokens into new types of financial derivatives could be embedded into smart contracts, using the trust mechanism of the blockchain to replace the opaque part of various financial products. Also, we can involve the public directly through fragmentation character, lowering the investment threshold and improving the liquidity of various securitized assets around the world.
In addition, at present, a large part of the supervision and authorization of these smart contract frameworks are completed off chain. We believe that even off chain, these oracle machine services must still need to have a certain trust mechanism. Proving its correctness in the absence of disclosure. So we continually focus on the technical development of trusted computation in various chains, and zero-knowledge proof to trusted execution environments like SGX or Keystone. We believe that if the blockchain is finally going to be mass adopted and mingled with the real industry, if you don’t trust every key part of the whole transaction then the system will not have not much differences compare with the centralized one. In the end, everyone will go back and ask why decentralization, and the blockchain will once again become a slogan and become a pseudo-concept that can never be adopted.
The Future of STO: Compliance and Self-Regulation
Regardless of our discussion for intelligent contract frameworks or more technologies, design more functions in line with the regulatory requirement. From the perspective of compliance, it is ultimately necessary to look at the attitudes of the financial authorities from various countries and the interest structure behind the securities market. These startups that promote STO standards or promote securitization tokens, as a challenger who wants to change the rules of traditional Wall Street games, if they can’t solve the pain point of efficiency or trust in the industry, it is impossible to shake the entire Wall Street easily.
The current securitization token market is a typical “chicken first or eggs first problem”. If there are not enough attractive assets or securities products to be tokenized, no matter what standard is used, naturally there will not be enough users to trade on the securities token exchange; on the contrary, if there are not enough users trade and increase the liquidity, why the project party need to spend a lot of time and money on assets or other types of securities products to go through the entire legal and legal STO issuance process. Therefore, how to create a large number of security tokens at the same time and attracting a large number of qualified investors should be the most challenging thing besides compliance at this stage.
Moreover, from a regulatory point of view, US Securities and Exchange Commission is unlikely to lower their standards for public listing just because of blockchain or STO, everything will eventually return back to the legal level. But compare with some smaller securities market, it is possible to reduce the listing standards or make various breakthroughs in regulations in order to attract STO investors and increase the scale of the market transactions and financing capabilities. Therefore, we believe that instead of focusing on the SEC’s attitude, it is better to try to adapt to compliance in other securities trading markets, such as from some smaller countries in Hong Kong or the European Union, or from some countries with low capital efficiency. After slowly attract the users and wait for the regulator’s attitude become clear, we can come back and attack the more standardized securities market.
But no matter what, we think that STO brings the whole industry, apart from the fact that everyone is trying to make themselves “compliant” with the law, we actually need to pay more attention to “self-discipline”. The reason why securities are so difficult to issue and there are so many regulation is because SEC want to protect investors, to avoid retail investors easily fall into the trap of various pyramid schemes and funds.
In fact, we can look at the future of the blockchain industry from the classic Internet entrepreneurs, from product crowdfunding sites in the past decade (such as Kickstarter, Indiegogo, JD crowdfunding) and equity crowdfunding sites (such as Angelist). The crazy ICO fundraising in the past two years is like the initial crowdfunding project on Kickstarter; Kickstarter has created many star projects, but over time, more and more projects are unable to deliver products, and more and more projects failed. In fact, it is not that different from the current bubble created by ICO. It is very rare you knew how to design hardware, how to get the software, how to deal with the factory, how to manage the supply chain to the final production IoT crowdfunding project. People like Satoshi or Vitalik, from the lowest level of consensus mechanism to the development of virtual machines and then design the token economy, to create a new industry, is even harder to see.
Although we still believe in the decentralized trust built by the blockchain, for the general public, blockchain or bitcoin are like poison. This is why the industry needs to promote “compliance” and “self-discipline”, lead the STO to the market, connect blockchain into traditional finance, and finally reshape the public’s trust of the blockchain.
References：
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