Reflections, Learning, and the Next Phase: Building the New Digital Economy
It’s been a year of learning and evolution. Swarm’s token issuance platform went live just over a year ago in January 2018, and we’ve come a long way.
We’ve always imagined Swarm as a self-sustaining decentralized network. By necessity, however, it didn’t start this way. The initial release of the Swarm token issuance and fundraising platform was on a private blockchain with a rigorous semi-manual process for qualifying investors and the investment opportunities presented on Swarm. This approach allowed us to iterate quickly on the product, to review the initial use cases, to ensure compliance on the investor side, and to refine the legal structure of the opportunities on Swarm.
Our hands-on onboarding process was intentional, and proved a great way to gain a deep understanding of the needs of investors, token issuers, as well as other relevant constituencies. Yet this measured approach had its limits. We were spending many resources maintaining our blockchain and trying to solve issues that others were already working on. We weren’t able to scale the due diligence required to serve the overwhelming number of opportunities showing up hoping to list on Swarm, and yet we didn’t want to compromise on quality by simply opening the floodgates. We knew we could do better.
By November, the solution became apparent, and we were ready to open up our infrastructure in such a way that we believed would ultimately benefit the burgeoning ecosystem of tokenized assets. We’d learned about the challenges that token issuers face when running a compliant public offering, and we understood the hurdles that investors must go through to get qualified. The regulatory landscape had evolved over the course of 2018, giving us a clearer understanding of what was needed to facilitate the mass adoption of this technology. It was time to evolve and take a new direction, to focus our attention on what we do best, and build the tools we felt were necessary to solve these and other relevant problems that the industry was crying out for, at the same time liberating ourselves from reinventing the wheel. It’s now time to scale technically, as well as the business reach and impact of our network.
Through the lens of our non-profit foundations, everything became clear. We are here to empower issuers, particularly of digital securities, and give them the best tools for issuance, for management of the ongoing compliance, as well as for interaction and governance with their investors. We see our role as key to this objective. Technically, this meant rethinking the platform stack from ground up. The viability of the Swarm blockchain, our token economics, our position in the industry… these were all put on the table. We knew we had to make some big calls. And it worked.
Kicking off 2019
And here we are in February 2019, only a few short months later. Swarm has transformed from merely an issuance platform to a technology-agnostic infrastructure builder. Transcending our own blockchain, we will support any tech stack, even non-blockchain applications. We’ve discovered a way to offer tokenization for free, we’ve ensured that we offer opportunities for anyone to collaborate and build with us, and we have found the partners we need to scale with us onward from here.
So where is Swarm now? What have we built, what is in the works, and what is our philosophy?
We like to think of Swarm as a vision built on three pillars. The vision stems from the original idea of blockchain as a force for empowering the individual. The pillars straddle the old world and the new, forming a conduit between and creating the path towards the realization of that vision — yet are modular, independent, and able to function (or stand) alone.
To talk about the pillars of Swarm is to talk about the tech we are building. Each pillar performs a self-contained key function that in conjunction enable people to own and manage assets collectively with others they have never met, in a framework that is legal and regulatory compliant.
It all starts with the Tokenization Toolkit, a framework that allows for the representation of assets as digital tokens. This is where the fundamental parameters, rules, and functionalities of these asset tokens are set, published, and distributed. The Tokenization Toolkit can be considered the foundry into which goes the creativity and entrepreneurship of new participants in the digital economy, and out of which is generated digital tokens which can be bought, traded, and governed. Like the entirety of Swarm’s technology, this toolkit is an open infrastructure that anyone can use, it is part API, part SDK, and while rooted in Ethereum, it is designed to be ported to any infrastructure. We believe token issuers should not be constrained by decisions on technology and infrastructure, but should be empowered with flexibility and a future-proof way to use any kind of platform that serves them best.
The Tokenization Toolkit allows for any tokens representing a security to be programmed for compliance, to sell as a fundraising mechanism, to facilitate dividend payments, and set buyback parameters. It allows assets to act as investments, to be reviewed, audited, and analyzed. It allows for complete token and investor management, across chains, with full transparency and enforceable accountability.
Most importantly, the Tokenization Toolkit is open. Any service can plug into it. We’re talking with wallet builders, exchanges, KYC providers, dispute resolution platforms, collateral and custody providers, and independent auditors. Anyone that can add value to an ecosystem of digital securities can freely participate, and build their business alongside ours.
Swarm’s Compliance Toolkit operates on Swarm’s Market Access Protocol (MAP) and is core to ensuring that our infrastructure allows all participants to engage with each other in a regulatory compliant manner regardless of either party’s jurisdiction. Most importantly though, it empowers the issuer of the digital security to manage the exposure of their assets and be able to fulfill the requirements of the asset’s regulatory regime. MAP is essentially a freely configurable decision engine that is consulted every time a transfer of regulated (security) tokens is initiated, and its authorization is required for the transfer to proceed. Typically, an authorization would be obtained by processing a number of checks. Firstly, MAP confirms that the receiving wallet is compliant to receive the desired tokens by comparing its certificates with those required by the token issuer. If the owner of the wallet requires a qualification certificate they do not yet hold, they are able to obtain it from any of the providers the token issuer has authorized. Secondly, the transaction is confirmed to comply with any applicable transfer restrictions, of which there can be many, and which are very dependent on the location and situation of different participants in the transaction. Finally, any required external sources of information are also considered to obtain final authority. Authorizations take the form of a digital signature that proves that all compliance requirements have been met. The compliance signature, when combined with the signatures of the sender and receiver allow the transfer to proceed fully.
While being purpose-built to support Swarm’s infrastructure, MAP is itself completely open, and can be used by any on- or off-chain application that needs to interact with investors in a regulatory compliant environment. The NYSE could conceivably use MAP to ensure that investors wanting to trade a certain stock meet the issuer’s requirements, such as being resident in the US, over 18 years of age, and not having appeared on a sanctions list anywhere in the world.
Looking a little further ahead, it is evident that the issuance of compliant digital securities is itself of little value if people cannot effectively manage and influence how they function and the benefits they generate. A co-owned piece of real estate is only as useful as what people decide to do with it. This is where Swarm’s Governance Toolkit rises to the fore.
Governance is the singular function that empowers owners of any asset or resource to ensure it is being used efficiently and in line with the interests of any relevant stakeholders. There are plenty of opinions on this topic, yet one thing is clear, it’s not a one-size-fits-all solution, and that is the approach we are taking. Note, that there are many different meanings of governance within the Blockchain world. In this case, we are targeting to best support the decision making that groups of token holders need to undergo about their co-ownership of such assets — more akin to proxy voting within the world of securities. Swarm’s governance toolkit is an open, modular layer allowing token issuers to plug in any governance model that supports a community of wallets coalescing around a defined asset with transparency, accountability and flexibility built in. This means that policies can be set initially, and then updated over time in line with developments in thinking and functionality.
Swarm’s three pillars are a foundation laid upon principles that tie them together, being that they:
- facilitate the creation and management of asset backed tokens, enable compliance, and empower individuals through governance.
- create APIs and interfaces for anyone to build upon,
- create participants in the Swarm network that have vested interest in its infrastructure via the SWM token, stimulate network effect, and align the network’s interest with that of the individual token holder.
Swarm is open and permissionless infrastructure. These toolkits can themselves be extended over time, as anyone can build dApps on top of existing contracts or build new contracts that add value to the network.