Extrapolating Tezos’ value proposition for high complexity, high value and why Tezos is the dominant smart contract platform with formal verification for tokenization of real-world assets.
Tezos has had a phenomenal year, not only by becoming the first crypto asset with daily staking rewards for over 30 million customers on Coinbase as well as OKEx and a recent ETP to be taken on the SIX Swiss Stock Exchange— but showing that there is a great demand for STO’s and that demand is not saturated on Ethereum or EOS but Tezos.
In this post, we will seek to answer and detail why entities such as tZERO, Alliance Investments, BTG Pactual, Dalma Capital, Elevated Returns, Securitize, and more have announced over $2.643 billion worth of STO’s to be deployed on the Tezos blockchain.
What are Security Tokens?
Simply put, security tokens are real-world assets that are deployed on the blockchain. There are numerous types of assets that can be deployed onto the blockchain including real-estate, equity, bonds, and more. While this sounds simple enough, security tokens are new forms of assets, one which is at an even earlier adoption level than cryptocurrency.
Security tokens pose several benefits as per their utility token counterparts such as reducing transaction costs, allowing for cross-border settlement, automation, and significantly allowing for enforcement and restrictions within the underlying technology dissuading the need for legal systems.
Broadly speaking, some more key benefits of security tokens are as follows:
- Security tokens allow stranded assets to be liquified and traded in real-time. Real estate is an asset notoriously difficult to extract capital from; you essentially have to either sell the asset or get a bank loan against it. If you securitize such a stranded asset, you can immediately trade it (make the capital flow out of and into it).
- Real-time pricing of stranded assets is notoriously difficult to gauge because it’s not like a skyscraper gets bought and sold several times a day so that you can see how much your skyscraper in the neighborhood is worth. So, knowing the true price of stranded assets is difficult. By tokenizing, you sort out the real price.
Some implications of having a real-time price are:
- One can prove to a bank the market price of your asset and secure collateralized loans again that asset.
- One may be able to reduce taxation on a large asset if you can show the tax authorities that they have mispriced your huge skyscraper.
- Tokenizing allows fractional ownership, so someone can own 1/1000 of a skyscraper, anonymously, without any hassles. This kind of idea and ability has long existed on stock exchanges (owning a fraction of Apple Corp, for example, and getting a fraction of the profits (dividend). So, this ability is now moving towards illiquid assets.
- Tokenization will have another huge benefit that many people don’t want to talk about. When there is a huge pile of real estate or loans (for instance) that is underwater, defunct, defaulted, it is difficult to get rid of these things because there is not a ready market for buying and trading such strange, hidden, difficult things. And even if someone wanted to buy some sour loans or defaulted mortgages, they can not be clear in their head that they are getting a “good price” for the risk they are taking. If you tokenize these bad loans and assets, they can easily trade and with little friction move from one owner to a new owner who may have a great idea or capital to turn the dead loan or skyscraper into something new and profitable. So, tokenization creates a market for assets and loans people want to get rid of.
With over $2.643 billion worth of Security Token Offerings (STO’s) announced to be taken place on the Tezos protocol, it is clear that among every other protocol, Tezos has been substantially leading the way in the STO issuance space.
Why are these companies and entities choosing to conduct STO’s on Tezos and not Ethereum or EOS for instance? The answer to that question revolves around three focal points that Tezos has as compared to it’s larger counterparts. These focal points, which we will go on to ascertain and include some insight from Mason Borda of TokenSoft — will show why Tezos is dominating the STO space, include some uses of STO’s for Tezos and what to expect in the immediate and short term.
Three Focal Points
There are three focal points that make conducting an STO on Tezos a very attractive choice as opposed to other protocols higher in market capitalization.
- Institutional-grade smart contracts — Tezos utilizes formal verification, a process that proves the mathematical correctness of the code. The Tezos blockchain allows for the facilitation of formally-verified smart contracts. Essentially, prior to sending $1 billion over the blockchain, one can run a formal test to simulate the transaction and ensure it will execute smoothly. The kind of smart contract language Tezos has built allows one the discipline to mathematically prove a contract (off-chain, during its development) before putting it on-chain. So, formal verification is a practice one does. Other chains, like Cardano, will similarly allow formal verification. So why does Tezos makes such a big deal out of it? Because Tezos aims to be a high-security, high-value chain and wants to make rigor and safety key practices. In other words, formal verification within Tezos strides to be cultural.
- Secure custody — Within the Tezos client software, it includes a formally-verified multi-signature contract. This allows for cold-storage deployment and management of smart contracts for the highest level of security. This, when aiming to be a highly complex, high-value blockchain, is crucial in storing and deploying large amounts of capital over the blockchain.
- Upgradeability — Tezos features a formal mechanism by which network participants are able to upgrade the protocol through a formal amendment process. Essentially, any of the newest features/tech that emerges can be ported onto the Tezos protocol via on-chain governance. This feature will allow Tezos to last much longer and be able to evolve and continuously adapt to changing times.
Furthermore, one of the reasons Tezos is an attractive place for security tokens is also because Tezos is deliberately focusing to specialize in that market and to bring the tools and facilities that make Tezos an easy home for security tokens. So, the securities market will likely look towards Tezos as deliberately specializing in that market.
The idea is to bring the first few securities offerings as a proof of concept (going small, and working out the process and tooling, for instance). Good tokenized securities exchanges have to spring up, and regulatory compliance has to be done correctly, especially with jurisdictional taxation and money laundering. Once many of these things are in place, both at Tezos and in the tokenized securities ecosystem, we will likely see massive movement towards Tezos as the go-to place to make offerings, and trading.
Possible Effects of STO’s on Tezos
One possible approach is that STOs are meant to be traded in real-time; sort of like putting a property on a stock exchange and the property unit price is floating. That means having a lot of STO’s on Tezos will likely lead to a high volume of trading transactions, which means a high amount of fees generated for bakers.
The bakers get fees for building blocks, and there is some burned for execution. It could perhaps be likely that Tezos may become valuable in the sense that people will need to buy XTZ to pay execution fees for trading security tokens and executing contracts. Perhaps if stocks and bonds begin being traded on Tezos, trading could be extremely lucrative because of the high trading volume of the security token being traded on Tezos. Think for instance, if Apple stock was to be tokenized on Tezos what that would result in terms of the trading volume.
The STO stage for real estate, at the current time, is just a proof of concept stage because of a few reasons.
- No one has taken real property and done real-time trading with it, but it is trivial on a blockchain, so it is a better fit to do STO’s on a blockchain than on a traditional stock exchange as it can be too cumbersome with title, taxation, local laws, etc.
- Because STO’s are such a new thing, the trading volume is likely to start out very modestly, which is exactly what one would want to see because no blockchain has matured enough for billion-trades per day volumes, so tackling STO’s is perfect for the maturity stage that blockchain is at currently.
- Securities stocks are traded in such volume with such regulatory scrutiny that currently no one trusts a blockchain to handle stock trading, and since there is the NYSE and NASDAQ and they are doing a fantastic job for 200 years, people don’t sense a need to trade on some new platform. But that will likely change once blockchains prove themselves with STO’s as a proof of concept.
Once blockchains can prove they will not make a $1 billion “whoops, bad contract” with real properties, NYSE and NASDAQ will begin to trust it as viable. And there is a huge amount of stranded costs in traditional stock trading that can be cut out with blockchains, so the exchanges will likely panic when the first new exchanges promise quick settlement, low or no fees and immediate tax and titling settlement. By that time, in 3 years, blockchains will likely be capable of massive throughput (1 billion tx/day) and very low latency (think 5G cellular).
Another interesting feature for tokenizing real-estate (on Tezos or any other chain for that matter) is being paid dividends as token holders. Dividends, that is those derived from actual value rather than being paid speculative tokens or an imaginary value based on burning supply. If STO’s eventually go mainstream, it would beg the notion why would anyone prefer to keep their money in a bank and earn minimal interest on their dollar when they can transfer it to real-estate and have the same liquidity as cash.
Key Insight from TokenSoft on Tezos
As enumerated on earlier with the three focal points that insinuate why Tezos is a very attractive platform for conducting an STO on, let’s take some time to dive into key insight from a leading Security Token Platform, TokenSoft. To achieve this, I decided to reach out to Mason Borda, the CEO, and Co-Founder of TokenSoft.
Below in bold were my questions for Mason and his responses are highlighted in a quotation.
There have been numerous STO deals announced and planned to be conducted on Tezos totaling approximately $2.643 billion. In your opinion, why is Tezos becoming more and more popular for STO issuances as opposed to other, even larger protocols?
After performing diligence on the Tezos blockchain, we found that Tezos is great for high complexity, high value. With the formally verified contracts, you can now test high-value transactions prior to publishing them to the blockchain, providing greater confidence in safely and securely using the blockchain. Anything which furthers security and reliability is of interest to our clients.
What is the current level of interest amongst your clients at TokenSoft with Tezos compared to other protocols for STO issuances?
We are projecting that within the next year, 25–35% of the amount processed through our platform will be on the Tezos blockchain. Currently our clients have processed half a billion through our platform, and they are currently seeking to issue $3 Billion+ onto the blockchain.
Current Planned STO’s and Digital Securities Infrastructure Development
Currently, Tezos has $2.643 billion worth of STO’s announced to be conducted on the protocol with a few additional ones in the works and a new strategic partnership focused on developing infrastructure for digital securities.
- Elevated Returns and Securitize — Are seeking to conduct and deploy up to $1 billion worth of real-estate STO’s on the Tezos protocol. Previously Elevated Returns has tokenized the St. Regis Aspen Hotel in Colorado on Ethereum. Shortly thereafter, after realizing the benefits of conducting an STO on Tezos, the security token, Aspencoin was transitioned to the Tezos blockchain.
- BTG Pactual and Dalma Capital — Are seeking to use the Tezos blockchain for conducting up to $1 billion worth of STO’s. BTG Pactual is the largest standalone investment bank in Brazil and previously conducted the ReitBZ STO on the Ethereum blockchain before announcing their plans to host up to $1 billion worth of STO’s on the Tezos protocol.
- tZERO and Alliance Investments — Have announced their plans to tokenize the first of their total $643 million worth of STO’s on Tezos with the River Plaza located in the UK. The River Plaza tokenization represents the first to be conducted in the UK and the STO is planned to launch in Q1 of 2020, with the rest to be conducted over the next several years.
- Fundament Group — Has announced a strategic partnership with the Tezos Foundation to develop digital securities infrastructure. One of Fundament Group’s strategic investors, Bauwens Group has a managed project development pipeline of roughly $7.4 billion in real-estate.
Tezos has emerged as the clear leader in the STO space, securing roughly $2.643 billion in future STO’s to be conducted and deployed on the Tezos protocol. With features native to Tezos such as institutional-grade smart contracts allowing for the facilitation of formally-verified smart contracts, secure custody, and upgradeability of the Tezos protocol — Tezos remains an attractive choice for entities to conduct an STO on.