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The Future of Security Tokens: Myths and Realities

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The Future of Security Tokens: Myths and Realities

  1. 1. The Future of Security Tokens: Myths vs. Realities Invector Labs
  2. 2. Agenda • Myths and realities of security tokens • Evolving tokenized applications • Evolving security token infrastructures • What’s next?
  3. 3. Myths vs. Technological Realities in Security Tokens
  4. 4. https://medium.com/coinmonks/what-we-need-to- enable-the-security-token-thesis-2eade6ee96f2 https://hackernoon.com/the-security-token-thesis- 4c5904761063
  5. 5. Myth: Security tokens will bring liquidity to illiquid assets...
  6. 6. Reality: Liquidity is something you build, not something that happens...
  7. 7. Myth: Tokenization will enable fractional ownership and global access to assets
  8. 8. Reality: Fractionalized ownership is mostly useless except for trading
  9. 9. Myth: Programmability will create new forms of crypto-securities
  10. 10. Reality: There are no programmable interfaces in the current generation of security token platforms
  11. 11. Myth: Regulation will expand the landscape of crypto-securities
  12. 12. Reality: Security tokens today only support two types of regulation: KYC/AML
  13. 13. Myth: Security tokens will disintermediate the securities market
  14. 14. Reality: Middlemen are finding their way into crypto securities
  15. 15. Important dilemmas in security tokens…
  16. 16. Regulation Decentralization
  17. 17. Off-Chain Processes Programmability
  18. 18. Anonymous Runtimes Identity
  19. 19. Tokenized Applications Infrastructure
  20. 20. We need a better model…
  21. 21. The Crossing the Chasm Model…
  22. 22. Applying to Security Tokens V1 Tokenization Platforms Tokenized Equity Projects V2 Tokenization Platforms Tokenized Debt, Corporate Issuances Specialized Security Token Protocols Security Token Blockchain/ Sidechain Tokenized Derivatives, Investor Products The Chasm Time TechnologicalSophistication
  23. 23. Evolving Security Tokens Mean… New Tokenization Models Evolved Tokenization Infrastructure Security Tokens 2.0
  24. 24. Evolving Security Token Applications…
  25. 25. The Next Wave of Security Token Applications Tokenized Debt Tokenized Securities B2B Tokenization
  26. 26. Tokenized Debt • Simple pricing model • Benefits of a dividend payment • Protocols specialized in that use case
  27. 27. Tokenization of Securities • Expand investor access to existing securities • Extend stablecoin model • Leverage established pricing and risk management models
  28. 28. B2B Tokenization • Leverage tokenization to streamline bank-to-bank trading of securitized products • Large volumes, manageable risk
  29. 29. Evolving security tokens infrastructure…
  30. 30. The Building Blocks of a Security Token Platform Security Tokens 2.0 Crypto-Financial Primitives Hybrid Governance Privacy Liquidity Protocols Disclosures Programmability
  31. 31. Crypto-Financial Primitives • Enable equity, debt, and hybrid protocols in security token stacks • Lay out the foundation for security token derivatives
  32. 32. Hybrid, Programmable Governance • Enable voting and governance models using identity-based, on-chain consensus mechanisms • Augment on-chain voting models with off-chain processes
  33. 33. Privacy • Incorporate privacy protocols as a first-class citizen in security token models • Model privacy regulatory rules as part of security token issuances/transfers
  34. 34. Liquidity Protocols • Build collateralization/convertibility directly into security token smart contracts • Incorporate liquidity protocols into security token exchanges
  35. 35. Disclosures • Decentralized, trustless models to store datasets relevant to security tokens • Correlated disclosure data sets with the performance and lifecycle of security tokens
  36. 36. Programmability • Extend security token platforms with programmable interfaces • Provide programmable models for third parties to build key building blocks of security token architectures: regulatory rules, exchange integration, etc.
  37. 37. Multi-Blockchain ST Runtimes • Extend security token platforms to non-Ethereum blockchain runtimes • Enable security tokens that can be pegged across different blockchains
  38. 38. Do security tokens deserve a new blockchain?
  39. 39. The Case for a Security Token Blockchain Smart Contract Limitations • Smart contracts are a horrible way to represent ownership A new consensus model • Consensus and incentives optimized for security token models at the blockchain level Crypto- Economics • Align the economics of security tokens with the crypto-economics of the network Market Players Network • Provide an environment for financial market players to be integrated into a security token network
  40. 40. The Case Against a Security Token Blockchain Protocol Landscape • Ethereum includes a large set of crypto- financial protocols relevant to security tokens Tier2 Model • Security tokens can be considered a tier2, instead of tier1, blockchain problem Market Players Influence • A new blockchain for security tokens can be subjected to manipulations by large market players Runtime Fragmentation • A new blockchain for security tokens can be conducive to many blockchains for security tokens
  41. 41. Where does that leave us?
  42. 42. Rapid Fire: 10 non- predictions about security tokens
  43. 43. Asset Tokenization is likely to be commoditized… But we will see 1-2 winners…
  44. 44. Most tokenization platform startups are likely to run out of cash before iterating in their platforms…
  45. 45. Security token debt products might be the first crypto-security to attract mainstream investors…
  46. 46. We will see several blockchains for security tokens…
  47. 47. New forms of stable coins will emerge (ex: treasury bonds)…
  48. 48. Security token derivatives can be the bridge to build successful tokenized products attractive to investors…
  49. 49. The first wave of successful crypto-securities might be extensions of existing securitized products…
  50. 50. Decentralized security token marketplaces and exchange protocols will emerge…
  51. 51. Trustless disclosures can become a standalone segment of the security tokens market…
  52. 52. Liquidity mechanics for security tokens are likely to be built at the protocol level…
  53. 53. Security tokens might enable new forms of securities…
  54. 54. Summary • Security token solutions today are too simplistic to have a big impact in the market • Crossing the chasm means transitioning from end-to-end platforms to best of breed protocols • The next wave of security token platforms will center on building crypto-financial and compliance protocols • We might see a new blockchain for security tokens
  55. 55. Thanks! jr@invectoriq.com https://medium.com/@jrodthoughts https://twitter.com/jrdothoughts