If you have been following the crypto trends in the past one or two years, you will know that Decentralized Finance has grown exponentially in 2020 where many DeFi platforms were deployed. However, enter the year 2021, the DeFi growth has somehow slowed and seems to have been overtaken by another emerging trend, the NFT industry.
The NFT craze started when Jack Dorsey, Twitter’s founder, and CEO, auctioned his first-ever tweet(on March 21, 2006) as a nonfungible token (NFT) and was bought using ETH for $2.9 million. Since then many NFTs were successfully sold for astronomical dollar values, like the artwork named “Everydays: the First 5000 Days.” by the artist Beeper which was sold for $69 million!
So why do people are crazy about NFTs and willing to spend so much money on them? What is NFT after all? According to Wikipedia, a non-fungible token (NFT) is a unit of data stored on a distributed digital ledger, aka blockchain, that certifies a digital asset to be unique and therefore not interchangeable. In contrast, a fungible token is a kind of digital asset that is not unique and therefore interchangeable. An NFT represents real-world objects like art, music, in-game items, videos, real estate, and more. They are bought and sold online, frequently with cryptocurrency, and they are usually encoded with blockchain technology.
The following table illustrates the differences between NFT and fungible tokens.
Interchangeable A fungible token can be exchanged with any other fungible token of the same type. It is like exchanging a dollar bill with another dollar bill and the value is still the same.
Non-Interchangeable A non-fungible token cannot be exchanged with another non-fungible token of the same type. It is like your passport or ID, they cannot be exchanged.
Uniform Each fungible token is identical to all other fungible tokens of the same type. For example, your one-dollar bill is the same as John’s one dollar bill.
Unique Each token is unique and different from all other tokens of the same type. For example, your bank account is not the same as John’s bank account
Divisible A fungible token can be divided into smaller units and the total value is still the same. For example, you can divide a dollar bill into two 50 cents or five 20 cents and the total value is still the same.
Non-divisible The non-fungible token cannot be divided into smaller units. The basic unit is one token and one token only. For example, your driving license.
ERC-20 Standard The Ethereum Standard is used for issuance tokens to be used as cryptocurrencies.
ERC-721 Standard The Ethereum Standard is used for the issuance of unique, non-fungible tokens. The most well-known case is CryptoKitties, which is a virtual collectibles marketplace where each kitty is unique.
NFT has several properties that help to improve processes and things. First, it can prove and authenticate the ownership of an asset or information, making it suitable for fraud and counterfeit prevention. Therefore, it can be used in the KYC procedure, issuing academic degrees and other educational certificates. Besides that, it can be used in areas that need authentication and proof of ownership and information, such as art, collectibles, badges, voting & elections, loyalty programs, in-game items, copyright, supply chain tracking, medical data, software licenses, warranties, real assets and more. Next, NFT is easily transferable and tradeable by capitalizing the blockchain network, without the need of intermediaries, all you need is a crypto wallet like MetaMask.
The history of NFTs began with the emergence of colored coins on the Bitcoin network(Opensea, n.d.). Rare Pepes, illustrations of the Pepe the Frog character built on the Bitcoin counterparty system, were among the first NFT projects. Some of them actually sold on eBay, and a set of Rare Pepes later sold in a live auction in New York. However the colored coins NFT projects did not gain traction in the mainstream.
Cryptopunk was the first Ethereum based NFT project which created 10,000 unique collectible punks with proof of ownership stored on the Ethereum blockchain. The is the project inspired that the modern CryptoArt movement. It was an inspiration for the Ethereum ERC-721 standard that powers most digital art and collectibles. No two punks are alike, and each one of them can be officially owned by a single person on the Ethereum blockchain. Originally, they could be claimed for free by anybody with an Ethereum wallet, but all 10,000 were quickly claimed. Now they must be purchased from someone on the Ethereum marketplace contract where you can buy, bid on, and offer punks for sale. To learn more, check out the website: https://www.larvalabs.com/cryptopunks
Though Cryptopunk was the first Ethereum based NFT, the first NFT project that made an inroad into the mainstream was the Ethereum based CryptoKitties. Launched in 2017, CryptoKitties featured a primitive on-chain game that allowed users to breed digital cats together to produce new cats of varying rarity. The first-generation cats were auctioned off and new cats could also be sold on a secondary market. At the height of the craze, sales of CryptoKitties nearly touched 5,000 ETH in volume, with Founder Cat #18 selling for 253 ETH ($110,000 at the time of sale). These high prices drew more users into the NFT gold rush.
Today, a couple of NFT platforms have been developed to help users create and mint NFT digital assets, the biggest one being Opensea. It claimed that it is the world’s first and largest NFT marketplace that lets users discover, collect and sell extraordinary NFTs.
Real estate has always been considered a safe investment compared to the stock market. However, it is also more expensive and illiquid. Though real estate is the largest asset class with a global value of $228 trillion, many retail investors are precluded from investing in this asset class, particularly commercial real estate. Barriers to entry include large upfront investment, very low short-term liquidity, management costs, among others. Therefore, how to make investing in real estate more affordable and accessible to retail investors has become an urgent matter.
In recent decades, a process known as securitization of real assets has reduced the frictions and costs associated with accessing real estate exposure for such retail investors. Among financial instruments that provide indirect investment via securitization of real assets, the most common are public and private real estate investment trust (REIT), real estate investment fund, Real Estate Exchange Traded Funds (ETFs), and real estate crowdfunding. Though investors can already buy and sell real estate investment trusts (REIT), but these often have high minimum investments and represent a large portfolio of companies rather than a single property or new development.
To work around the issues, a new form of securitization known as tokenization of real estate has emerged and is gaining popularity. Tokenization helps asset or fund owners raise capital more efficiently, and gives investors unprecedented access to private real estate investments, transparency, and liquidity.
Tokenization is a way to securitize real assets by dividing them into shares that can be sold to investors. It involves representing ownership of an interest in real estate with virtual tokens that exist on a blockchain which is known as security tokens. These tokens are created using blockchain technology, and once created can be traded on digital exchanges or Alternative Trading Systems (ATS).
An actual tokenization use case happened in Paris recently. The property is known as AnnA Villa, which is valued at € 6.5 million. The Villa became the first-ever property in France that was sold via a blockchain transaction. The transaction took place in three steps. First, the ownership of the building was transferred to a joint-stock company called “SAPEB AnnA.” Next, the ownership of the company was divided into 10 Ethereum-powered tokens which were distributed among the new owners. In the final step, each of these tokens was then further broken down into 100,000 units, meaning each token has a face value of € 6.50. Therefore, you can invest as little € 6.50 in the villa.
Advantages of Tokenization
The main advantage of real estate tokenization is improved liquidity. Liquidity means the ease with which an asset can be bought or sold as the cost of entry will be reduced. Tokenization allows a real asset to be subdivided into smaller units and sold as security tokens to potential investors. For example, a 5000 sqft property that costs $1,000,000 can be divided into 100,000 tokens, and each token sold at $10, a price much more affordable to retail investors.
In addition, tokenization will widen the market reach by creating a global investment pool that can extend the real estate market to buyers and sellers from around the globe. Anyone with sufficient capital and an internet connection can easily participate in buying and selling real estate located anywhere in the world.
Other advantages include the following:
Transparency: Blockchain is a public distributed ledger so every transaction of the security tokens can be tracked and accessible to anyone.
Security: Blockchain is a distributed ledger that is encrypted using advanced cryptography. Every transaction is encrypted into a hash which is not hackable.
Immutable: Once a transaction has been submitted to the blockchain and subsequently confirmed, the data cannot be altered. This means no one can falsify the transactions and hence frauds can be prevented.
Improved Operational Efficiency: Smart contracts can automate processes such as compliance checks, investor whitelisting, and post-issuance matters including dividend distribution, thereby reducing cost and settlement time.
Implementation of a real estate tokenization project involves the following matters that must be dealt with:
White Paper-we need to prepare a whitepaper to describe the tokenonomics, the business model, the technological requirements, legal compliance, and more.
Type of Tokenization- We need to decide what interest to tokenize, the real asset itself, the equity of a real estate, a mortgage of the property, or others.
Asset Information-Type of asset, whether residential or commercial, the property owner, location of the property, etc.
Tokenization Ratio-Whether to tokenize part or entire property
Smart Contract-The smart contract must address the questions like the total supply of tokens, the amount of tokens to be distributed to holders, do the holders receive dividends, and so forth. Besides that, you must decide the token standard, usually, we adopt ERC20. In addition, the smart contract must be audited by a certified auditing firm.
Securities Regulation-Real estate tokens are securities therefore must be registered with regulatory bodies like SEC.
Tax-The earnings from the tokens may be subjected to taxes such as property gain tax etc, must engage tax experts to work out the tax structure and strategy.
KYC/AML– Real estate token issuers must comply with AML and KYC laws and regulations.
Basically, real estate tokenization involves the following steps:
Asset Identification—identification of the real estate asset, whether it is commercial or residential, and its location. Besides that, it may involve the acquisition, financing, and appraisal of its value.
Smart Contract Generation—Taking compliance with securities laws into consideration in the creation of the smart contract;
Token Creation—determination of the total supply and type of tokens.
Marketing and Distribution—advertising of the offering, confirmation of investor accreditation and listing of tokens on the exchange through a security token offering (STO); and
Post-Listing Support—ongoing support for investors and distributing dividends or other rights to payment.
Example Real Estate Tokenization: Aspen Coin
A good example of a real estate tokenization project is Aspen Coin. A real estate asset management and advisory firm by the name of Elevated Returns LLC issued a token that represents ownership of Aspen Digital Inc, a Maryland corporation formed with the sole purpose of owning the St. Regis Aspen Resort. Tokenization was handled by the token issuer platform known as Securitize (digital security issuance platform). In addition, Templum, a registered broker-dealer and alternative trading system managed the primary distribution, and Computershare (shareholder services) provided custodianship. Marketing was also supported by Indiegogo, a crowdfunding platform. The project successfully raised $18 million.
The tokenized securities were exempt from registration via Regulation D, and therefore were offered and sold only to accredited investors by means of a private placement memorandum. The minimum investment was set at $10,000. Besides that, dividends are to be distributed on-chain to the token holder wallet using Ether. Secondary trading is provided by Templum to whitelisted investors, and whitelisting is also provided by Templum.
In this article, I shall discuss the types of DeFi products and services available in the crypto markets. Popular DeFi products include decentralized exchanges, loan and savings markets, tokenized physical assets such as gold, derivatives, forecasting/betting markets, payment, insurance, asset management, and more.
The complete list of DeFi products are as shown in the following Figure.
DeFi loan and savings markets allow you to lend, borrow, or deposit money in a platform. Among the popular loan and savings platforms are Compound, Aave, MakerDAO, Fulcrum, dYdX, and more. If you lend out your digital assets by depositing them in a liquidity pool, you will earn interest over a period. On the other hand, you can borrow a digital asset by giving another digital asset as a collateral. The collateral is usually ETH but can be other cryptoassets. The debt has an accruing interest which is to be paid off along with the principal.
Decentralized exchanges or DEXs are like stock exchanges but run by smart contracts on the Ethereum blockchain. While both allow you to trade assets, decentralized exchanges only trade cryptoassets and do not require centralized authorities to manage the trading. They run on autopilot 24/7. Therefore, it offers fantastic opportunity to anyone in the world to have access to invest in digital assets, particularly the unbanked and underserved.
In a nutshell, DeFi products allows you to use your digital assets to secure a loan and use that loan to invest in some other digital assets that you expect to gain higher returns. You may also leverage on your collateral to secure more loans to purchase more assets with the expectation that the value of the assets will appreciate, not unlike real estate investment. Besides, you can lend your assets in a lending and borrowing market to earn more attractive interest than banks.
In addition, you may contribute your assets to liquidity pools in the DeFi money market to earn rewards. If your risk appetite is high, you may trade with margin in many different types of Decentralized exchanges. You can even expose yourself to higher risk by leveraging. The list goes on, so do not miss the opportunities!
The automotive supply chain is a highly complex and broad ecosystem with participants ranging from parts suppliers, manufacturers, sellers to aftermarket suppliers. All parts come with certain life expectancy, specific requirements and maintenance attributes. With thousands of spare parts, hundreds of parameters, and the number of manufactures distributed regionally or globally, the SCM team need to deal with a very large amount of data.
The two most common challenges are the need to keep inventories well-stocked but not overstocked, and the need to deal with the sheer amount of recalls. In addition, the industry is also facing a mirage of issues including tracking of parts, theft, counterfeit products, and data fraud.
Currently, centralized and siloed IT systems have been used to handle the issues but failed in many aspects. On the contrary, decentralized blockchain inherent features could offer perfect solutions to overcome the automotive parts supply chain issues.
All participants share a common data
Everyone has access to a single source of truth
Trust is embedded in the system
Tamperproof due to its immutability
Blockchain technology can improve transparency across the supply chain and significantly reduces the cost and complexity of doing business with multiple parties. For automakers and suppliers, blockchain technology offers unique benefits starting with protecting their brands from counterfeit products to enhancing their brand experience by creating customer-centric business models.
Possible benefits of Blockchain usage in SCM
Identification and Tracking of Automotive Spare Parts
Counterfeit Protection -Verifying Authenticity and Origin
Counterfeit products are a significant issue for automotive manufacturers / suppliers and the counterfeit spare parts market is currently estimated at several billion dollars. Counterfeit spare parts are often of low quality and thus more likely to fail. This leads to dissatisfied customers and trust in the brand .
The Blockchain technology offers significant advantages over existing solutions where spare parts can be uniquely identified and digitally represented. The digital identification of these parts can be shared transparently to multiple parties in the blockchain business network.
Mutual collaboration is facilitated within the parties knowing that sensitive business information remains confidential. Confidentiality is enforced through blockchain cryptographic methods, hence protect integrity of the data not only from manipulators within the business network but also externally from attackers.
Spare parts service centers can accurately verify the authenticity of parts during replacement. The immutability of blockchain provides for a tamper-proof solution and offers a single source of truth. This will enhance the trust relationship between customers and the manufacturer.
Protection of Aftermarket Business
The global aftermarket business was valued at over 800 billion USD in 2018 and expected to grow to over a trillion USD over the next 10 years. Over 50% of this market consists of the sale of vehicle spare parts and business is split across OEM (Original Equipment Manufacturer) and IAM (Independent Aftermarket) Suppliers.
As each product or part is uniquely represented on the blockchain, the technology can be applied to enforce business terms related to the exact production volume and timing. This level of enforcement can also be applied for manufacturers working with more than one supplier as part of their dual sourcing strategy.
Spare Parts Liability Resolution
In case a spare part needs to be replaced due to failure, liability needs to be established and this requires tracing the part back to the manufacturer. If parts are identified and digitally represented on the blockchain, it offers an accurate way to trace the origin. Liability is thus clearly established and is transparent to all parties in the blockchain. Any liability disputes can be resolved much faster and resources can be focused on customer engagement.
Vehicle Recall Optimization
Many of the recalls involve product defects that are life-threatening and automakers are exposed to a huge liability. With blockchain technology , the car and the individually assembled parts can be uniquely represented on the blockchain. If automakers can accurately identify which defective parts were installed in which cars, then the scope of the recall can be precisely executed thus result in massive cost savings.
Optimizing the Supply Chain Process
Inbound Logistics and Smart Manufacturing
Efficient planning of production capacity requires the manufacturing plant to coordinate between multitier suppliers, 3rd party logistics and transportation companies. Tracking and tracing individual parts across the inbound supply chain is complex and error-prone. Accurate, real-time information is not available and information is spread across individual databases.
By using a distributed immutable blockchain ledger across all parties, an accurate view of the status, quantity and location of the individual parts can be established. This can improve real-time logistics and plant production capacity.
Outbound Logistics Planning
The outbound supply chain in the automotive sector consists of a complex network of manufacturers, distributors, importers, and dealers. Like the inbound supply chain, participants in the outbound supply chain do not have a common data-sharing model.
Having a shared blockchain based system across the different participants will offer transparency and visibility. This will ensure faster transactions by lowering settlement periods.
Business Model Innovation
Car Personalization and Customer Engagement
The driver profile along with car customization preferences can be saved in a personal blockchain wallet. Shared or lease cars will authenticate the driver using the wallet and the car settings are personalized based on the driver profile. Automakers and mobility operators can thus create new business models focusing on individual preferences
Dynamic Pricing Models in Automotive Insurance and Leasing
A driver profile including miles covered, economical usage of vehicle and accident history is securely stored on the blockchain. Users share this data with providers offering insurance and leasing products based on their personal driving profile. The advantage that blockchain technology brings here is that the driver profile and historic events are immutably stored on the blockchain providing a single source of truth.
Digital Car Wallet
Ownership history, maintenance, and repairs can be transparently, and verifiably stored in a blockchain-based car wallet. Ownership record and fair price assessment of second-hand cars can be quickly established and transferring ownership can be done faster.
As vehicles are uniquely identified on the blockchain, stolen cars can be easily tracked and traced. Lack of trust and business friction arising in the transfer of ownership is hugely reduced. If repairs and parts replacements are verifiably tracked on the blockchain, warranty claims will be transparent for all parties.
Blockchain technology offers a unique way to automate transactions between machines and enable the future of M2M commerce. Cars in the future will be equipped with blockchain-based wallets and transactions with toll booths, park stations, and electric charging outlets will be automated without manual intervention.
Hyperledger is an open source effort created to advance cross-industry blockchain technologies hosted by The Linux Foundation. Hyperledger is a group of open source projects focused around cross-industry distributed ledger technologies. Hosted by The Linux Foundation, collaborators include industry leaders in technology, finance, banking, supply chain management, manufacturing, and IoT.
The Hyperledger project has been a collaboration of players from various industries and organizations in technology, finance, banking, supply chain management, manufacturing, IoT and more. Since its inception in December 2015, it has managed to enlist many prominent members that include IBM, Intel, NEC, Cisco, J.P Morgan, AMN AMRO, ANZ Bank, Wells Fargo, Accenture, SAP and more.
Hyperledger Fabric is the first blockchain project developed and hosted by the Linux Foundation. According to the Linux Foundation , it was Intended as a foundation for developing DLT applications or solutions with a modular architecture.
Hyperledger Fabric is an open-source enterprise-grade permissioned distributed ledger technology (DLT) platform, designed for use in developing enterprise applications. It features some key differentiating capabilities over other popular distributed ledger or blockchain platforms.
Hyperledger Fabric is a blockchain framework that runs smart contracts called chaincode, which are written in Go. You can create a private network with Hyperledger Fabric, limiting the peers that can connect to and participate in the network. This private network can be hosted on AWS or other web service provider such as Microsoft Azure , Oracle or IBM.
One special feature of Hyperledger Fabric is that it allows components, such as consensus and membership services, to be plug-and-play. Besides that, Hyperledger Fabric uses container technology to host smart contracts called chaincode that comprises the application logic of the system.
The AWS Blockchain Template for Hyperledger Fabric creates an EC2 instance with Docker and launches a Hyperledger Fabric network using containers on that instance.
The network includes one order service and three organizations, each with one peer service. The template also launches a Hyperledger Explorer container, which allows you to browse blockchain data. A PostgreSQL server container is launched to support Hyperledger Explorer.
Channels are another unique feature of Hyperledger Fabric. They allow transactions to be private between two actors, while still being verified and committed to the blockchain.
Hyperledger Fabric Architecture
Hyperledger Fabric has a highly modular and configurable architecture. Therefore, enterprises can make use of its versatility to develop innovative business applications. Besides that, it can be used to optimize the applications. Indeed, Hyperledger Fabric is well suited to develop a broad range of industry use cases including banking, finance, insurance, healthcare, human resources, supply chain and even digital music delivery.
Hyperledger Fabric is a permissioned blockchain network that provides ledger services to application clients and administrators. It allows multiple organizations to collaborate as a consortium to form the network. The permissions to join the network are determined by a set of policies that are agreed to by the consortium when the network is configured.
Hyperledger Fabric Network
The Hyperledger Fabric network comprises the following components:
Ordering service Chaincode (aka smart contract)
Membership service provider
The Hyperledger ecosystem also consists of the client applications that allow users to interact with the network. Moreover, The Hyperledger Fabric application SDK provides a powerful API for developers to program applications to interact with the blockchain network on behalf of the users.
Channels are data partitioning mechanisms that allow transaction visibility for stakeholders only. Each channel is an independent chain of transaction blocks containing only transactions for that channel.
The chaincode (Smart Contracts) encapsulates both the asset definitions and the business logic (or transactions) for modifying those assets. Transaction invocations result in changes to the ledger.
The ledger contains the current world state of the network and a chain of transaction invocations. A shared, permissioned ledger is an append-only system of records and serves as a single source of truth.
The network is the collection of data processing peers that form a blockchain network. The network is responsible for maintaining a consistently replicated ledger.
The ordering service is a collection of nodes that orders transactions into a block. The world state reflects the current data about all the assets in the network. This data is stored in a database for efficient access. Currently, supported databases are LevelDB and CouchDB.
The membership service provider (MSP) manages identity and permissioned access for clients and peers.
Channels partition the Fabric network in such a way that only the stakeholders can view the transactions. In this way, organizations can utilize the same network while maintaining separation between multiple blockchains. The mechanism works by delegating transactions to different ledgers. Members of a channel can communicate and transact privately. Other members of the network cannot see the transactions on that channel.
Recently, Security Token Offering (STO) has emerged as a new option in fundraising in the blockchain/crypto space after ICOs have been banned or heavily regulated in many countries. ICO projects were banned because many of the projects were scams. In China, they called such coins “Air Coins” and in the west, they called them “S**t coins”.
In contrast to ICO tokens which are mostly utility tokens, security tokens are backed by underlying tangible assets that have monetary value, such as stocks, bonds, funds, bank reserves, properties, minerals and more. In fact, Security Token Offering (STO) can be considered a hybrid model between initial Public Offering (IPO) and ICOs.
A security token represents the ownership of a tokenized underlying asset that is stored on the blockchain. Security tokens holders are entitled to an array of rights including equity, dividends, profit sharing, voting rights and more. These rights are written into smart contracts and traded freely as digitized tokens.
Tokenization is a method that converts rights to an asset into a digital token. Thus, we can take an asset, tokenize it and create its digital representation that lives on Blockchain. Blockchain guarantees that the ownership information is immutable. Tokens created in this way are also known as crypto tokens or security tokens. The benefits of tokenization include the ability to fragmentize large assets and expensive assets, achieve greater liquidity, achieve lower insurance costs and higher market efficiency.
For example, you can tokenize an asset such as a book that you authored. The book is kept somewhere while the book token is uploaded to the blockchain network. The book crypto token is a representation of the book ownership. You can specify how many tokens need to be transferred to your crypto wallet before you can transfer the book ownership to a buyer by means of a smart contract.
Cryptokitties is a brilliant example of the crypto token that allows users to acquire an adorable collectible by transferring some cryptocurrencies to the owner. The owner will then transfer the digital collectible to the buyer. The transaction occurs automatically via the smart contract.
STOs are usually more acceptable to the regulatory bodies as they are asset-backed and comply with regulatory governance. They are seen as a more legitimate method of fundraising. Compared to ICO, It is much more difficult to launch an STO, as it is governed by strict securities law.
Therefore, STO projects will have to conduct due diligence work to make sure they comply with the relevant regulations that are usually imposed by the security commission of a country. They would typically only be able to raise funds from accredited investors who need to pass stringent whitelisting and KYC processes. In addition, the financial cost of launching an STO is higher compared to ICO, though it is cheaper than the traditional IPO.
The process of launching an STO is nearly the same as IEO and ICO but drafting legal documents with the help of a qualified legal adviser is more important than the latter two. They may need to furnish a prospectus just like the IPO, depending on the amount of money they wish to raise and the jurisdiction of different countries.
Despite the additional legal restrictions and financial cost, STO campaigns have been fairly successful. For example, the blockchain venture capital firm Blockchain Capital was able to raise USD$10 million via its STO initiative in 2017. Nexo, a company that operates crypto-backed loans worldwide, successfully raised USD$52,500,000 in 2018.
The success of Polymath was even more phenomenal, its STO campaign managed to raise a total of USD $207,300,000 in 2018. Polymath is an interface between financial securities and the blockchain, helping issuers to overcome the complex technical and legal challenges related to issuing regulated securities on the blockchain. This cutting-edge blockchain platform offers a comprehensive tokenization process with decentralized protocol. Polymath allows a company to quickly and conveniently raise capital and mint security tokens.
Steps in conducting an STO
Step 1 Assemble A Formidable Team
In this era where information is instantly available, potential investors and Exchanges will know instantly the background of the project team members. If the project team comprises mostly inexperienced people, it will seriously affect the confidence of the investors and the Exchanges. Therefore, the project owner must assemble a formidable team that comprises experts in business, legal, technology, marketing, and other related disciplines. As most STO projects are blockchain-based, it is a must to hire blockchain experts.
Step 2 To Decide Whether STO is Suitable for the Company
Though STO might be easier and less costly than traditional IPOs, it is not necessarily more beneficial. Therefore, the project needs to analyze and evaluate the options before deciding to go ahead with STO.
Step 3 Decide on the types of Security Token
The project team needs to decide on what type of security token they wish to issue. The most common type is the equity token. Equity token means token holders become a shareholder of the company which allows them to receive periodic dividends and have voting rights.
Another type of token is the debt token (or bond token) which means holders are entitled to receive periodic interests based on the underlying digital assets they lend to the company. The token holder is a lender(the creditor) rather than a shareholder of the company.
Step 4 Decide on the Soft Cap and Hard Cap
Next, the project team must decide on the amount to raise in the STO campaign. Specifically, it means they have to decide on the soft cap and hard Cap. A hard cap is the upper limit of the STO’s goal whereas a soft cap is the lower limit, more like the actual amount the team is aiming to raise. Besides that, they have to determine the initial token price at the private sale stage, how many tokens to be minted and how will tokens are distributed.
Step 5 Writing the whitepaper
The whitepaper is a document that comprises a thorough description of the project, distribution of tokens, business model, tokenomics and more. It also includes information about the project team which usually comprises the board members, the marketing team, the technical team, the legal team, and the advisers.
Writing the whitepaper is a very important step in the IEO campaign. It is an important document that showcases the project. Whether the investors will be impressed and looking forward to investing in the project depends on how well the paper is written.
Step 6 Developing the Token
The token is an integral part of the STO project. Without a native token, what can you sell to the investors? Therefore, it is crucial to design the token from day 1, and start developing it as soon as possible.
Most tokens for STO projects are ERC20 tokens. The ERC20 standard is chosen because it can be easily designed and deployed to the Ethereum main net. However, if you want a customized token and your team has the expertise and programming skills, you can develop a different protocol from the Ethereum main net, or even develop your own blockchain system.
Step 7 Marketing
The project team must carry out an aggressive marketing campaign for its STO initiative in order to broadcast the news to as many investors as possible. However, they need to choose a jurisdiction that allows STO campaign, is crypto friendly and has less redtapes. I would recommend Malta as they are crypto friendly and intend to turn the country into an international STO hub.
The marketing campaign can be conducted through websites, blogs, as well as social media platforms such as Facebook, Twitter, WhatsApp, WeChat and more. They can also organize events and conferences to promote their token but they need to check whether these activities can be conducted in certain countries. For example, you cannot do so in Malaysia and China.
Step 8 Listing Your Security Token
Finally, the project team also must choose a crypto Exchange to list its STO. They need to conduct due diligence in searching for a trusted Exchange before deciding to engage one. A good guide is to look for Exchanges that rank within the top 50 on Coinmarketcap. Besides, they need to analyze reviews of the Exchanges on various crypto platforms. STO fees may also be another concern, as a top rank Exchange may charge an extremely high fee. Therefore, there is always a trade-off between the fee and the reputation of the Exchange.