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Are STOs the killer use-case that blockchain desperately needs?
It’s been ten years since the advent of the first blockchain network but the technology has yet to find a firm foothold, to fuel mass adoption on a global scale. Cryptocurrencies were blockchain’s first use-case and it managed to make some waves but crypto quickly gained notoriety for its extreme price-volatility. Although a majority of people don’t fully comprehend what cryptocurrencies are or how they work, you’d have to live under a rock to not know about Bitcoin.
Initial Coin Offerings (ICOs) were the next use case and it swiftly gained massive popularity among entrepreneurs as an alternative for traditional fundraising mechanism. Inordinate sums of money were raised by startups to fund their projects, it seemed like ICOs were the future of blockchain technology. Unfortunately for the technology, the downfall of ICOs was just as swift as its rise, as a lack of regulation in the space led to many bad actors duping investors of their money. The number of ICOs in 2019 has significantly decreased and is approximately one-third its value in 2018. On top of this, regulatory authorities in the US have classified ICOs as an ‘unregulated security’, and slapped dozens of startups with cease and desist orders.
In the wake of all these events and the bearish market sentiments, one use-case is exhibiting immense promise and may take the crypto space by storm.
Security Token Offerings (STOs) are traditional financial securities but in the form of digital token. This is dramatically different from ICOs, as security tokens grant investors ownership rights in a company or its underlying assets. ICOs simply provide users access to startup’s future product/ service, if it doesn’t fail. To the relief of many investors, security tokens are compliant with regulatory norms, which means investors are protected by the law and any fraudulent activity as with the case of ICOs are punishable. STOs were welcomed with open arms by entrepreneurs and investors alike and have been steadily picking up pace since 2018.
2. Will STOs overtake ICOs?
STOs have till date raised as much as $2 billion despite the lingering crypto winter and are exhibiting no signs of slowing down.
Number of STOs, quarter-wise
In spite of the bearish market sentiments being prevalent in the space, the number of STOs have maintained healthy numbers over the past few months and is likely to grow further. 2018 witnessed 93 security token offerings in total, and 2019 is already off to a good start with the number of STOs already reaching 45% of Q4 2018 levels.
ICOs, on the other hand, bore the brunt of ‘crypto winter’ with the number of ICOs observing a depreciating trend. January 2019, witnessed ICO numbers shrank by a staggering 200% when compared to January 2018.
3. Startups banking on STOs
Envisioning the need and the potential of STOs in the future, several blockchain startups have come forward with security token issuance platforms and aim to make the cumbersome process of issuing a security token more streamlined and convenient using their platforms. Ethereum is currently the most popular security issuance platform with over 252 STOs were facilitated on its platform. One reason for Ethereum’s popularity is the versatility of its platform, as it’s open source and any developer can build decentralized applications on it. In spite of this, Ethereum’s platform is plagued with technical limitations, related to scalability and transaction speed that hinder the growth of applications on its network. Some of these issues will be addressed in Ethereum’s Constantinople upgrade, which was carried out on the 28th of February.
The downside to Ethereum’s platform is that it has a broad use-case and is not specific to some functions. Which is why some of the competing platforms like Polymath are quickly gaining ground. Polymath’s platform is exclusively for security token issuances, this specific functionality brings the benefits of more streamlined and scalable projects on its platform. Polymath has facilitated till date as much as 80 security token issuances.
So far, STOs are gaining ground because they are regulatory compliant, grants investors rights over tangible assets of a company and because institutions can wrap their head around ‘a financial security in digital form’. But what are the real world implications for the latest use case of blockchain?
4. Will all assets be tokenized in the future?
In retrospect, buying and selling assets in the form of a ‘security’ has been a time and capital intensive process. This is largely attributed to the numerous intermediaries involved in facilitating each transaction, that make the process cumbersome. Security tokens could make this process more efficient, reliable and cheap by leveraging blockchain technology. Blockchain can store the proof of ownership or private key for an asset and it could be directly transferred to another user via a peer-to-peer network.
This step is revolutionary as now any asset can be tokenized and traded directly via a peer-to-peer network. Assets like real estate and fine art which suffer from low-liquidity problems can be profoundly impacted by this technology. Considering the fact that real estate is one of the largest asset classes in the world, valued at an incredible $280 trillion, there are vast opportunities for growth tokenized assets. Incredibly, if security tokens capture a measly 0.1% of just the real estate market that amounts to $280 billion.
5. Has the ethos of decentralization deteriorated?
The ethos that inspired the creation of blockchain technology and crypto was the democratization of the age-old financial ecosystem to create a more transparent and secure global payments network. It was meant to empower the subaltern and redistribute wealth but recent developments indicate a deterioration in its core belief.
In the past few months startups and investors alike have been more inclined towards raising capital through private funding, instead of a public sale. Literally, anyone with an internet connection and some money could invest in public sales, and this is what makes ICOs popular in the first place. But with the arrival of securitized tokens, startups are finding it easier to conduct private funding round from select accredited investors.
Funds raised ($MM) through private funding and ICO sales
6. Why the crypto space needs institutional investment
The crypto space is down in the doldrums currently and it desperately needs a lifeline. With institutional investors getting into the space, it could herald the market stability. On top of that institutional involvement can also boost public trust in the technology and help fuel mass adoption on a global scale. Thus if STOs can create a conducive environment for onboarding institutional investors then it will likely be the killer use-case blockchain desperately needs.