Blockchain is undoubtedly one of the fastest-growing sectors in recent history, it’s groundbreaking decentralization model is being embraced with open arms by industries far and wide. Most of its popularity is derived from the advent of cryptocurrencies, which this year, is more than a decade old — ever since Bitcoin, the first cryptocurrency, was introduced in 2009.
When Bitcoin was introduced, cryptocurrency was limited to being a currency. In contrast to this, although the word “cryptocurrency” has been around for as long as anyone can remember, the growth of initial coin offerings (ICOs) has resulted in the creation of hundreds of distinct and unique cryptocurrencies, with ICO-initiated coins often referred to as ‘tokens.’ With 2021 proving to be a successful year for cryptocurrency projects, it is likely that this year will mark the beginning of the rise of a specific type of token, known as a security token, which represents one of the most encouraging, enticing, and innovative applications of blockchain technology to date.
The emergence of security tokens this year is exciting, since these tokens are one of the most promising types of tokens that may really drive the development of blockchain technology.
Security tokens: Moving in a new direction
Tokens can be categorized into two types: utility and security tokens. Because utility tokens are considerably more popular than security tokens, the vast majority of the cryptocurrency community is acquainted with them rather than with security tokens. Ethereum and Litecoin are two well-known examples of utility tokens in use today. A security token, on the other hand, is a kind of cryptocurrency that is distinct from the rest. Security tokens are mainly digital liquid contracts for fractions of any asset with an inherent worth, such as real estate, a vehicle, or stocks, that have a digital liquid contract value.
Security tokens are digitally exchanged agreements that represent a small part of an asset like real estate, vehicles, or equities, having an intrinsic value. Simply put, security tokens represent an ownership stake in an asset or anything that has value. It entitles its holder to a share of profits in the assets.
To put both Utility tokens and Security tokens into perspective, Utility tokens are like chips in a casino. In return for playing games and tipping dealers, they may be converted back to cash when it is time to pay out and enjoy your wins. They can also be used to trade money with other players at the casino. Holders of casino chips do not have any ownership or interest in the casino, nor do they have any right to any of the casino’s wins or profits if the casino is successful.
In contrast, Security tokens are like owning a part of the casino. When the casino profits, you profit. Security token holders own a part of the casein that pays off through profits or distributions.Utility tokens are digital assets that are utilised inside an ecosystem. Security tokens transfer ownership of an ecosystem to the holder. The crypto world went on the security token bandwagon in 2018, when the value of several prominent utility tokens plummeted, which was an interesting development. A flood of venture money has flowed into security token initiatives, with the goal of increasing liquidity in private markets such as the real estate market.
Founders Fund, Andreeson Horowitz, among other high profile venture capital funds poursed over $28 million into Harbor, an upcoming crypto project promising to put ownership of real-world assets on the blockchain. However, at the time Harbor failed to back up their claims and failed to show any results, which led to everyone thinking that security tokens are not worth their while.
However, since 2021 has proven influential for the cryptocurrency market, we’re finally moving in a new direction. Security tokens are changing how we invest and use our money. They now serve as a natural bridge between the traditional finance sector and blockchain. Security tokens are beneficial for both the industries. This is because assets administered via tokens are already a thing in the traditional market — even the biggest market like equities and real estate.
Why are security tokens great?
Security tokens are advantageous because they enable any business that wishes to distribute its shares to interested investors to use security tokens to reflect the advantages associated with conventional securities such as shares, voting rights, and dividends. Since the underlying technology is none other than the heroic and transparent blockchain technology, the advantages are numerous such as
Transparency
Since security tokens are based on blockchain technology, that means everything is auditable, immunitable, and will include the identities of participants. Everyone in the globe has access to the distributed ledger, which keeps track of the holdings and issuances of particular fungible and non-fungible tokens in circulation.
Instant Settlement
With traditional systems, trades are performed quickly; however, assigning ownership can take days. With blockchain technology, that can happen within seconds.
Availability
Everyone in the globe has access to the distributed ledger, which keeps track of the holdings and issuances of particular fungible and non-fungible tokens in circulation.
Divisibility
Asset tokenization creates a slew of new investing possibilities for everyone, from big hedge funds backed by multinational corporations to individual investors trading on trading apps. Tokenization will infuse assets with democracy and increase their accessibility and granularity.
What is a security token offering?
From 2016 to 2018, ICOs were all the rage. Investors were pouring in hundreds of thousands of dollars into this novel form of fundraising. By the first quarter of 2018, over $6.3 billion of capital were locked into ICOs with the expectations that these investments would generate great yields. However, by the end of 2018, the market crashed, which led to the SEC to regulate the space and classify ICOs as securities. This regulation pushed entrepreneurs and investors away from the market.
The regulation of ICOs led to the birth of STOs, short for security token offerings. Similar to ICOs, STOs are compliant with the legislations set by SEC.
Today there are three types of security tokens
Equity tokens
Equity tokens are essentially traditional stock, except they’re based on blockchain technology. The tracking of shares is done digitally on a distributed ledger. Holders of equity tokens are entitled to a share of the company’s earnings as well as the ability to vote.
Debt tokens
Essentially, debt tokens are tokens that reflect a short-term loan to a business at a fixed interest rate, in exchange for the amount of money that investors are lending to the company. It could represent mortgages, bonds, or other types of structured debt.
Asset-backed tokens
Asset-backed tokens, as the name implies, are tokens that reflect ownership of things like as real estate, art, and other valuables.
Blockchain technology is influencing every sector there is. The features that it provides makes it possible for users around the world to enjoy something as influential as security tokens. Security tokens offer up a plethora of investing opportunities. While STOs are still relatively new, they are here to stay, and additional security tokens will likely be launched in the near future.
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