The first two parts of this series sought to clarify what STO’s actually are, their potential for investors, and the possible pitfalls which come with such tokens. This final installment examines the current infrastructure of the STO market and attempts to identify a lower risk approach to investing in the space.
Primary Components of the Security Token Market
Security Token Exchanges
Smart Contract Validation
Individual Security Token Offerings
These entities are the base layer of the security token industry. They typically facilitate the set-up, issuance, and compliance of a security token on behalf of their client. Thus, Know Your Customer (KYC) and Anti Money Laundering (AML) procedures are ‘baked into‘ the token they launch. Obviously, these platforms are paid a fee to do so. Prominent examples include Polymath, Harbor, Securitize and Swarm Fund. This is a growing segment of the market with many more players set to enter the space.
Though issuance platforms often offer custodial services to their clients, there are also companies that focus primarily on crypto asset / STO custody. New corporate bodies entering the market may be required to show ‘due diligence’ by having an independent body secure their token assets. Just as they don’t hold liquid funds in their home office, nor will they attempt to store their tokens in-house – leaving this function to an organization with day to day expertise in this area. Examples include Coinbase Custody, Ledger and LCX AG.
Security Token Exchanges
The buying and selling of STOs is clearly going to be a key component of the STO market. Examples include DX.Exchange, OKEX , Ledgity, and Binance (STO exchange component in development). These secondary markets will offer compliant 24hr a day trading of tokenized securities in a similar but much more regulated manner than current crypto exchanges. As with the issuance platforms. KYC and AML procedures will be integral to the trading on these exchanges. Most of these exchanges are still in nascent form.
Smart Contract Validation
Each and every STO will involve a smart contract or a series of interwoven smart contracts. These will need to be audited. Even if issuance platforms offer this service, it is very likely a further external review of the token’s code will be sought after. Projects such as Quantstamp, Solidified and Hackernoon are already up and running but this is another aspect of the STO space that will likely see explosive growth.
Individual Security Tokens
Each individual offering will spawn a new token, so of course, this will be by far the biggest part of the market. However, it will also be the most challenging to invest in – picking a ‘winner’ from the first wave of STO’s will require a great deal of research(and a pinch of luck) on the part of retail investors.
Where does the Investment Opportunity Lie?
While there is no doubt opportunity in each and every area of the STO market, in my opinion, it is the base layer issuance platforms which offer the easiest entry point. Just as a protocol such as ETH or EOS is home to dozens if not hundreds of tokens, so a successful platform will be responsible for bringing many individual STO’s to life. Investing in a platform offers many chances to be successful and of course, success builds on success. The issuance platforms that gain traction will likely appreciate in value. An individual failed offering won’t necessarily undermine the platform itself just as Ethereum’s fate isn’t tied to a single ICO. However, this will be an incredibly competitive segment of the market so research and due diligence will still be essential to identify possible opportunities.
My STO Investment Thesis
Issuance platforms offer the highest likelihood of high return over time.
Up to 10% of my available crypto funds are ear-marked for possible STO’s
Research Issuance Platforms / More research / Research some more / Go back and do some research / Question my bias in conducting this research / Rinse and Repeat.
10% of my available crypto funds are ear-marked for possible STOs
Diversify – invest in a number of platforms – in the range of 3
Note – Currently invested in one issuance Platform and have been for over a year. The jury’s out as to whether it will offer a decent return.
Secondary preference: Smart Contract Auditing
Already invested in a number of the keys players – so leave as is for now. Revisit the area mid-2019.
Hopefully, this series will be helpful to those of you navigating your way through the Security Token landscape. As a final word of caution – take your time – STOs are going to be an ongoing and growing component of the crypto market and will take years to mature. Time is on your side – try not to chase ‘every’ opportunity – there will always be more . First and foremost, preserve your capital and slowly build up positions in STOs. As always, looking forward to your comments, reflections, and critiques.