Comparing ERC20, ERC223, and the new Ethereum ERC777 token standard
Next to the well-known ERC20 standard, other standards exist which try to improve the original standard. ERC223 is focused on security seeking to solve an ERC20 critical bug which has caused the loss of millions of dollars. ERC777 focuses on a wider set of transaction event handling functions and mass adoption
You are all familiar with ERC20 tokens as you probably own a couple, distributed by some kind of token sale. But did you know many more standards exist besides ERC20? Ethereum has a long history of developed standards.
To give you a better idea of what ERC means, it stands for “Ethereum Request for Comment”. This is a proposal submitted for discussion and suggestions to the actual standard. The number (like 20) refers to an issue number on code sharing platform Github. First, let’s take a look at the ERC20 standard.
What exactly is the ERC20 standard?
The advent of ERC20 tokens revolutionized the cryptocurrency market and opened the door to the plethora of ICO cryptocurrency projects the world witnessed during 2017. Introduced in 2015, the ERC20 code outlines a specific list of rules that a given Ethereum based token has to deploy, simplifying the process of programming the functions of tokens on Ethereum’s blockchain. Basically, ERC20 tokens are special forms of smart contracts that utilize Ethereum’s blockchain.
The most prominent examples of ERC20 tokens include Bancor, EOS, Tronix, BNB, VeChain, and Bankex.
Before the innovation of the ERC20 standard for Ethereum tokens, coders had to create specific implementation standards for developing a token and launching it on Ethereum’s network. Nevertheless, the ERC20 token code have simplified the process of creation of tokens, thanks to a streamlined protocol and smart contract standards. The ERC20 code alleviated the complexity associated with implementation of token’s smart contracts, which significantly reduced the possibility of breaking token’s contracts.
As of April 2018, there are 66,468 ERC20 token contracts, thanks to the uniformity of token code provided by the ERC20 standard, which made it easy for cryptocurrency exchanges to list various tokens on their trading platforms. As such, the ERC20 standard has helped the crypto community overcome liquidity problems that could have associated such an enormous number of Ethereum based tokens.
ERC20 token functions:
ERC20 code outlines six specific functions for tokens, which are
1- Getting the total supply of tokens via the “totalSupply” function
2- Retrieving the token balance of another account associated with the “_owner” address via the ” balanceOf(address _owner) constant returns (uint256 balance)” function.
3- Sending a specific amount of tokens “_value” to a given address via the “ transfer(address _to, uint256 _value) returns (bool success)” function.
4- Sending a specific amount of tokens “_value” from one token (contract) address to another token (contract) address via the “transferFrom(address _from, address _to, uint256 _value) returns (bool success)” function.
5- Enabling a specific account to withdraw tokens from one’s account repeatedly, while predefining the upper limit for the amount of tokens to be withdrawn with the “_value” parameter. This can be achieved via the “approve(address _spender, uint256 _value) returns (bool success)“. The upper limit for withdrawal, i.e. the “_value” parameter, can be overwritten when the function is recalled.
6- Returning the residual amount of tokens, within the preset amount defined by the upper limit allowed to be spent by the “_spender” to withdraw from the account of the “_owner“. This can be executed via the “allowance(address *_owner*, address *_spender*) constant returns (uint256 remaining)” function.
These six functions defined by the ERC20 code represent cornerstone functionality issues, which include how these tokens will be transferred between different accounts, and how users can retrieve data associated with a given ERC20 token. These group of functions are prescribed to ensure that Ethereum based tokens will function similarly within any part of Ethereum’s platform. As such, all crypto wallets that are compliant with the ether coin will also support tokens based on the ERC20 standard.
ERC20 is the first token standard of Ethereum. As is often the case with new code, it contains some bugs or logical mistakes. ERC20 assumes two ways of performing a token transaction. First of all, the transfer function lets you send tokens to someone’s address. If you want to deposit tokens to a smart contract, you should use the combination ‘approve + transferFrom’. You should authorize this contract to withdraw your tokens via the approve function. Then, you need to call a function of a contract that will handle your deposit and withdraw your tokens via the transferFrom function.
What if you deposit tokens by accident to a contract with the transfer function? The transaction will succeed but this transaction will not be recognized by the recipient contract. For example, if you send tokens to a decentralized exchange contract, then the exchange contract will receive your tokens but it will not credit this tokens to your exchange token balance. Moreover, if the decentralized exchange contract does not implement an emergency token extraction function, then it’s impossible to get your tokens back in any case, resulting in a permanent loss of the tokens. Due to this bug, the Ethereum ecosystem has lost millions of dollars already.
Why are we still using the ERC20 standard?
Reddit user u/Dexaran, creator of the ERC223 standard, is one of the first developers who notified the community about the aforementioned bug. We asked him why ERC20 is still so widely used, even when knowing about this critical bug. He gave the following reasons:
- Because of criminal irresponsibility of token developers for their deeds.
- Because Ethereum Foundation is still promoting the ERC20 token standard even when it is known to contains bugs. The same situation as it was with TheDAO previously. They need to say “Stop this now” but they will not.
- Because the main reason for token development is fund grabbing, rather than product creation.
- Because using a different standard will lead to higher network effects. This is not what we really need given that the Ethereum network already has scalability issues.
The ERC223 standard was proposed by u/Dexaran who helped creating this article. ERC223 is a token standard that allows token transfers to behave exactly as ether transactions. ERC223 utilizes event handling (considers a transaction an event) to prevent tokens from being lost in unhandled transactions. This improved standard resolves the ERC20 critical bug by making the transfer function throw an error on invalid transfers and canceling the transaction so no funds are lost. In short, ERC223 focuses on security.
Additions and problems
ERC223 adds an additional data parameter to the transfer function, to allow for more complex operations than just a token transfer.
Dexaran’s main concern is that too many people can lose their tokens by sending them to contracts using the transfer function, not the approve and transferFrom methods as earlier discussed. His solution is to modify the transfer method to check whether the receiving address is a contract (i.e. contains data) or not. If it is a contract, then it assumes that there is a tokenFallback function to call it back. The main weakness is that if the tokenFallback does not exist, then the receiving contract’s fallback function will be called and the sent tokens may still be lost.
ERC777 is a new fungible token standard that relies on ERC820 (Contract pseudo-introspection registry) and tries to solve ERC20’s problems, such as lack of transaction handling mechanisms that led to the loss of millions of dollars from the Ethereum ecosystem. In short, ERC777 focuses on adoption by offering a wide range of transaction handling mechanisms.
The main advantage of ERC777 is that it uses a new method of recognizing the contract interface. This standard assumes that there is a central registry of contracts on Ethereum’s network (this is defined in ERC820). Everyone can invoke this registry to know if a certain address (it doesn’t matter if this address is a contract or not) supports a certain set of functions i.e. `interface`.
One of the main problems of Ethereum is the inability to know what functions the contract implements. ERC820 is intended to solve this. ERC777 takes advantage of this approach, which is definitely a good idea.
On the other hand, you can create a token that will implement ERC20’s default functions alongside with the new ERC777 functions without overrides (and optionally inherit ERC20’s critical bug). This can guarantee a good network effect for this new token standard and faster adoption. As practice shows, the main goal of token developers is to raise money which assumes that they need to push their tokens to exchanges. It is easier for exchanges to support a token that implements legacy ERC20 functions (it doesn’t matter if these functions contain bugs or not) without any research on newer functionalities of new token standards. The easier it is for exchanges to support tokens on a new standard, the more developers will use it. This boosts the adoption of ERC777, while ERC223 lacks this property.
This token standard defines a completely new set of functions i.e. `send` functions instead of `transfer` functions. `authoriseOperator` instead of `approve`. `tokensReceived` handler function instead of `tokenFallback` handler function.
Such an approach can guarantee that the functions of this standard will not cross and override with functions of any other token standard, thus it is possible to make a token that will be compatible with ERC777 and ERC820 standards simultaneously.
At last, ERC777 standardizes Mint and Burn functionality of tokens.
Points of failure and security concerns
ERC777 implements the `authoriseOperator`function which allows someone to manage tokens on your behalf. Dexaran explained to us that he thinks this method is deprecated and should not be used. In addition, authorizing someone to manage tokens on your behalf hurts the network’s bandwidth and requires more gas. `authoriseOperator` already represents one transaction, and another transaction is required to perform the “authorized withdrawal”. So, two transactions are required to perform a transfer which can be done with just one transaction.
Next, the ERC777 standard contains an optional flag to prevent stuck tokens by performing some checks about the ITokenRecipient interface, and to check if the address is whitelisted. As this standard is focused on security of a network that handles tokens that are worth millions of dollars, it’s not a good thing to make these checks optional.
There are many other standards like ERC827 which combines some advantages of ERC223 with legacy ERC20 functions. The ERC664 standard focuses on the modularity of the token standard. This standard allows token contracts to be upgradeable, but it has inherited the ERC20 critical bug. Other standards include ERC721, ERC677, and ERC820, but they are less well-known.
Compatibility between standards
We asked Dexaran which standards are backward compatible. He told us we first should understand what ‘backward compatibility’ stands for: “Backward compatibility is a property of a system, product, or technology that allows for interoperability with an older legacy system, or with input designed for such a system.”
ERC20 & ERC223: ERC223 tokens are compatible with ERC20. Everything that is designed to properly work with ERC20 (like wallets) can work with ERC223 as well. The only exception here are contracts that are relying on approve + transferFrom token deposit patterns. However, it is possible to implement approve + transferFrom functions with ERC223 tokens, even if they are not included in the standard right now. As for wallets and any third party services that are not smart-contracts, they support ERC223 automatically because the input call data of ERC20 token is valid for ERC223.
ERC20 & ERC777: You can find the following statement in the ‘Backward Compatibility’ section of the ERC777 proposal: “This EIP does not introduce backward incompatibilities and is compatible with the older ERC-20 token standard.”
However, Dexaran told us the exact opposite and gave us this example: “Such wallets and services as MetaMask, Mist, and MyEtherWallet are working with ERC20 tokens. The input that is designed for the ERC20 token is a contract call that contains encoded parameters and a function signature. Function calls in the Ethereum Virtual Machine are specified by the first four bytes of data sent with a transaction. These 4-byte signatures are defined as the first four bytes of the hash of the canonical representation of the function signature. This means that `transfer(address, uint256)` and `send(address, uint256)` functions will have different signatures. As a result, the input designed for the ERC20 token will not be valid for the ERC777 token.” As we use our definition of backward compatibility, ERC777 is not compatible with the ERC20 token standard.
When to use which standard
ERC20: Reddit user u/Dexaran gave us this sarcastic advice, “When you want your investors to lose money because of bugs.”
ERC223: This token standard is also usable alongside with ERC777. ERC777 has some elegant features that ERC223 lacks, but the logic of ERC223 is straightforward compared to ERC777 which can guarantee that it cointain much less error-prone code. Moreover, ERC223 is not relying on any central service which means that your ERC223 token will only depend on your own implementation. As we have mentioned earlier, ERC223 aims at security improvements, but this rendered ERC223 tokens non-compliant with the ERC20 standards.
ERC777: This token standard is already usable. On the other hand, ERC777 has some security concerns as mentioned above. They also rely on central contract registry which is a security concern as well. A central registry can make developer’s life easier but it also acts as a central point of failure exactly as it was with Parity Multisig. All the Parity Multisigs relied on a central code library. It happened that there was a bug in the library and it was exploited. As a result, all the Parity Multisigs crashed. In addition, ERC777 defines a new set of functions. This is an attempt to allow token developers to make their tokens compatible with both ERC20 and ERC777 standards simultaneously for the sake of adoption. This means that a developer can inherit a bug of ERC20 in ERC777, but it allows a developer to use more transaction handling events.
In general: All tokens have a similar use case – ICO. I would say that ERC223 and ERC777 are trying to solve one problem of ERC20 in different ways. ERC223 is already taking its niche in Ethereum Classic instead of the ERC20.
This article was created with the help of Dexaran, the ERC223 developer. Some of Paul Edge’s comments on Ethereum’s token standards were used too.
Your most comprehensive guide to stablecoins
The term stablecoin refers to any cryptocurrency coin or token pegged or backed by an asset with a relatively stable price, such as fiat currencies or gold. A stablecoin can be under control of a central entity, such as Tether (USDT), or a Decentralized Autonomous Organization (DAO), such as Dai, a stablecoin which is issued on the Ethereum network. Nubits is another stablecoin which is partly controlled by a DAO, but is also under control by a central authority, representing a hybrid issuance model.
A stablecoin is typically backed by a reserve asset that has the exact equal value of the coin/token. The reserve can be a fiat currency, a precious metal (e.g. gold), or a cryptocurrency. The issuer, whether it is a central entity, or under control of a DAO, should only issue an amount of stablecoins equal to the reserve they own. New coins can be issued only when the reserve grows.
How do we define stability?
What is stable? To be considered stable, a currency or asset’s value has to experience only minor fluctuations, such that its value remains relatively steady over time. Is bitcoin stable? As of yet, we have not seen bitcoin stable in terms of value.
Why do we need stablecoins?
Why are we seeing so much interest in stable crypto? The truth is that while the volatility of cryptocurrency values makes them a popular choice for those who enjoy high-risk investments, this volatility isn’t ideal for those who actually want to use their cryptocurrency. Until we start to see a stable BTC value, people are going to look for alternatives. A stable coin can be seen as an attempt to marry the best parts of digital currencies with the relative stability of real-world assets.
The four most common uses of stable cryptocurrency are as follows:
- To create stability in cryptocurrency trading pairs in forex-style trades. Tether (USDT) was frequently used for this purpose, though recent concerns about that currency (explained later in this article) has lead to many exchanges replacing it with other stable coin options.
- Professional investors and hedge funds can use stablecoins to diversify their portfolios in times of market instability. You’ll see institutional investors in the coming months and years trying to determine what is the most stable cryptocurrency to use for this purpose.
- Because a stablecoin has a steady and predictable value, it can be used for transactions as easily as a fiat currency. Those with an interest in seeing mass adoption of cryptocurrency see stablecoins as a natural step towards this goal.
- Similarly, their stable value makes stablecoins the ideal medium for recurring payments such as salaries and rent. The current volatility of major cryptocurrencies can make it difficult to use them for monthly payments, as the value can swing wildly from month to month. Stablecoins may be especially attractive to blockchain startups who want to make a statement by paying their teams in cryptocurrency.
Let’s take a look at some of the most popular stablecoins across the cryptoverse.
Tether (USDT) is a stablecoin that is issued by Tether Limited, which claims that each USDT is backed by one USD (often cited when making a stable currency definition). However, the company has never managed to provide audits for the token’s USD reserve. Most cryptocurrency experts believe that Tether Limited was printing millions of Tether that had no USD backup. The main objective of USDT is to facilitate exchange transactions between cryptocurrencies and fiat currencies with a rate pegged to the USD.
USDT is issued on Bitcoin’s blockchain via the Omni Layer Protocol. Tether Limited claims that each USDT is backed by one USD held in the company’s reserve, yet users cannot necessarily redeem them via the Tether Platform or partnering exchanges. USDT can be stored and transacted just like any other cryptocurrency. To transact and store Tether, users have to have an Omni Layer-enabled wallet such as Holy Transaction, Ambisafe, or Omni Wallet. USDT offers an alternative means to Proof of Solvency via introduction of a Proof of Reserves process.
The USDT Proof of Reserves system, the number of USDT tokens in circulation, can be checked on Bitcoin’s blockchain via the tools available on Omnichest.info. The amount of USD comprising the backup reserve can be proven via publishing the company’s bank account balance and undergoing periodic audits performed by professional auditors, who publish the financial transfer statement and the bank’s account balance of Tether Limited.
During the period between January 2017 and September 2018, the volume of circulating USDT rose from around $10 million to more than $2.8 billion. During the early months of 2018, USDT represented around 10% of bitcoin’s total trading volume, yet during the third quarter of 2018, it accounted for around 80% of bitcoin’s trading volume.
In June 2018, USDT was the tenth biggest cryptocurrency by market capital. Researchers and crypto experts proposed that a price manipulation scheme that exploited USDT, accounted for around 50% of the rise in bitcoin price during the fourth quarter of 2017.
To solve the problems associated with USDT, USDX was created to bridge the gap between cryptocurrencies and fiat. The USDX token is pegged to the USD via a novel logarithmic protocol, mitigating the risks that accompany the usage of USDT or other stablecoins.
USDX promotes stability of its value through its algorithmic central bank, which boosts and reduces the total supply of USDX tokens to match the value of USD in real time. A market price feed is delivered via Oracle Feed, which extracts price data from multiple exchanges. To boost transparency, exchange rates have to be accepted or dismissed via randomly selected token holders. Through this process, the system boasts a decentralized, trustworthy means to accommodate value indicators.
Despite the fact that USDX is not the only stablecoin that utilizes a transparent, elastic supply mechanism, its founders claim that it promotes superior decentralization and stability via its innovative algorithmic protocol.
TrueUSD (TrueCoin) was developed to solve USDT’s problems, as it is based on regular auditing, maximum levels of transparency, full backup reserves (collateral), and legal commitment to exchange TrueCoin tokens to USD whenever needed. The company plans to create stablecoins pegged to the Euro, Yen, precious metals (gold and silver), and other assets (real estate, stocks, etc).
While USDT is marked by a centralized and suspicious architecture, TrueCoin has partnered with a wide range of chartered banks and trusts to make sure that there is a transparent reserve of USD backing up the stablecoin. The strong legal architecture of TrueCoin represents a clear improvement upon the questionable nature of USDT. When you buy a TrueUSD token, you are legally an owner of one USD that is fully redeemable upon request.
Reliance on unrelated assets such as fiat currencies or altcoins poses a serious challenge when it comes to the development of stablecoins. Havven was established to provide the market with a decentralized payment network and a stablecoin solution that defies volatility. nUSD is Havven’s first nomin, which is a stablecoin pegged to the USD. Havven is planning to issue nomins for several fiat currencies, towards the end of 2018, including nGBP, nEUR, nJPY, and nAUD.
Havven’s system is based on a dual token design that offers a stablecoin solution that is on-chain, asset backed, and decentralized. Nomins are backed up by the value of the system’s collateral token, havven. The value of havvens originates from fees charged by nomin transactions, which reward holders of havven tokens for staking their tokens. Overall, nomins’ value is stabilized via nomin holders, who are rewarded with the ability to control the overall supply via the percentage of fees they receive. Havven, the company, holds 80% of the total supply of havven tokens in escrow, to shield the system against the aftermaths of price drops accompanying large scale sell-offs.
Havven is endorsed by a group of the world’s top cryptocurrency investors and funds, including AlphaBlock Investments, BlockTower Capital, and GBIC. Furthermore, the company has also announced future partnerships with some projects that will rely on nomins for providing a stable medium for transacting including intimate.io, MARKET Protocol, Swapy, and others.
Rockz is a stablecoin that is pegged to arguably the world’s most stable currency, the Swiss franc (CHF). For every Rockz token issued, one CHF is held as a backup reserve, legally enforceable by the company. 90% of the total CHF backup reserve of Rockz is held in paper form and stored in vaults secured high in the Swiss mountains. The remaining 10% is held in some of Switzerland’s most trusted and secure banks to promote liquidity.
Every holder of Rockz tokens has the full enforceable legal right to the corresponding amount of CHF. As such, in the event of the company declaring bankruptcy, token holders will have direct access to their funds secured in the vaults and/or Swiss banks.
Every month, Rockz’s holdings are audited via a trusted third party auditor, so that token holders are transparently assured that 100% of their investments are solidly backed by the CHF collateral. Rockz is a stablecoin that can help crypto investors ride out periods of extreme price drops without having to convert their crypto holdings to fiat and deal with high fees and taxes.
DAI has been issued to solve some of the problems associated with stablecoins, especially those pegged to fiat currencies. Mainly, whenever a stablecoin is backed by fiat currencies saved in bank accounts, manipulation and legal actions taken against the holder of the bank accounts will jeopardize the token’s value.
The creator of the MakerDAO coin solves this problem via the use of Ethereum’s smart contracts to promote stability. Instead of purchasing DAI coins, users create it after locking up their ETH in the Maker system. When a user doesn’t need their DAI coins any more, the CDP smart contract will return to them the same amount of ETH that was collateralized. To mitigate the problems associated with ether’s price volatility, DAI boasts an automatic liquidation process whenever ether’s price drops. The ETH locked up by the CDP smart contract is proactively auctioned off right before its price falls below the value of the DAI it backs up.
Basecoin’s approach to stablecoins is very innovative. In contrast to other stablecoins, the concept behind Basecoin is very simple. Basecoin’s value is pegged to either an asset or an index, such as the Euro, USD, Consumer Price Index, SP500, or others. Via continuous monitoring of price feeds, the total supply of Basecoins is automatically modified to offer a stable value.
Basecoin also relies on another pair of currencies; Base Shares and Base Bonds. These currencies serve as an economic incentive for holders of the token to adjust the token supply by exchanging their Basecoins for bonds, which opens the door to users to earn profits on their investments. Shares are issued whenever the supply has to be boosted. Both of these processes promote the stability of Basecoin’s value.
Even though Basecoin will be initially pegged to fiat currencies, this is planned to shift to an index offering promoting decentralization of the whole system, price stability, and complete independence from reliance on fiat for token pegging.
DigixDAO was the first company to issue a stablecoin pegged to gold. DigixDAO issued two tokens on Ethereum’s blockchain; DGX and DGD. One DGX token has the value of 1 gram of gold, and is backed up by real gold. DGD tokens offer their holders voting power that is proportionate to the amount of tokens they hold.
Seigniorage Shares is a non-collateralized stablecoin. It is intended to form a central bank via smart contracts that can continuously issue a currency with a value of $1 to control the overall supply. The smart contract is programmed to issue new coins and offer them for sale whenever the price skyrockets, until the price drops back down to $1. As such, the smart contract will generate profits. On the other hand, buying Seigniorage Shares coins takes place to reduce supply, which will lead to a rise in price.
Basis.io is an algorithmic stablecoin offering, designed to expand and contract supply, similar to the way central banks buy and sell fiscal debt. The intention is therefore to stabilize purchasing power, as when demand rises, the blockchain will create more Basis. This expanded supply is designed to then bring the Basis price back down. It’s important to note that there are no tangible assets with Basis, but the system creates incentives designed to build up a stable equilibrium for the currency. The more that Basis grows, the stronger its status as a potential medium of exchange, and the stronger its stable equilibrium. The company has raised $133M from an impressive list of top VCs.
This is another stablecoin which expands and contracts supply algorithmically, with a Stability Reserve intended as a decentralized guarantee of solvency. Most central banks maintain reserves via foreign currency and gold, and similarly, Terra’s Stability Reserve finances contraction of the Terra money supply whenever necessary. The company has the ambition of Terra becoming a global currency, and it is designed for mass adoption, with an eye to making everyday transactions possible. Terra has raised $32M from Exchanges and VCs.
Other stablecoins that are backed by crypto include Shelling Coin and TruthCoin. Digix Gold and OneGram are backed by gold. Kowala, Stably, Augmint, Carbon, Nubits, Gemini dollar, Paxos, Nushares and USDC are stablecoins pegged to the USD. GJY is a stablecoin backed by Japanese yen. EURS which is stable crypto backed by EUR
Even though some of the stablecoins discussed might seem promising, picking the winning horse among them can be quite confusing. Governments might have begun to accept cryptocurrencies, especially in that they support the shift towards a cashless society. However, the high volatility of crypto and the fact they are non-collateralized currencies are the main reasons that governments remain reluctant to accept mass adoption of crypto. As long as governments have to ask “How stable is bitcoin?” we can’t count on them to trust it. Stablecoins might be the answer to governments’ fears, but we have yet to witness the birth of a stablecoin that perfectly adheres to the principles of the blockchain technology: decentralization, full transparency, optimum security, and immutability.
This article is part of Cointelligence’s Stablecoin Week! For more information and opinions about stablecoins, see What does ‘stable’ mean? and Subjecting stablecoins to the duck test and A stablecoin fairytale.
An Overview of Security Token Exchanges Expected to Launch in 2019
The year 2018 has definitely witnessed the breakthrough of security tokens. The blockchain technology has permitted the tokenization of various forms of securities and assets. It is inarguable that security tokens have made it possible to tokenize almost everything that bears a value including equities, goods, real estate, fundraising, futures, credit, time based rentals, service leases, creative products such as music, art, and literature, credit, futures, and more.
Security tokens are revolutionizing security markets and mitigating most of the problems associated with conventional security trading. The blockchain technology promotes transparency as all trades and ownership records are stored on public ledgers which cannot be tampered with. Security tokens make it possible to tokenize securities, so financial assets such as stocks, bonds, futures, equities, swaps, and forwards can all be managed via distributed ledgers.
However, where will security tokens be traded? Presently available cryptocurrency exchanges are not equipped to support security token trading. Moreover, most exchanges don’t have the necessary licenses to permit the trading of securities. As such, licensed security token exchanges have begun to emerge to fill this gap and provide liquidity for the security token market.
Obviously, security tokens will attract an enormous share of Wall Street’s money during 2019. This expected shift has urged many venture capitalists and entrepreneurs to invest in the establishment of security token exchanges during the past couple of years. Throughout this article, we will take a look at security token exchanges that are expected to launch in 2019 and 2018’s fourth quarter.
Before we get started, let’s explore the most important security token exchanges that have been already established and are currently promoting liquidity of the security token market.
Current Security Exchanges
BTF is a crypto security investment platform that is only open to professional investors. To qualify to join BTF, investors have to have an annual income of over $200K, and should be able to invest at least $1,000 with them.
BTF is trying to establish itself as a market for blockchain-based projects that issue security tokens, shares, conventional bonds, futures, and other forms of tokenized securities.
By issuing their native token, BFT, they have taken a big step towards bringing together the highest net worth investors interested in tokenized securities, cryptocurrencies, and other forms of Fintech solutions.
tZero is the brainchild of Overstock which has been established to serve as an exchange for security tokens. The greatest thing about tZero is its user interface which is extremely friendly and easy to use. The platform boasts front-end integration of a risk management system, an order management system, an order matching engine, place orders, market orders, proprietary technology, and full support for security token trading.
tZero has partnered with Polymath to simplify the legal process of issuance and trading of security tokens. Polymath has innovated a new Ethereum based token standard, the ST20, which can only be owned and held by a list of authorized Ethereum wallet addresses, which have completed KYC verification procedures, which enforces compliance with government regulations.
tZero recently concluded the private sale phase of its security token (TZRO) which lasted til the end of August; that’s when the trading platform went live.
Bancor has innovated the Smart Token protocol which is the seed for a decentralized cryptocurrency exchange. Smart Tokens can be continuously and autonomously converted to other tokens on the network using a technology that operates in a manner that is somewhat similar to Atomic Swaps.
Bancor has joined the world of Security Token exchanges. Literally, the Bancor protocol is fully compliant with security token trading and the BNT token will act as a connector token, or a bridge token, that can intermediate the exchange between any pair of security tokens.
Now, let’s take a look at the security token exchanges that are expected to launch during Q4 2018 and 2019.
Forthcoming Security Exchanges
Gibraltar Stock Exchange
The Gibraltar Stock Exchange (GSX) is a Gibraltar based stock exchange. GSX was the first fully licensed stock exchange in Gibraltar. The exchange was fully operational in 2015’s first quarter. In October 2017, the CEO of GSX announced the establishment of a new subsidiary for the exchange, the Gibraltar Blockchain Exchange (GBX), which aimed at the establishment of a regulated utility token marketplace. Soon after the GBX announcement, GSX Group Ltd. confirmed that it was planning to revamp the group’s stock exchange (GSX) to become the world’ first ever regulated security token exchange.
Even though trading of security tokens was planned to kick start by the fourth quarter of 2018, delay in regulatory approval by the Gibraltar Financial Service Commission (GFSC) led to adjournment of the process to the first quarter of next year. The launch of security token trading on GBX will mark a big moment for the crypto community as security tokens become recognized by an EU licensed stock exchange.
Coinbase, the popular US-based cryptocurrency exchange, has announced that it is on track to enable security token trading on its platform. Being based in the US, acquiring the necessary banking licenses and brokerage statuses can take years. To overcome this, Coinbase has decided to merge with companies that already have the required licenses and registrations. That’s why Coinbase has successfully purchased three financial institutions: Venovate Marketplace Inc, Keystone Capital Corp, and Digital Wealth LLC.
Approval of these acquisitions by the government will help Coinbase acquire the legal standing of a full brokerage, which will enable the exchange to launch security token trading on its platform. It is expected that users will be able to trade security tokens on Coinbase in 2019, yet a specific date for the launch of Coinbase’s security token exchange hasn’t been announced.
Templum is another US based security token exchange that is planned to launch in 2019. Templum Markets LLC is a subsidary of Templum that is established to permit issuance and trading of various forms of tokenized assets.
Last February, Templum acquired Liquid M Capital, which gave the company access to an ATS, enabling a secondary market for the institution. Via the ATS, Templum will be able to offer security token trading on its platform in compliance with the US SEC regulations.
Even though Templum’s trading platform is live, the listed tokens are very few. So far, BanQu was the only company to conduct a TAO, and BCAP is the only secondary trade successfully completed. Templum has just partnered with CUSIP Global Service to be able to bring the standardized identification number to ICO security tokens.
The platform is expected to be completely developed in 2019, enabling security token trading that is fully compliant with the US SEC regulations.
In 2009, SharesPost was established to open the door for online private equity secondaries. Today, SharesPost has over 50k accredited investors and has executed more than $4 billion worth of shares transactions for over 200 technology companies.
Last May, SharesPost announced that it would revamp its current ATS to be able to offer security token trading on its platform. Thereafter, the company announced in June that it managed to close a $15 million Series C round that had been led by LUN Partners and Kinetic Capital to expand their ATS and open markets in Asia. SharesPost’s CEO aims at creating a global marketplace for trading of both conventional and tokenized security assets of various private companies.
Australian Securities Exchange
The Australian Securities Exchange (ASX), Australia’s primary stock exchange, announced in 2017 that it was working on becoming the world’s first stock exchange to develop an infrastructure for its trading platform based on the blockchain technology. ASX planned to use public ledger technology to replace its clearinghouse framework, known as Clearing House Electronic Subregister System (CHESS) to offer traders improved system efficiency, security, and reliability. Australia’s top stock exchange is actually developing their own blockchain, i.e. “permissioned blockchain”, to tokenize securities for the equity market in Australia.
Even though ASX planned on launching its security token trading platform in Q4 2020, the exchange’s board has announced recently that the launch date was adjourned to March/April 2021. ASX started exploring various applications of the blockchain technology in 2015, in order to be able to replace the exchange’s settlement, registry, and clearing system with a blockchain based system developed via collaboration with Digital Asset (DA), a software company specializing in the development of distributed ledger based solutions for financial institutions.
The new trading platform will operate on a permissioned blockchain where registered account holders will have to obtain clearance to be able to use it, while ASX will represent the only party with the ability to commit financial transactions to the ledger. As such, the new platform will represent a centralized network for trading of tokenized securities.
Malta Stock Exchange
Malta Stock Exchange has just inked a number of deals aiming at enabling MSX, the fintech arm of the exchange, to launch a trading platform for tokenized securities. These deals will see MSX partner with Neufund, a platform for the issuance of security tokens, to build a decentralized, fully regulated, stock exchange for trading of tokenized securities in addition to security tokens.
The partnership is planning a pilot during the next few month, which will include an ICO hosted on Neufund’s primary market, and the ICO tokens will later on be listed and traded on Binance (via means of a separate agreement with Neufund).
MSX is working closely with the regulators in Malta to comply with the Malta Financial Services Authority Act. Malta has emerged as a haven for blockchain investors, with big businesses like OKEx and Binance relocating to the country, which has been referred to as the “blockchain island” during the past few years.
SIX Swiss Exchange
SIX Swiss Exchange, Switzerland’s primary stock exchange, announced last July that it is developing a fully operational trading, settlement, and custody platform for security tokens and tokenized securities. The exchange’s new project, which has been named “SIX Digital Exchange” (SDX), is intended to be the world’s first end-to-end exchange for tokenized asset markets. SDX will tokenize existing conventional securities and other forms of non-bankable assets to boost the liquidity of illiquid assets. Furthermore, SDX’s services will include the issuance, listing, and trading of security tokens. SDX will be fully compliant with the regulations of the Swiss financial regulator FNMA, and endorsed by the Swiss National Bank, similarly to the SIX Swiss Exchange.
London Stock Exchange
London Stock Exchange, one of the world’s earliest stock exchanges, announced last July that it is collaborating with UK’s main financial regulator, the Financial Conduct Authority (FCA), in addition to two UK based firms; 20|30 and Nivaru, to issue tokenized equities in a UK based company in full compliance with the regulations of UK’s Financial Conduct Authority.
The planned partnership will utilize LSEG’s Turquoise platform, a hybrid exchange that offers a broad universe of European equities. The equities will be based on Ethereum’s blockchain and will be mainly comprised of ERC20 standard tokens. Later this month, 20|30 will be the first platform to test the process. Following a one year lock-up period, the service will be launched to the public, enabling startups and corporations to tokenize their shares. Interestingly, a large number of companies are awaiting to test out the process.
Finally, it is worth mentioning that all these emerging security token exchanges and trading platforms for tokenized equities represent just the beginning of a new era that will take equity markets to a whole new level. Blockchain based security tokens offer traders a myriad of efficiencies and advantages that promote transparency and security. Even though a considerable percentage of the world’s conventional financial institutions are resisting utilization of the blockchain technology, the market has just begun to adapt, as we’re witnessing the emergence of many trading platforms for security tokens and tokenized equities during the upcoming year. As more and more people are beginning to realize the advantages of the public ledger technology, the market will definitely start moving towards a new model based on tokenization of assets.
I wouldn’t be surprised if all of the world’s equity markets shift to the blockchain within the next few years. Who knows? Let’s just wait and see!
Quick way to spot an ICO scam
Everybody knows that it’s important to perform your due diligence before any investment in the ICO industry. But few people seem to understand what that actually means. One of our missions is to teach people how to spot a scam, rather than relying on others to do it for them. In the interest of increasing your own self-reliance and ability to outwit the scammers, we’re presenting a new tutorial on how to validate image authenticity on ICO websites.
Know your templates
As we’ve mentioned before in our above-linked guide, many ICOs use ready-made website templates as a way to both present the ICO without a lot of effort and save money on web design. While some of these templates give ICOs a base structure and allows them to use it to create a very personalized page, others offer a completely generic pack with very few possible changes.
Becoming familiar with the most common ICO templates, and what they look like in their unmodified forms, is a valuable tool in your scam-prevention arsenal. One common red flag is when the ICO has not changed the default images that come with the scheme. Let us demonstrate.
In this case, we searched for the image of the mobile application presented on the website of Referpay Network, a known scam. This image was originally used in the template from which this website was created.
By simply searching this image, we found that more than 70 ICO websites had never changed this image and are still presenting it as their “app-to-be-developed” on their website. It didn’t stop there.
We went through each one of these websites to confirm that the actual image is still there. As we discovered two very interesting things:
- The vast majority of these sites were scams. Luckily, about 90% of these scams had already ended in February. Unfortunately, there are 7 scams that are still active (which we will be publishing in the coming week). All initially connected by the same image. One of these scams has actually created a wallet app that looks exactly like the image, yet does nothing.
- Although the majority of the websites had a false link to the various application stores, some of the sites had links for the HB Wallet app on all the stores. We followed up with HB Wallet, and they stated that there is no connection between them and these wallets.
Image searching: quick, easy, necessary
This is a great example of how important it is to Google the images used on an ICO’s website. This wasn’t a team member’s profile picture or something buried in the whitepaper, it was prominently displayed as the mobile app image.
But how do you search for an image? It couldn’t be easier! Simply right click on the image, and click on “Search Google for image”. See many results, from different sources, containing that image? Congratulations, you have found a stock picture.
Not sure which image to Google? Since it’s so quick and easy, we recommend searching every image that presents information about the ICO. Team members, apps, charts, and graphs should all be investigated. And remember, you can save yourself a lot of search time by familiarizing yourself with the most common ICO templates and the images they use, so that you’ll recognize them when you see them later. The more you research and investigate ICO websites, the more you’ll start to develop a hunch about what images have been carried over from the default or stolen from other sites.
We hope that this guide will help you in your efforts to spot ICO scams!