Tag: ico

Security Token Offering

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 aka RWA(Real World Asset) 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.

References

https://hackernoon.com/security-token-offerings-what-is-it-and-how-to-market-it-a067f46a6f2

https://diamco.io

https://blog.tokenomica.com/6-essential-steps-for-launching-and-preparing-your-sto

https://www.coinist.io/crypto-hard-caps-soft-caps/

Creating Your Own Token for ICO

ICO is a hot topic in the crypto world today. In this article, I will attempt to explain how to create your own token for an ICO project. 

First of all, you need to set up a private Ethereum network, before you can proceed to create the token. After setting up the private network, you need to run it. (The detail steps for setting up a private Ethereum network is discussed in another article)

Next, you need to install the Ethereum wallet before you proceed. Follow the steps below to install the Ethereum Wallet.

  1. Install Ethereum Mist Wallet for Windows 10.
  2. Visit the link https://github.com/ethereum/mist/releases
  3. Download Ethereum-Wallet-win64-0-11-0.zip
  4. Create a folder Ethereum under the Program Files folder and extract the zip files there.

Launch the Ethereum wallet after successful installation. Also, create an account in the wallet.

Next, Open the Wallet app and then go to the Contracts tab as shown in the figure below:

Click on DEPLOY NEW CONTRACT and bring up the  Solidity Contract Source code text editor as shown the following figure:

Now type the following smart contract  code in the code editor. 

pragma solidity ^0.4.24;

contract BestToken {
    /* This creates an array with all balances */
    mapping (address => uint256) public balanceOf;
     string public name;
     string public symbol;
     uint8 public decimals;

    /* Initializes contract with initial supply tokens to the creator of the contract */
 constructor(
     uint256 initialSupply,
     string tokenName,
     string tokenSymbol,
     uint8 decimalUnits
     ) public {
     balanceOf[msg.sender] = initialSupply;  // Give the creator all initial tokens
     name = tokenName;                        // Set the name for display purposes
     symbol = tokenSymbol;                   // Set the symbol for display purposes
     decimals = decimalUnits;               // Amount of decimals for display purposes
    }
    

    /* Send coins */
    function transfer(address _to, uint256 _value) public returns (bool success) {
     require(balanceOf[msg.sender] >= _value);   // Check if the sender has enough
     require(balanceOf[_to] + _value >= balanceOf[_to]); // Check for overflows
     balanceOf[msg.sender] -= _value;                    // Subtract from the sender
     balanceOf[_to] += _value;                        // Add the same to the recipient
     return true;
    }
}

Don’t worry about the code first, I will explain them in another article.

If the code compiles without any error, you should see a “pick a contract” drop-down list on the right, as shown in the figure below:

Click Pick a contract button and select the “BestToken” contract. On the right column, you’ll see all the parameters you need to personalize your own token. You can tweak them as you like, I use the following parameters: 10,000 as the supply, BestCoin for the token name, “#” as the symbol and 2 decimal places. Your wallet should be looking like this:

Scroll to the end of the page and you’ll see an estimate of the computation cost of that contract and you can select a fee on how much Ether you are willing to pay for it. Any excess Ether you don’t spend will be returned to you so you can leave the default settings if you wish. Press “deploy”, type your account password and wait a few seconds for your transaction to be picked up.

Now click the DEPLOY button to deploy the smart contract, the output dialog is as follows:

Upon entering the password for your account and click send transaction, the contract is successfully deployed, as follows:

Now the new token Best Token is shown in your wallet, as follows:

Tokens are currencies and other fungibles built on the Ethereum platform. In order for accounts to watch for tokens and send them, you have to add their address to this list. Proceed to add BestCoin to the list, as shown in the following figure.

Now the new token BestCoin will be shown in the list, as shown in the figure below.  

Now you can send some funds from BestCoin to a wallet, as shown in the figure below:

References