The emerging trend of security token offerings

How an STO is realized via the blockchain

An STO, just like an ICO, is created with a smart contract on a network like Ethereum. In short, with a smart contract it’s possible to do what a usual contract can do. All without the need for a middle man, like a lawyer. Fully digital.

Ethereum is the most popular smart contract platform and most development activity takes place there.

The key reason why a lot of new fintech applications are built on platforms like Ethereum is, because smart contracts are a lot more efficient than usual contracts.

Example contract: Joe and Alice want to make a personalized bet on the weather tomorrow. Usually, a lawyer is required to make the bet, the contract, legally verified. Joe and Alice are smart and want the bet to be secure but also cheap. They choose the smart contract platform Ethereum. Their smart contract calls a weather API and if Joe was right, he’d get the money sent automatically. Else, Alice gets the money.

Example with an STO: Not only bets can happen, but also so called ERC-20 tokens can be issued. This makes it possible for ICOs and STOs to exist. The programming logic behind an STO is usually pretty simple. In the case of a real estate STO, the smart contract would need to issue ERC-20 tokens when someone buys them and additionally provide percentage based monthly rent payments to the addresses holding the tokens. The rent payments could be done in Ethereum, which is a cryptocurrency itself. There are also options to provide fiat-pegged cryptocurrency called stablecoins. This should be the preferred way, as security token owners don’t necessary want to be exposed to the volatility of Ethereum.

The owner of the real estate object buys Ethereum with the rent at the end of the month and simply sends it to the smart contract address. The smart contract automatically distributes the rent among the token holders. The owner could even set an automated payment to buy Ethereum and automate the sending to the contract address. With that, the whole process would be completely automated.

Continue reading

This post was originally published on this site