April 23, 2019 | AtoZ Markets - Blockchain technology opened the door for ICOs, a fundraising model where a project sells blockchain-based tokens to gain funds. When the crypto market was booming in late 2017, ICOs were thriving as well, raising astronomical amounts in record times. When the 2018 bear market hits, the craze for ICOs diminished as investors were less willing to buy utility tokens, which are supposed as even more speculative and risky assets than Bitcoin and other cryptocurrencies.
With interest for the Initial Coin Offerings (ICOs) melting down, a new type of blockchain-powered funding mechanism is gaining a lot of attention, which is referred to as Security Token Offerings (STOs). Before we explain What is an STO, you should have a basic understanding of tokens and securities.
What is a Token?
A token is a unit value that exists on an existing blockchain technology. Tokens do not have their own blockchain but depend on an existing blockchain of a cryptocurrency. Some examples of tokens on a blockchain are:
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- Cryptocurrency: Bitcoin
- US Dollar based stable token: Tether
- User reputation based coin: Augur
- File sharing coin: Filecoin
- Rewards based coin: Steemit
- Crypto exchange native token: CGCX
What is a Security?
Securities are tradable financial assets such as bonds, options, stocks, and warrants. These financial assets, particularly stocks, enable an individual to own a share of a company without having to buy it outright. There are strict rules, regulations, and assurances to ensure that if the company does well, the individual shareholders are rewarded proportionately, which is known as a dividend.
What is an STO?
In simple words, STO can be defined as the cryptographic blockchain technology based tokens, which can represent real-time financial values such as shares, bonds, warrants, etc. You own a share of the company by having the STO even though you are not in fact acquiring any ownership of the company. In terms of difference with ICO, STOs are the next generation of ICOs. They are fundamentally the blend of some modification of ICOs plus the additional security. STOs are confined by the regulations, hence more trustable. Several organizations utilize security token to increase the values for several investors using these STOs.
How do security tokens work?
The main aim of an STO is to increase the funds for a startup or a well-settled company. In this competitive world, no of startups evolving day by day is very high. If there are so many startups, how the internal financial market would be capable of investing in them. This was the case for which ICOs were evolved. Similarly, security tokens also work in the same manner. They can also be used to tokenize the real financial assets. With the evolving crypto world, the scope of security tokens has also increased significantly. In upcoming days, security token offerings would completely replace its competitor. There is more fluidity in the STOs as compared to ICOs.
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