The world of tokens and tokenization of assets
Since 2016, the tokenization process has been launched, hundreds of thousands of tokens have been created on various blockchains, most of them using the Ethereum blockchain. This report discusses and analyzes the diversity of token standards across different blockchains that support the issuance of new tokens.
1. Ethereum Network Token Standards
Ethereum was the first programmable blockchain to serve as a "world computer".
In 2013, the document for Ethereum was written by Vitalik Buterin. It describes an open source, open source, open source blockchain-based distributed computing platform that can execute smart contracts: applications that run exactly as programmed, without any possibility of downtime, censorship, fraud, or third party intervention.
Ethereum allows developers to create and deploy smart contracts as well as issue their own cryptocurrency directly on the Ethereum blockchain, eliminating the need for developers to create their own new blockchains for their services. This not only saves developers the time it takes to build the blockchain, but also allows them to leverage the security and decentralization of Ethereum.
As a result, Ethereum has become the blockchain standard for creating tokens and raising capital. In addition, new decentralized apps like DeFi apps have resulted in positive network effects, driving the majority of blockchain developers to build Ethereum.
We can distinguish utility tokens from security tokens at the code level, with security tokens referring to tokens whose built-in functionality is designed to comply with both existing and future securities regulations. In particular, the security token standards introduce new methods for issuers such as whitelisting wallet addresses, transfer and ownership restrictions, and the creation of central authorities.
1.1 Utility tokens
When it comes to utility tokens on Ethereum, the most common standards are ERC-20 and ERC-721. This subsection discusses many token standards: adopted, in development, or in draft form.
ERC-20 & nbsp; is the technical standard used for smart contracts on the Ethereum blockchain for the implementation of tokens. In particular, this refers to the general set of rules that an Ethereum token needs to implement in order to allow developers to program how exactly tokens function in the Ethereum ecosystem. Thanks to these rules, this provides more predictability when moving tokens from one address to another.
Prior to the introduction and actual adoption of this set of rules by all Ethereum developers, tokens could not be transferred with full predictability, which led to compatibility issues.
ERC-223 - built on top of ERC-20, belongs to additional standard functions that can be implemented in contracts related to tokens to prevent accidental sending of tokens to contract addresses. In addition, token transactions behave like ethereal transactions. In particular, it expands on the ERC-20 standard to address problems that could result in the loss of some funds permanently.
ERC-777 . Similar to the ERC-223 standard discussed earlier, ERC-777 refers to additional standard functionality that a token contract can implement to prevent possible loss of tokens.
These functions allow for preliminary checks to ensure that the contract has all the necessary functions to support tokens obtained using certain functions. In a nutshell, operators can send a token on behalf of a different address, be it a contract or a regular account, while holding tokens gain more control over their tokens. In addition, it de facto supports blacklisting certain addresses as operators can now be whitelisted.
ERC-721 refers to an open standard that describes how to create and deploy non-functional or unique tokens on the Ethereum blockchain. While most tokens are fungible, all ERC-721 tokens are unique. One of the first popular examples of the use of such tokens was CryptoKitties at the end of 2017.
According to Binance Academy , the creation of non-functional tokens based on the blockchain allows tokenization:
- Physical assets (such as houses, artwork, and vehicles)
- Virtual collectibles (like CryptoKitties or collectible cards)
- Assets with a negative value (for example, loans)
All ERC-721 tokens must also comply with the ERC-165 interface , which standardizes the way smart contracts interact with tokens that conform to other standards (i.e. not ERC-20).
ERC-998 & nbsp; is the standard extension for any immiscible holding token another immiscible ERC-721 token or a mixed ERC-20 token. In particular, transferring ownership of token composition means transferring the entire hierarchy of elements.
This standard extension for any non-replaceable token can allow new creations such as:
- Meta-NFT (e.g. NFT as part of other NFTs)
- Packages and individual portfolios for digital asset managers (for example, sets in Recruitment Protocol)
ERC-1155 & nbsp; (Enjin) refers to the standard interface for contracts, which manage several types of tokens. This allows one contract to include any combination of fugue tokens, non-fugue tokens, or other configurations such as partially fugue tokens.
This standard interface allows the use of a token identifier to differentiate between items included in the same contract. Each token identifier represents a new custom token type that can have its own unique metadata, resources, and other specific attributes. In particular, the design of this interface offers several advantages, such as the ability to transfer multiple types of tokens (e.g. in-game items) at the same time.
1.2 Security tokens
ERC-20 was the main type of token standard used in ICO Mania 2017, during which many market participants took advantage of the global regulatory uncertainty associated with cryptocurrencies and ICOs to raise capital from investors.
Since then, the SEC and other financial bodies have created a different regulatory framework for security tokens. As a result, Ethereum developers and researchers are working on various token standards to comply with current and future regulations around the world.
Security tokens are intended to represent “full or partial ownership interests in assets and/or organizations”. While utility tokens have no restrictions on who can send or receive tokens, security tokens are subject to stricter restrictions based on identity, jurisdiction, and asset category.
In particular, these key features include the ability to differentiate ownership of tokens, the right to freeze certain tokens by a central custodian, or the inclusion of links to documents (such as KYC documents).
When it comes to Ethereum security token standards, one of the most prominent standards is ERC-1400 combined with ERC-1410 for Partially Non-Hygienic Tokens (PFT).
ERC-1400 is a library of standards for security tokens in Ethereum. This set of standards was conceptualized, designed and developed by the main developers of Ethereum, namely Adam Dossa, Pablo Ruiz, Stefan Gosselin and Fabian Vogelsteller.
These standards are the umbrella of several other standards (discussed briefly below) that are all backward compatible with ERC-20 and ERC-777 interfaces.
ERC-1410 : Partially Rectified Token Standard
ERC-1410 refers to both differential ownership and transparent constraints. This interface supports owner tokens for grouping into sections, each represented by an identity key and balance.
Some of these sections may be used interchangeably while others are not. For example, a non-functional section of tokens may have certain conditions (for example, a transition period defined for security holders).
ERC-1594 : Basic Security Token Standard
This standard provides an interface that introduces checks for potential in-chain constraints, off-chain data entry for transmission constraints, and issue/redemption semantics.
Data injection refers to rules that are defined off-chain that can be applied and updated by the contract administrator to determine the set of applicable issuance and redemption mechanisms and potential restrictions on transfer between addresses.
ERC-1643 : Document & Legend Management
This standard allows you to associate documents with a smart contract and provides a standard interface for requesting or changing these contracts, as well as for receiving updates (via events) of changes in these documents.
ERC-1644 : Controller Token Standard
This standard allows "a token to transparently declare whether a controller can unilaterally transfer tokens between addresses."
A controller refers to a program that controls or directs the flow of data between two addresses.
The ERC-884 token is an ERC-20 compliant token that was developed by David Sag in accordance with Delaware General Corporate Law.
Delaware corporations can use blockchain technology to create a tradable ERC-20 token and support Delaware corporation-issued shares.
ERC-1404 is an add-on to ERC-20 compliant tokens that includes an additional feature to restrict the transfer of tokens. This standard was created by TokenSoft, a technology provider for companies looking to issue and manage digital securities on the blockchain while meeting regulatory requirements.
Specifically, it adds the following functionality on top of the existing ERC-20 compliant token functionality:
- Token Holder Identification (KYTH): Maintaining a whitelist of accredited investors who are allowed to own tokens.
- Application of complex restrictions: country-specific restrictions or restrictions on the maximum number of token holders or the maximum number of shares per token holder.
- Support for proprietary standards: Integration with proprietary token standards such as ST20 or R Token, which are described.
ERC-1450 (also called LDGRToken) refers to an ERC-20 compliant token that complies with the new Securities Law Rules: Crowdfunding Rule, Rule D and Rule A. This standard was developed by Start Engine.
1.3 Proprietary token standards (proprietary standards)
This subsection discusses the main proprietary token standards for security tokens.
Branded Token Standards refer to token standards developed in-house by companies such as Polymath, Securitize or Harbor.
ST-20, developed by Polymath, is an ERC-20 compliant token standard that includes the ability to restrict asset transfers.
It is designed according to the ERC-1400 set of standards, which was also developed by Polymath.
DS Token (Securitize)
DS Token (Digital Security Token) was developed by Securitize, with part of its platform focused on enabling digital securities to be issued on the blockchain while meeting compliance requirements.
The DS token is an ERC-20 compliant token that implements certain functions of the DS protocol. DS Token reviews compliance with regulatory requirements through additional checks through the Compliance Service, which checks whether a transfer should be accepted between the two addresses.
In addition, the DS protocol adds methods for issuing security to either lock wallets or freeze tokens to comply with regulatory requirements. In addition, it offers special features for securities issuers to perform certain services, such as paying dividends directly to a list of investors (referenced by their wallet addresses).
R-Token is developed by Harbor as part of its decentralized compliance protocol to standardize the processes of cryptocurrencies that are issued and sold on blockchain networks.
R-Token is an open source standard that defines a set of rules for crypto securities traded by address, in accordance with existing rules. R-tokens are authorized ERC-20 tokens on the Ethereum blockchain, which must synchronize operations with the on-chain regulator service before any approval.
In particular, the Regulatory Service introduces special rules designed specifically for each type of security in order to comply with relevant regulations, KYC policies, AML requirements and tax laws.
Part of their own ecosystem (ie the OpenFinance Network), S3 is a library built on many modular contracts that aim to offer a library with specific regulatory needs. Specifically, this library solves the problem of limiting compliance, AML/KYC, investor accreditation, and intruder checks (via blacklisting).
This library also covers many registered and restricted offerings such as Rule D, Rule S, Rule A + and Rule CF. These offerings allow issuers to easily and accurately create a security token.
Atomic-DSS (Atomic Capital)
Atomic DSS Tokens, developed by Atomic Capital, offer an extension to the ERC-20 token standard to “issue digital security and automatic compliance”.
Atomic DSS (Digital Security Standard) tokens are authorized ERC-20 tokens on the Ethereum blockchain designed for digital securities that impose transfer restrictions based on the "Regulator Service" contract, which can be updated over time to comply with changes into the regulatory environment. Specifically, this standard is intended to ensure compliance with “KYC and AML requirements, accredited investor audits, trade blocking periods, tax laws and other contractual agreements.”
1.4 Limitations in the Ethereum network
Despite Ethereum's dominance as a blockchain for creating new tokens, other programmable blockchains have been developed and have been dynamically developing in recent years.
Today, one of the main problems with Ethereum is related to the scalability of its base layer, which sometimes leads to high gas fees and slow transactions. While this can be interpreted as a sign of blockchain popularity, newer blockchains have begun to compete in different segments.
Despite the full range of promises from ICO projects in 2017 to create payment systems, gaming and other service systems at the basic level of Ethereum, the most significant example of using Ethereum at the moment was the actual fundraising for these projects. The vast majority of these “promises” have never been fulfilled since then, simply due to Ethereum's scalability issues.
Since Ethereum is viewed as a universal blockchain in which almost anything can be created, albeit with relatively slow and inefficient transactions, other blockchains are looking to create more specialized and niche areas, for example TRON with more efficient distributed storage solutions and transactions leading to better support.
Level 2 scaling solutions (e.g. Celer Network or Matic ) or Ethereum upgrades for Plasma could potentially be solutions for these scalability issues, although new blockchains are becoming more aggressive in the fight for market share in tokenization.
2. Tokens in various blockchain networks
This section discusses the main characteristics of programmable blockchains that support embedded tokens running on-chain. It also compares activity, number of developers and tokens between chains.
2.1 Overview of token standards in blockchains
This first subsection introduces all the main blockchains (both by deploying smart contracts and by default) and additional layers (for example, Omni Layer, Simple Ledger Protocol) that support token creation.
By its own standard, we mean a blockchain that natively supports the creation of special tokens in its chain, and Binance Chain is a prime example of the BEP-2 standard. For example, in terms of code, tokens running on Binance Chain as BNB (Binance Chain's own token behave just like all other BEP-2 issued tokens, they all run on Binance Chain.
On the other hand, the developed standard refers to a blockchain whose tokens are maintained as part of a smart contract function, with Ethereum and Tron being two familiar examples. For example, ERC-20 tokens are not recognized at the blockchain level and run in a virtual machine (Ethereum virtual machine).
Table 1 - Blockchains and core layers supporting tokens