What is STO ? (Security Token Offering)

STO stands for security token offering. It is a regulated financing tool to help the company especially startup business to raise fund with a lower cost, higher liquidity and lower entry barrier.

A security token is an investment contract into an underlying investment asset, such as stocks, bonds, funds and real estate investment trusts (REIT). A security token, thus, represents the ownership information of the investment product, recorded on a blockchain. When you invest in traditional stocks, for instance, ownership information is written on a document and issued as a digital certificate (e.g. a PDF). For STOs, it’s the same process, but recorded on a blockchain and issued as a token.

There are four layers of STO:

The blockchain protocol is the underlying technology on which a particular project is built. The blockchain protocol directly influences the scalability, flexibility and complexity of the security token itself. All other layers are built on this core technology. The most popular protocol for this is currently Ethereum.

Smart contracts are automated contracts. The contract self-executing with specific instructions written on its code which get executed when certain conditions are made. Smart contracts are powered by programming languages just like any other software. The programming language smart contracts are written in is determined by the blockchain protocol. Security tokens are smart contracts that are meant to represent real-world assets that can be transferred following securities law. The smart contract itself is simply a series of pre-written lines of code that have parameters in place to allow for the transference of the token (and therefore the asset) following proper compliance with securities law for all parties involved.

Issuance platforms are the technology providers that actually create and issue the security tokens themselves. These providers are typically responsible for having compliant, regulated smart contracts for the token issuance. Examples of issuance platforms are polymath, harbor, securitize.

Exchange is one of the most critical functions in the crypto ecosystem. It acts as a portal between the Fiat world and the crypto world. It helps to facilitate the trading of Security Tokens and thus is consider as the liquidity provider in the system. Centralized exchanges, such as the traditional incumbents like Nasdaq and NYSE, help facilitate trading using their own in-house operations. Decentralized exchanges are designed to create peer-to-peer markets without any middlemen, something which was previously not possible. Finally, at their core, a Security Token will be transferrable peer-to-peer with any other wallet that supports it, even if there is no marketplace for it.