Different types of Security Tokens

Equity tokens is the value of shares issued by a company on the blockchain. The difference between an equity token and a traditional stock is the method of recording ownership. A traditional stock is logged into a database and the records are then represented by a paper certificate. On the other hands, equity tokens are recorded on an immutable blockchain. Investors are entitled to receive a portion of the company’s profits and a right to vote by owning an equity token. There are three advantages to this system:

• Allows investors to invest in blockchain companies while staying in compliance with securities law
• New fundraising model for early startups
• Framework for regulators to evaluate the project’s fundraising

Debt-based security tokens represent debt instruments such as real estate mortgages and corporate bonds. The prices of these tokens are impacted by: Risk and Dividend. A medium risk of default in a real estate mortgage cannot be priced the same way as a bond of a pre-IPO company. Thus, modeling the price of a security token after risk and dividend is key. In blockchain terms, the smart contract is a debt security token should include operations such as repayment terms that dictate the dividend model but also incorporate the different risk factors of the underlying debt. The advantages of tokenizing debt include:

• Fractionalization (Fractionalizing debt vehicles brings new opportunities to a larger scope of investors)
• Futures (Tokenizing futures contracts and derivatives could open up a whole world of new opportunities. Consequently, they increase liquidity in the tokenized market. It also provides a great way of hedging portfolios.)
• Market Size (The potential market for debt-based tokens can be massive.)
• Dividends (The difference between dividends from equity and from debt is its regularity. Dividends from bonds are typically more frequent than equity because dividends from equity heavily depend on the underlying companies’ performance)

Real Asset Token represents ownership to a certain asset such as real estate or commodities. Commodity-backed tokens address issues of trust, their inefficiencies and the complexity of transactions, which typically involve multiple parties. Blockchain technology allows a transparent record of complicated transactions, track goods, and reduce fraud, which seems to make it a natural fit for the commodity business.

Tokens can be used as virtual currencies, which have the same characteristics as any commodity (like gold) that can be traded with profit-making intentions. Commodity-backed cryptocurrencies included tokens linked to gold, silver, and oil. And each of those commodities has its own advantages and disadvantages.