Recently, I’ve been discussing many of my viewpoints about security tokens space with thought leaders in crypto and economics with very diverse vantage points. As a result, I believe I am developed a thesis about the security token market that combines a strong believe about the potential of the space more pragmatic perspectives from the technological and market dynamic standpoints. A friend recently encouraged me to publish some of my most controversial ideas about security tokens to facilitate a broader debate within the community. So I’ve put together fifteen ideas about security token that most people in the industry are either going to find controversial or, most likely, disagree with.
I would like to clarify that I am incredibly bullish about the security token space. However, I also believe there is an immense (and growing) gap between the vision in the space that is being presented at conferences and tradeshows and the realities of the current generation of technologies and use cases being solved. Ok, here we go:
1-Tokenization Platforms Are Likely to Get Commoditized
Let’s start with a bag: I believe the process of generating security tokens is likely to be commoditized in the long run. As the space evolves, value should shift from tokenization to higher levels of the stack that are closer to the investor side. The current architecture of security tokens is relatively trivial from the technology standpoint and its likely to be recreated in many forms.
2-There Will Be a Handful of Winners in the Tokenization Space
Complementing the previous point, I believe that only a very small number of the current generation of security token platforms will stay relevant in the market. The next phase of the security token market its going to present a higher bar both technologically and financial for startups to be relevant in the space. I wouldn’t classify the tokenization space as a zero-sum-game but rather as a few-take-all dynamic.
3-Ethereum Might Not Be the Platform of Choice for Security Tokens in the Long Term
Following the utility token frenzy, most crypto-securities are built as variations of the ERC-20 standard. However, many of the features that make Ethereum attractive for utility tokens are largely irrelevant when comes to security token. Furthermore, there are several blockchain technologies such as Stellar, EOS or Algorand that are based on architectures that are a more natural fit for the dynamics of security tokens. While most of these technologies have struggled to compete with Ethereum as the platform of choice for utility tokens, they might see security tokens as a way to level the playfield.
4-Smart Contracts Are a Horrible Way to Implement Security Tokens
Following up on the previous point, not everything in the world can be modeled as a smart contract and that certainly applies when comes to security tokens. Many of the constructs used in security token dynamics have little to do with smart contracts which forces developers to constantly hack their way around it. While smart contracts are certainly a viable option for the first generation of security tokens, that might not be the case for more sophisticated scenarios.
5-Without a Killer Product, Security Tokens Might Stay Irrelevant for Years
The security token space is full of grandiose statements claiming that crypto-securities will be next financial revolution, the biggest application of blockchain technologies or the next Wall Street. I don’t believe those claims are helpful at this early stage of the space and I certainly believe they don’t have any technological or economical rigor behind it. If history give us a lesson in financial markets, is that many promising products have stayed irrelevant for decades until a viable application was found. An analogy I like to use a lot in this space is high-yield debt or junk bonds. Originally a product of the 1970s, junk bonds remained largely irrelevant until people like Michael Milken and the team at Drexel Burnham Lambert figured out how to use them to finance leveraged buyouts. In that context, security tokens need a “Milken moment”.
6-The Killer Application for Security Tokens Might not be Obvious, Yet
My friend Leonard Boord( legendary entrepreneur and founder or Token Match) uses a clever ( and yet horrible ) analogy in which he compares security tokens with the transition from postal mail to email. Leonard’s point is that the first-time email came out, we couldn’t envision the many applications/industries it will enable. Many of those use cases were an alternative to traditional communications and many others were entirely new. Something similar happens when comes to security tokens. While today we are obsessing about tokenization models that are analogous to securitized products, the space is likely to uncover new applications that are native to the crypto space.
As a side note, if you have a better analogy for security tokens so that I don’t have to hear this email metaphor again, it would be greatly appreciated 😊.
7-The Killer Application for Security Tokens Will Not Happen Without the Right Infrastructure
Sometime I get the feeling that security token space is too obsessed with specific(tokenizing this or that) use cases while the main focus today should be on building the right infrastructure. Debt protocols, derivatives, custody, disclosures, analytics, governance and all those crazy things I’ve highlighted in my security token 2.0 thesis are necessary building blocks to enable fintech startups to create viable security token applications.
8-End to End Tokenization Solutions are the Way to Win Today, Best of Breed Stacks Will Emerge Soon
In his famous book Crossing the Chasm, Geoffrey Moore depicted different dynamics of technology markets. One of the ideas that is very clear in Moore’s thesis, is that nascent markets are more receptive to end-to-end technology offers while mature markets create a window for best-of-breed solutions. Following Moore’s ideas, I believe the current state of the security token market is better suited for platforms like Securitize or Harbor that control the entire lifecycle for the creation of crypto-securities. As the space matures, we will see specialized solutions such as financial primitive protocols gain a natural audience.
9-Liquidity is Something you Build, Not Something that Happens
Liquidity is by far the biggest challenge in the security token space and, yet, sometimes we act like is something that is going to happen organically. History is full of financial markets that didn’t achieve significant levels of liquidity and made a painful and slow transition to irrelevance. Building liquidity pools and products for large institutional investors should be one of the key focus on the security token market in order to ensure the long-term viability of the space.
10-Security Tokens are a Recentralization Vector of the Crypto Space
In emerging markets, Economic movements and financial capital very often follows a cycle from centralized to decentralized to recentralized models. Conceptually, recentralization is defined as “the concentration of power in a central authority that had previously been delegated to regional and local authorities”. As a economic phenomenon, recentralization became very visible in the 1980–1990s in which much of the developing world experienced transitions to democracy accompanied by economic liberalization and decentralization of power to subnational governmental bodies. Many of those decentralized economic structures resulted to be inefficient and they were slowly transformed into recentralized models in which the central government has some influence, without having absolute control, over the economic dynamics of the space.
I often think about security tokens as a recentralization vector in the context of the entire crypto space. Some of the completely decentralized crypto-architectures might result inefficient when comes to model crypto-security dynamics as elements such as financial policies, governance and identity are essential in this space. At the same time, the completely centralized model of most tokenization platforms today is not scalable in the long run and can become a roadblock to innovation. I believe a middle-ground model is needed.