Security tokens are essential elements of the blockchain industry. Security tokens are unique tokens issued on permissionless or permissioned blockchains. They represent stakes in the external enterprise or assets. On a simple note, government or business entities can issue security tokens that will suffice for the same purpose as bonds, equities, or stocks.
What is a Security Token Offering?
Before getting into what STO is, what an ICO is because seemingly it is the precursor to STO. ICO stands for Initial Coin Offering. It resembles the concept of an IPO or Initial Public Offering. IPO and ICO both are elements to help startups and entrepreneurs to gather capital funding. In return for the investment in IPOs, securities get issued, while in return for the investment in an IPO, coins or tokens will be issued.
A security token represents ownership information regarding any investment product or blockchain records. For example, when someone invests in a traditional stock, the stock ownership information is written on paper or digitally created -followed by the generation of a digital certificate in PDF. Regarding STOs, it is almost the same process, but the record is maintained as the issuance of a token, and this token is none other than the security token. STO is a hybrid model between ICO cryptocurrency and IPO. Both of these concepts are highly applicable to investment fundraising.
The fundamental idea of the STO is to connect the traditional markets with the new-age blockchain market. Security token involves shared assets and investment or profit and loss ownership. A security token is fundamentally a blockchain token, just that the collaterals, in this case, are real-world assets. ICOs, on the other hand, are like shares where people invest in the tokens expecting a fall or a rise in their price. ICO, indeed does not hold any intrinsic value apart from market enlistment. Security tokens are safe to use.
Benefits of Security Token Offerings
If you are equally interested to know what it is that drives the hype towards STOs rather than ICO and IPOs, here is all you need to know about their advantages:
Low Entry Cost
STOs are popular among small to medium industries for fundraising. For holding an IPO, a company generally needs ten million USD. This one is not a feasible amount for small startups that hardly have any funding. For them, the STOs are a great point of entry that ensures security and does not have any rigid bar for entry.
A business listing in public exchange often restricts a business’s real-time conversations. This scenario forces the company to focus on goal attainment to meet facial deadlines instead of any scope for long-term business vision. STO is an excellent option in this matter. Investing through STOs does not force the entrepreneurs to focus on just the monetary goals and instead helps the company focus on its overall growth and development. With STOs, companies can enjoy greater flexibility and pave the way for transparency. Since STOs are open-source protocols, they are always open for development.
STOs have revolutionized the concept of fractional ownership. Through permissionless or permissioned blockchains, assets can now be distributed among the company stakeholders. This is a massive advantage for small to medium-scale companies that need help to afford complete ownership. STOs also empower individuals in this way, empowering them to participate in asset buying. The tokenization of assets ensures security and flexibility.
Security tokens are indeed secure. Smart contracts through permissioned blockchains have made the process even more lucid and reliable. The KYC rules and regulations of the security tokens via hard coding diminish all chances of fraudulence. STOs have also been a significant factor in business globalization. With IPO and ICOs, only the heavily funded ownerships enjoyed advantages, while with STO, the small and medium enterprises can get better funding, a higher number of investors, and the highest possible liquidity states for their companies.
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