Mary Amakihi 
Security Tokens and Decentralized Finance (DeFi) The Emerging Synergy
Security tokens are a type of digital assets that serve as investments. This article discusses the emerging synergy between Security tokens and Decentralized Finance (DeFi).
Because blockchain technology developed from the discipline of data science, many of the phrases used in cryptocurrency and tokens are similar to those used in those fields.
The phrase “token” is one of them. In data science, a token is a value—like a randomly generated number—assigned to sensitive data to hide the original information.
In a blockchain, information is given a unique identifier called a token. Giving an asset a token is called “tokenization.”
As an investment asset, a security token is a digital asset that reflects ownership or other rights and transfers value from an asset or bundle of assets to a token.
In basic English, security tokens are the digital form of traditional investments like stocks, bonds, or other securitized assets.
For example, a corporation that wishes to generate funding for an expansionary project can elect to sell fractionalized ownership of its company using a digital token instead of issuing shares.
It might then offer this token to investors on an exchange that permits digital security tokens.
All About DeFi
“Decentralized finance” (DeFi) refers to a subset of cryptocurrencies.
What is DeFi? It’s a group of financial goods, like apps and “protocols” (basically self-running computer programs), created on blockchain and controlled by smart contracts.
Smart contracts are digital agreements built on code and can carry out their terms. Because of how they work, deals between anonymous parties can be tracked but can’t be undone.
DeFi apps aim to change how we think about finance by making it decentralized and not holding money.
Once the creators of a protocol or app give up control of the smart contracts, the users become owners. This is called decentralization.
The fact that DeFi doesn’t hold your assets means that you keep control of your DeFi coins and tokens.
This is very different from how traditional banks and cryptocurrency loan programs handle your assets whenever you need them to make a deal.
How DeFi is Used
The DeFi ecosystem is growing; every month brings the launch of several new projects that aim to become market leaders.
The DeFi industry is holding $55 billion in crypto assets, according to data from DeFi Pulse, with each of the top 10 projects holding at least $1 billion in collateralized value.
However, while decentralized exchanges and lending protocols make up the bulk of the major initiatives, other interesting use cases exist to investigate, as shown below.
- Decentralized Exchanges
- Lending
- Yield Farming
Decentralized Exchanges (DEXs)
Decentralized markets, or DEXs, are what DeFi is built on. As one of the first widely used DeFi services, they became popular with crypto investors because they allowed non-custodial, decentralized trade.
Developers run DEXs, which depend on smart contracts. These contracts carry out deals, keep liquidity, handle deposits and withdrawals, and do other vital things traders need.
And because of this, only some people are working with or controlling user funds.
Uniswap, Bancor, dYdX, PancakeSwap, and SushiSwap are all well-known DEXs. Most DEXs use Automated Market Makers (AMMs), but some offer an experience similar to a CEX through order books.
Lending
Decentralized finance (De-Fi) loan protocols eliminate unnecessary barriers to lending. This is especially helpful for people who don’t have a bank account.
Because these methods are decentralized and open to everyone, people from all walks of life, races, and locations can use them.
It is possible to get a loan and use the money you get as long as you can provide the required collateral.
Yield Farming
Decentralized markets reward yield farmers with trading fees from users who make trades using the liquidity provided by the yield farmer.
This creates a link between the DEX, traders, and liquidity providers that works well for everyone.
Each farmer gets fees based on how much money they put into a cash pool. There is no end to the yield-growing process.
On the other hand, users are told to switch between groups to find the best yield rates. Compared to other related activities, yield rates are much higher in yield farming.
What are DeFi Tokens and Coins?
DeFi coins and tokens are frequently used interchangeably in the crypto industry. While they are very similar, there are a few significant variances.
A DeFi coin functions similarly to a digital counterpart of a fiat coin in that it transfers value during a financial transaction.
DeFi coins are based on and frequently called for their respective native blockchain networks. Maker, Compound, Uniswap, Aave, Chainlink, and Ankr are among the most popular DeFi coins in spring 2021.
DeFi tokens also transfer value, although only sometimes in a monetary sense.
Utility tokens, like passwords, can be used to gain access to a resource, asset tokens can be used to represent physical assets like real estate, and non-fungible tokens (NFTs) can represent one-of-a-kind “items” like digital art (for example, Nyan Cat recently sold for $600,000).
DeFi tokens differ from coins in another way: they may be developed on current blockchain networks.
What are Security Tokens?
Security tokens are a type of cryptocurrency. It symbolizes fractions of real-world assets such as equity, a firm, real estate, etc.
In essence, security token holders own a piece of an asset. Owners receive a portion of the asset’s profits, similar to holding stock in the company. Securities tokens, unlike typical cryptocurrencies, operate on existing blockchains such as Ethereum and do not have their blockchain. Blockchain Capital (BCap) is a well-known security token.
Security tokens are digital assets that show ownership or other rights to move value from an asset or asset class to a token. They are used as an investment asset.
To sum up, security tokens are purchases that can be made online that look like stocks, bonds, or other securitized assets.
For instance, businesses that need to raise money for projects like growth can choose to give away digital tokens that represent separate ownership of their business instead of releasing shares.
These tokens can then be sold to investors on platforms that accept digital security tokens.
To understand security tokens, you need to know how tokenization works. Tokens can be used to represent anything. For example, you can make a token that shows who owns and registers a car.
The vehicle’s VIN, along with the owner’s name, address, and other details needed by the state to register the car, could be turned into a token.
The state’s motor vehicle department would use a blockchain interface program to put the data into their blockchain. This would create a token for car registration and ownership.
This is also how a security token is made: a company could say what the token stands for, and it would be made.
After that, the business would put this token on an exchange or other suitable investment site so investors could buy it. The blockchain would then keep track of who owned the token.
It’s not always a new idea to tokenize a business or object ownership. For instance, when people bought stocks, companies gave them paper stock certificates.
The paper certificate was a sign that showed the investor-owned the property or had other rights. That’s not how a digital security token is different.
The only difference is that it’s digital and has been tokenized on the blockchain.
To be recognized, a security token could look like a few different things. For example, it could have a picture that shows up in a digital wallet with its value.
It could also just be a number that your wallet remembers. The wallet could show you what you have stored, how much it’s worth, and any due dividends.
You might also be able to quickly get a prospectus or a yearly report from your wallet.
Divisions of Security Tokens
Now that we have a solid foundation on Security tokens, Security Tokens can be divided into three. There are;
- Debt tokens
- Assets-backed tokens
- Equity tokens
Debt Tokens
Tokens like this are issued by firms in the same way that corporations issue bonds to raise financial financing. It stands for loans with fixed rates and short terms.
Assets-backed Tokens
These have worth based on something tangible, like land, art, carbon credits, or commodities. They share qualities with precious metals and oils. Put another way, you can buy, sell, and trade them.
Equity Tokens
This type of stock works and looks like regular stocks, but ownership and transfers happen online.
Investors are eligible for dividends based on the actions and decisions of managers and issuers.
Owners of security tokens can profit from the token’s growth in value and, in some cases, receive dividends in the form of more tokens.
They are often given the right to vote and other privileges. This allows security token holders to reap the same benefits as those who own stocks or other traditional securities.
The Blockchain Capital (BCap) token is a well-known example of a security token.
Owners of security tokens can profit from the token’s growth in value and, in some cases, receive dividends in the form of more tokens. They are often given the right to vote and other privileges.
This allows security token holders to reap the same benefits as those who own stocks or other traditional securities. The Blockchain Capital (BCap) token is a well-known example of a security token.
Security tokens are distributed via initial coin offerings (ICOs).
The Emerging Synergy Between Security Tokens and DeFi
Do you recall one of the DeFi services I mentioned was DEX or decentralized exchange?
These are the “stock exchanges” of DeFi, where tokens of all kinds, including our precious security tokens, can be listed for sale and purchased.
There are no barriers to entry because anyone with an internet connection can participate. They rely solely on code and stringent cryptography, with no middlemen such as notaries or brokers.
Therefore allowing for the unmediated use of tokenized assets.
Unlike the millions required to be listed on a conventional stock exchange, a company can issue its shares on a blockchain (a process called tokenization) and list itself on a Decentralized Exchange for just a few thousand dollars tomorrow, giving it direct access to investors worldwide.
This is already enormous and ground-breaking, but the advantages and surprises remain.
In addition to lowering the entry barrier to investing in private enterprises, this also converts a previously untradeable asset into a liquid one. Securities tokens offer passive income potential to their holders.
On DeFi, you can borrow money against your security tokens or lend them out to generate interest payments. Put your security tokens to work for you, and you’ll benefit from their rising value and any income you earn.
Bottom Line
The potential of Security tokens cannot be overhyped. The widespread adoption and expansion into non-blockchain-related industries is not a reality yet, but it will be shortly.
Security tokens aren’t extensively adopted without more knowledge and a consistent global regulatory framework.
