Why ‘The Ethereum Of Security Tokens Might Not Be Ethereum’
Opinions, Technology

Why ‘The Ethereum Of Security Tokens Might Not Be Ethereum’

In a recent article, chief scientist and managing partner at Invector Labs Jesus Rodriguez made a case against Ethereum as an efficient solution for securities tokens. He says that identity, asset-ownership representation, and compliance models are the three pillars of securities tokens— which are entirely lacking from the Ethereum platform.


Jesus Rodriguez is an outspoken advocate of the Ethereum protocol. From a scientific perspective, he says that it “might go down in history as one of the greatest technological contributions of the first century of computer science”.

Yet the upcoming wave of securities tokens has a distinctly bright future. And while the Ethereum community has been busy developing token standards for securities tokens, Rodriguez implies these won’t be sufficient.

The Requirements Needed for a Successful Security Token Platform

Securities tokens have additional prerequisites when compared to digital currencies or utility tokens. They have to comply with numerous regulations, from various organizations, in different jurisdictions.

Under such conditions, it is easy to see the vital need to reflect accurate asset-ownership representation, to include owner identity verification. These types of components are things that the existing blockchain consensus mechanisms struggle with.

Looking to the future, the crucial needs for efficient securities tokenization was summarized by Rodriguez:

“When building an architecture for tokenized securities, there are three fundamental building blocks that need to be in place: identity, asset-ownership representation and compliance models. Security token laws around the world require that the identities of parties involved in a transaction need to be known and verified.”

He went on to add that the Ethereum platform “doesn’t really support any of those elements”.

How Ethereum Lacks the Optimal Capacity for Security Tokens

It is in the realm of asset ownership that Ethereum poses the largest problem for securities tokens. While Ethereum is enhanced for the transfer of assets, its protocol has almost nothing to do with asset ownership, says Rodriguez.

“The fundamental limitation that makes Ethereum a painful choice for security tokens can be expressed as the friction between transactions and asset ownership. Ethereum is a very powerful platform that is fundamentally optimized for one use case: transfer a crypto-asset from point A to point B. The behavior of security tokens, on the other hand, is fundamentally dictated by dynamics related to asset ownership that have little to do with transaction mechanics.”

Many developers have tried to compensate for this absence through the advancement of different Ethereum token standards, such as the ERC-1400 and ERC-1404. Rodriguez’s remarks however, suggest that the smart contracts contained in these solutions are simply too labor intensive.

“In turns out that smart contracts are a really painful way to model security tokens. Smart contracts are too constrained in terms of code-semantics, every single financial model is a monster coding effort, they have some very tangible limitations in terms of size and portability and a million other limitations that make it a nightmare to express complex crypto-security models.”

In the end, Rodriguez see’s additional development, perhaps beyond Ethereum, when it comes to the tokenization of securities.

“In my opinion, we are likely to see new blockchain architectures and protocols optimized for security token use cases and, who knows, the Ethereum of security tokens might not be Ethereum.”

Will the future of securities tokens involve a specialized giant supplanting Ethereum? Or will developers work out a way to mitigate the current downfalls of the Ethereum platform? We’d love to know what you think in the comments below.


Image courtesy of Pixabay.

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October 4, 2018

About Author

GaryStevens Gary Stevens is a full time developer based in Canada. He's an early bitcoin investor and loves everything open source. Gary believes in a decentralized future and has worked with a number of corporate clients helping them understand blockchain technology and innovation.