Security tokens are a highly underestimated type of crypto asset, crucial for a well-diversified portfolio. The key factor limiting their popularity is low liquidity – you can barely trade most security tokens. The emergence of DeFi enables to hack the liquidity problem and unlock the full power of tokenized securities. In this article, I will tell you how.
Why are security tokens a good investment? Usually, they represent interest in private companies, such as real estate, industrial machinery, private equity funds, scale-up startups. These are companies, in which you cannot simply invest in stock markets because they are private, i.e. not traded on the stock market, so only few big private investors have access to these investments.
The benefit of security tokens is a good risk-return ratio. They usually do not deliver the same level of return as utility tokens. However, unlike DeFi and utility tokens, security tokens are issued by companies with a history of operations and provide a much better protection level to investors. Furthermore, they allow higher diversification as they are issued by companies from different industries, so in case of new crypto winter and crush you have tokens related to companies from real industries performing well.
Despite their benefits, security tokens are not very common in the portfolio of an average crypto investor. The principal reason is that most security tokens can’t be traded. They cannot be listed on conventional crypto exchanges – only on a few specialized and licensed exchanges.
Listing on centralized securities exchanges is quite expensive with the cost often exceeding a hundred thousand dollars. Furthermore, there are additional legal requirements, because if you are listed on a licensed securities exchange, you basically become a public company, and public companies have to file management reports, audited financial statements, etc. The cost of legal compliance may easily reach hundreds of thousands of dollars annually. Therefore, many projects choose no listing and no trading at all, which makes security tokens less attractive to investors.
Decentralized Uniswap-style trading may be a solution to the problem. If a project operates a liquidity pool itself and for their tokens only, it is not considered a centralized exchange that needs a license. And providers of such a technology are not exchanges either as they don’t make any decisions, don’t manage the listing.
If the liquidity pool is not an exchange, the project does not have to become a public reporting company to operate the pool, which saves hundreds of thousands of dollars in legal fees. With decentralization, making security tokens being traded becomes much more attractive.
Therefore, when security token companies develop protocols for decentralized trading, we should expect a flood of new security token projects and higher investor interest. Decentralized trading makes it possible for tokenization to go mainstream and conquer conventional trillion-dollar capital markets. Will you take part in this explosion?
Borys Pikalov is Co-Founder and Chief Analyst at Stobox, the world’s first provider of decentralized security token trading technology. Stobox also provides a comprehensive service of asset tokenization and security token offering, as well as operates an upcoming Stobox Crypto Exchange, powered by the STBU token. Borys is a prominent researcher, adviser to the government of Ukraine, and author of the book “How to Attract Investments with STO. A Practical Guide”.