A Match not Made in Heaven… but it is Possible
At a recent security token event, I surprised a group of panelists by asking whether they thought we will see security tokens in the Bitcoin blockchain in the near future. The group of experts seemed almost puzzled by my choice of questioning. Is that even technologically possible or does it even matter? While I didn’t spark the debate I was hoping for with my question, there was no doubt that the idea of security tokens in the Bitcoin blockchain seems intriguing at least. Today, I would like to explore this idea in more detail.
After a year of evolution in the security tokens market, Ethereum remains virtually unchallenged as the platform of choice for issuing crypto-securities. The entrance of other blockchain runtimes in the security token race seems to be a highly anticipated, and almost inevitable, development in the near future of the market. While the obvious candidates for security token runtimes are smart contract-based blockchains such as EOS, Cardano or Stellar, the Bitcoin blockchain should not be completely discarded.
The idea of security tokens in the Bitcoin blockchain seemed ludicrous a few months ago. However, the consolidation of Bitcoin as the most dominant crypto-asset in the market, the relatively simple structure of the current wave of security tokens as well as the rapid growth of infrastructure technologies supporting the Bitcoin blockchain are making Bitcoin an intriguing choice for the next generation of crypto-securities. While there are still major technological challenges that need to be addressed, the idea of security tokens in the Bitcoin blockchain might be closer than we think based on recent market developments.
Some Factors Influencing the Path Towards Security Tokens in the Bitcoin Blockchain
The fundamental principles behind the idea of security tokens in the Bitcoin blockchain is relatively simple. Shouldn’t the dominant crypto network in the market serve as an enable for the next generation of crypto-assets? Expanding beyond the theoretical value of that thesis, there are some very tangible market and technical developments that are influencing the emergence of crypto-securities in the Bitcoin blockchain. If we analyze the current state of Bitcoin from both the technological and financial perspective, there are five fundamental factors that might catalyze the Bitcoin blockchain as a viable runtime for crypto-securities.
The Digital Gold Factor
The thesis of Bitcoin as a digital and programmable version of gold is one of the favorite gospels of Bitcoin purists. Regardless of whether you agree with that thesis or not, it is unquestionable that Bitcoin has proven to be the most effective store of value in the current cryptocurrency market. If Bitcoin continues to expand as the favorite asset allocation vehicle in the crypto space, the Bitcoin blockchain will present the best opportunities for reimagining sophisticated financial scenarios. In the context of security tokens, running on a blockchain with the biggest allocation of financial assets has some obvious benefits.
The Security Factor
In financial markets, as asset classes evolve they tend to gravitate towards the most stable and secure infrastructure. Extrapolating this idea of security tokens, the proven security and robustness of the Bitcoin blockchain can become an incredibly attractive factor for most sophisticated crypto-securities. Although computationally inefficient, the high rewards of the proof-of-work(PoW) consensus models in the Bitcoin blockchain has established levels of security and stability unmatched by other crypto-networks. As highly regulated instruments, security tokens can greatly benefit from the security and stability of the Bitcoin blockchain.
The Lighting Network Growth Factor
Scalability is one of the biggest limitations of the Bitcoin blockchain. Efforts like The Lighting Network were launched to overcome some of those limitations and expand the value of Bitcoin to millions of transactions per second. In recent months, the growth of the Lightning Network has been astonishing and is rapidly approaching 6000 nodes in the network and over 20000 payment channels. Capabilities of the Lighting Network such as side-payment channels, smart contracts or cross blockchain transactions are very relevant to security tokens. As the Lighting Network growths, it might become a viable runtime for the next generation of crypto-securities.
The Better Money Factor
Bitcoin remains the best form of money in the crypto-asset world. While Bitcoin has developed clear qualities of money such as being deflationary and scarce, Ether remains inflationary and abundant. In that sense, Bitcoin is a far superior form of money than Ether. The money-like characteristics of Bitcoin makes it a better candidate for payments and financial scenarios that are relevant in the security token space. In the same way that many financial securities scenarios are only possible in economies with access to strong currencies such as the US Dollar or the Swiss Franc, many security token scenarios will rely on the best forms of digital money and that, today, is Bitcoin.
The Programmability Factor
The value of the Bitcoin blockchain is often constrained to being a currency rail and not so much as a runtime for decentralized applications(DApps). However, that picture is rapidly changing. In recent years, the evolution of smart contract platforms in the Bitcoin blockchain has been remarkable and so has been the growth in the developer communities of these projects. With more developers experimenting on the Bitcoin blockchain, it seems inevitable that they will find their way into security tokens.
Which Platforms will Enable Security Tokens in the Bitcoin Blockchain?
The rapid growth of developer platforms in the Bitcoin blockchain is enabling the creation of more sophisticated scenarios running on that crypto network. While in theory there are several platforms that enable security tokens in the Bitcoin blockchain, I believe there are two platforms that are better positioned both technologically and financially to bridge the world of crypto-securities and Bitcoin.
Blockstream
Blockstream Elements is one of the most intriguing options for security tokens in the Bitcoin blockchain. Conceptually, Elements is a side chain to the Bitcoin blockchain but its value extend way beyond computational power. The platform supports capabilities such as asset issuance, confidential transactions or federated two-way pegs that seem designed for the world of security tokens.
Rootstock
One of my favorite technologies in the crypto space, Rootstock(RSK) is at the forefront of bringing smart contracts and programmability to the Bitcoin ecosystem. RSK smart contract language provides a relatively easy path to adapt security token protocols such as DS or ST-20 in the Bitcoin blockchain. Additionally, RSK’s growing developer community can be a great asset to security token issuances.
The idea of security tokens in the Bitcoin blockchain seemed impossible a year ago but not anymore. The evolution of the Bitcoin infrastructure and developer ecosystem, the consolidation of Bitcoin as the dominant crypto-asset in the market together with the rapid evolution of security tokens seems like a great combination to enable the first group of security tokens in the Bitcoin blockchain.