by Miguel Schneider, Blockchain Research and Product Development at Securitize
Jul 12, 2022
Last week, Security Token Market (STM), the leading global oracle for all digital asset security financial data and research, achieved a major industry milestone when it launched the first-ever Web3 crowdfunded capital raise on Securitize. While the financial news often focuses on the boom and bust cycles of digital assets like bitcoin and ether, digital asset securities like STM represent a significant step forward in the evolution of financial services. This is because they operate under the same regulatory exemptions that traditional financial services follow, but do so more efficiently and at less cost to investors. Using digital asset securities, businesses can efficiently raise capital and investors can gain exposure to new investment opportunities faster, more efficiently, and with greater control than using traditional methods.
Since 2018, I’ve been at the heart of the blockchain space, and have come to develop a keen sense of what kinds of innovation make a splash vs. what makes a real-world difference. So, in the following article, I will share my perspective as a blockchain researcher and developer, who has worked through both the boom and bust cycles, to show you how digital asset securities have evolved over time, and how they can offer businesses a better way to raise capital today.
Fits and Starts
In 2017, Initial Coin Offerings (ICOs) helped raise capital from the crowds using blockchain technology, seemingly democratizing capital markets access overnight. People who previously could not access early-stage investments were suddenly able to invest in promising blockchain-based companies, or so they thought.
While the blockchain technologies powering these new opportunities enabled a more efficient way to invest, by and large, ICOs did not make use of existing investor protections. And this contributed to their downfall. Nearly as quickly as it made investors rich, unregulated fast capital left them empty-handed without recourse, and raised questions about the legal frameworks used (or not used) by ICOs.
Digital Asset Securities Make This Better
At Securitize, we consciously built the DS protocol underlying our services to be blockchain-agnostic and make use of identity so that verified digital asset security tokens can provide investor protections and more people can access early-stage investments in a regulated manner. How is this possible?
Securitize is a leader in the development of regulated digital asset securities, which are consistent with regulatory standards since 2017, and have issued multiple different kinds of digital asset securities under all of the common exemptions. We know that the process needs to be simple, secure, and consistently compliant to scale. And we know the right way to do it:
Making Digital Asset Security Investing Easy
To do this, we broke down the investor experience into four simple steps and built an easy-to-use interface to streamline the investment flow. In the following sections, we will briefly describe how we leveraged different elements of Web3 technology to support a very simple user interface and frictionless user experience, while maintaining all the same Know-Your-Customer (KYC), Anti-Money-Laundering (AML), accreditation and qualification checks that traditional investment platforms use to determine suitability and ensure that securities exemptions are followed.
By streamlining the user interface into three simple elements (e.g. Stepper, Information, and Action), and by reducing the investment journey to just four steps (e.g. Investor Information, Submit Application, Qualification, and Purchase Tokens), we enabled investors to seamlessly invest across devices and know exactly what step of the process they're in along the way.
Web user interface on the left, with stepper, action and information from left to right.
All the work started by clearly defining how investors would interact with the platform and how they would ultimately invest in the opportunity.
Therefore, we decided to divide the screen into three different sections:
Digital wallets like Metamask and Wallet Connect are key to accessing Web3 and blockchain technology. And this is why we designed the main interaction between Securitize’s fundraising portal and investors to take place in the investor’s digital wallet.
To simplify the investor experience even further, Securitize designed our fundraising portal to seamlessly interact with the most-used digital wallets, including MetaMask and Wallet Connect. This way, more people have more access to Web3.
To provide a more efficient investment process, we decided to use USDC as the funding vehicle to acquire digital asset securities issued under a Reg CF regulatory framework, so that once an investor has USDC, it is possible to invest instantly.
For more information on why we use USDC, click here.
While using USDC, most of the friction occurs pre-trade when sending fiat funds from the investor’s account to an escrow account. This is because funds have to be sent from a legacy bank account and then manually confirmed to ensure that the transferred funds correspond to the signed agreement before the process can close.
USDC tokens are the ideal mechanism for transferring funds from the investor to the issuer using a digital wallet because of the institutional trust that surrounds them. But before any funds can be transferred, a formal agreement must be signed between the issuer and the investor, which we use blockchain technology to streamline.
Signing The Agreement
The traditional way to get a contract signed is by sending a physical copy of the final subscription agreement to the investor so that it can be manually signed and returned. At Securitize, we have used electronic signatures to reduce processing time and make it easier to invest for years. Along the way, we realized that we could drastically improve the investor experience to make it more reliable and secure by using a key feature of modern digital wallets, the cryptographic signature.
Illustration by Author
The basic idea is pretty simple: since the investor has already provided their personal information and the amount of digital asset securities to be purchased, we can generate a template of the agreement using this data and securely share it with the investor. To do this, we create a unique digital 'signature’ of the subscription agreement as a PDF called a cryptographic hash. Since the hashing method we use generates a unique 256-bit (32-byte) signature, the subscription agreement is incredibly specific. This unique cryptographic signature is later used to sign and verify the subscription agreement, completing the investment process.
Completing The Investment
Once the investor decides how much USDC to purchase, investing is just one click away. As we have already seen, completing the investment requires, potentially, multiple steps, which we have been able to join into a one simple atomic transaction: a transaction which will only occur if all the following steps happen in the order in which they are intended:
All of these actions are performed using a smart contract on the blockchain. In order to make it all happen in a single transaction, a lot of magic must happen on the backend first.
The previous paragraph might sound overly complicated, but the truth is that it is far from trivial to get all the pieces working together smoothly. Fortunately, we’ve made it easy for investors so all that’s needed is to simply click a button, and all the actions will be executed, verified, and stored on an unalterable distributed ledger called the blockchain.
In this article, we demonstrated how Securitize provides a more efficient and streamlined user experience by leveraging Web3 technology, including how to use digital wallets to sign transactions and perform multiple operations which previously required multiple steps.
In future articles, we will provide more technical details about the agreement signing process using hash codes and emitting events on the blockchain, the generation of signed transactions by backend services, atomic transactions, and the usage of crypto wallets to authenticate users and sign transactions.