1/ This is a fantastic thread by @hosseeb on why security tokens might not make sense. It brings to mind a key question to explore with big implications that is "what problem does a public blockchain really solve here?" Let's start with immutability...
2/ As @hosseeb mentions it's helpful to use the thought experiment of what happens if an investor gets hacked and their security tokens are stolen? Most proponents claim that isn't a problem as new tokens would be re-issued and the stolen ones invalidated.
3/ This re-issuance could be done by the issuer but may be more likely to be done by a 3rd party compliance protocol like @harbor who could blacklist the hacker's address from trading with any whitelisted kyc addresses making their stolen tokens effectively non-fungible
4/ If a centralized entity must censor transactions in accordance with the traditional legal system (wet code) @hosseeb argues that a public blockchain doesn't make sense as it's mutable by definition so no better than a centralized database
5/ I'd argue that the advantage that public blockchains provide over centralized databases for security tokens is not immutability but instead is providing open standards with decentralized ownership of the underlying protocol
6/ If the next gen "native digital" securities want to benefit from interoperability, 24/7 liquidity, real time settlement, programmability, etc. while using a centralized database, who will build, maintain, and own that database and what are their incentives?
7/ Option 1 - one company. @Google could probably do a good job. Every securities issuer and exchange could start to use a Google specialized database. Entities could trust that Google would not act maliciously, but this would give Google significant power and control.
8/ For Google to make the investment of building and maintaining this product, it would need to be justified by a return from either monetizing directly through charging a toll for use or selling the data that they obtain
9/ If Google dominated this market as the de facto standard they could leverage their control by increasing their fees or optimizing the product towards their future revenue capturing value from issuers, exchanges, and investors
10/ Option 2 - there could be a jointly owned consortium or association that develops and maintains this database and gets paid fees from members with defined governance.
11/ This model was pursued by projects like R3 but despite high expectations it seems it has been a challenge to get members to agree on features and ship code. It also hurts long tail as largest companies in space will likely wield significant control - goo.gl/At7vR4
12/ Option 3 - use an open source database. But who will be incentivized to update and secure it without the need for a consortium?
13/ This leads to the value of public blockchains as incentivized open source cryptonetworks that create public infrastructure without needing to extract profits @cdixon outlines this thesis here - goo.gl/DqNPYJ
14/ Therefore a blockchain like Ethereum provides a universal database and open standard for tokenized securities that is built, updated, and secured by top engineers with the latest technology...
15/ while not optimized to monopolize data or fees and not owned in a material way by any of the companies utilizing it
16/ This lens also means there could be opportunity for other less immutable smart contract platforms like EOS for this use case as @KyleSamani has suggested (if they have higher performance) as immutability is less important
17/ However, the winning platform needs to have the most infrastructure, tooling, documentation, and the largest developer community to make it easy for issuers, exchanges, and investors to support and build on that standard which Ethereum leads by an order of magnitude
18/ Ultimately it will be interesting to see how public blockchains stack up against centralized databases in use cases that don't require immutability but could benefit from decentralized ownership
Thanks @HendoVentures for thinking through this with me
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Thanks @HendoVentures for thinking through this with me
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