Distributed ledger or blockchain’s great innovation is the ability to create distinct digital objects without the need for a central organizing authority. To do this, all participants in a network of unrelated parties manage equally-valid and continuously updated copies of a record of all transactions on the blockchain, making changes only possible with community consensus.
There are several well-adopted blockchain protocols, each with their own particular strengths and weaknesses. These include names such as Etherium, Stellar, Bitcoin, Ripple, Hyperledger, and others. Each of these has their own native coin and many allow for the creation of tokens within their blockchain (see below for more on the distinction).Through the creation of unique tokens, these blockchains enable the use of unique digital objects to represent fractional participation in a larger whole (such as investors in a company) or can power purpose-led ecosystems (such as using tokens to represent carbon offset credits).
While blockchain provides the foundation, smart contracts represent a tremendous innovation in the management of legal rights. In Hunit’s application of the technology, smart contracts are legally binding agreements that contain executable instructions that can serve to automate processes, determine how tokens can be traded or execute operations associated with binding commitments (such as calculating and executing an interest payment). Smart contracts are associated with specific tokens and are recorded on the blockchain, making them self-executing and indelible. So-called smart contract “legal tech” represents a key innovation area in the use of blockchain and promises to deeply impact a number of sectors. A critical issue for smart contracts has been their limited ability to interact with data, objects or entities that are not represented on the blockchain or available by API.
Smart Securities vs Tokens vs Coins
The prevalent blockchain protocols each have a native digital currency, or “coin”. These coins are sometimes (famously) used as alternatives to government-issued currencies or as a means for allocating technical resources within the blockchain network itself. Put simply, a coin is a digital object that represents itself.
Tokens are digital objects, recorded on a blockchain, that represent something else. This could be an equity share, a bond commitment, a portion of an asset or nearly any other real or abstract object of value.
Decentralized financial instruments result from:
- attaching tokens to smart contracts that determine how they behave and what they represent
- offering the combined token and smart contract to investors using a financial structure that is compliant with the regulatory environment of the jurisdiction of the issuer and/or its investors