Security Token Offering 101

A Security Token Offering (STO) is a form of raising capital for a startup by distributing tokens to investors. While ICOs mainly deal in utility tokens that grant their holders access to services and products associated with respective blockchains and dapps, security tokens can be thought of as digital documents representing the investor’s rights to equity, a revenue share, debt, etc. STOs provide a better investor protection as they need to be compliant with appropriate regulations

Last year Bitcoin saw a massive price appreciation hitting an all-time high of $19K in December. The wild success stories of early bitcoin enthusiasts attracted a wider audience hoping to get their slice of the pie. Token sales became a popular capital-raising method for blockchain startups. The ease and freedom that ICOs offered is what brought many retail investors into the space. Never before has investing been as easy as it is with ICOs, for buying tokens is a matter of only a few minutes. However, the lack of regulation means that that token sales offer minimal investor protection and, naturally, many ICOs turned out to be blatant scams.

Utility of utility tokens

Utility tokens sold during ICOs represent the holder’s access to the services offered by the dapp or blockchain in question. However, these tokens have no intrinsic value outside the blockchain. The value of utility tokens outside their system is usually subject to speculation. For example, bitcoins are utility tokens in that they are tokens native to the Bitcoin system. Bitcoins represent the holder’s ability to transfer value. And Bitcoin’s value largely depends on whether people believe it is useful.

The return on investment in utility tokens comes only as the tokens appreciate. In an ideal world, this happens when the dapp or blockchain proves its usefulness and creates a demand for its tokens. Sadly, this is not the world we live in, and the cryptocurrency market, young and ambitious, is subject to manipulation and fraud.

Security token as claim to securities

Like utility tokens, security tokens are issued on a blockchain. However, unlike their predecessors, security tokens represent the holder’s claim to an equity, debt, a share of revenue, etc.

The term ‘Security Token Offering’ was first mentioned in April 2017 in a blog post by Manhattan Street Capital. Of course, the idea of tokens that are tied to real assets was not new to the blockchain space, as we saw various startups hold regulated ICOs and ICO 2.0, which were essentially STOs. The first official STO was held by St. Regis Aspen Resort on Indiegogo platform. The company raised $18M.

STO regulation

All STO must comply with appropriate regulations. For example, in the U.S. an STO is required to be registered with the U.S. Securities and Exchange Commission (SEC) or use an exemption from said registration.

Regulation D and S

STOs are typically held using an exemption called Regulation D (506c), which is a public offering of securities to accredited investors (anyone with a net worth of $1 million or more or an annual income of $200,000 or more for the past two years—$300,000 in combined annual income for spouses). This means that retail investors can participate in the STO but they first must verify their accreditation status with the SEC.

Regulation S is similar to Regulation D with an exception that this type of STO will not be extended to non-US investors.

Regulation Crowdfunding

Regulation Crowdfunding, an offering for the general public, meaning both accredited and non-accredited investors can participate in the offering, but there is a limit to how much an STO can raise in a given year, the limit being $1,070,000.

Regulation A+

The last and most important exemption is Regulation A+. Like Regulation Crowdfunding, it allows everyone to participate in the STO but in this case the company can raise up to $20M for Tier 1 and $50M for Tier 2 annually. Such STO must be qualified by the SEC, which is different from the other exemptions.

One of the crucial reasons as to why Regulation A+ is important for the blockchain space, besides a higher limit, is that there is no lock-up period for trading these security tokens, meaning you can buy and sell them on the same day. Regulation D, S, and Crowdfunding STOs have one year lock-up before the tokens can be traded on cryptocurrency trading websites, which is the main attraction for small-time investors. Additionally, exchanges usually do not hurry to list security tokens as those lack liquidity and imply a large amount of legal compliance to be done.

As of today the SEC is yet to qualify a single Regulation A+ STO. Some of the candidate companies currently under consideration are Gab, Knowbella Tech, RideCoin, dexFreight, and Mandala.


STOs have been on the rise for some time now and many believe this is the right direction that blockchain landscape needs to take in order to have a more robust and secure token economy.

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dApps are the New Wild West: In Search of Reliable Metrics

Gaming was one of the main hopes for the mass adoption of Blockchain technology at some point. People foresaw the emergence of amazing games and decentralized applications (DAPPs), which would push the internet to the edge of web 3.0.Right now we are almost halfway through 2019 and Blockchain Gambling games are smashing all DAPP ranking websites with over the roof volumes and key metrics. But are they as successful as numbers show?In this article, I will share my key findings of the current situation of the market.DatasetIn order to understand the current DAPP situation I went to and analyzed the top 100 DAPPs ranked by volume and top 50 DAPPs ranked by daily active users (DAU).After removing the duplicates, I ended up with a data set of 118 DAPPs.I then added website data information from Alexa as an additional reference point.To finalize the research, I dived deeper into products and checked their betting books. I used their solutions, tested their UX/UI, and gained a qualitative understanding of the DAPPs to compliment the data I had gathered.BaselineTo establish some baselines to compare DAPPs, I performed correlation analysis and tried to look for outliers so that I could detect manipulation and fake data.DAUThe majority of DAPPs are ranked according to their DAU. DAU is determined by looking at the number of unique wallet addresses transacting with the DAPP’s smart contracts, hence projects have a clear incentive to manipulate DAU in order to rank higher on the leaderboard and gain access to potential new users.Have a look at some outrageous examples:How can an online casino with 15k users have only 180 daily visitors in Alexa’s database and such a small volume of bets? Or an exchange with zero to none traffic?Moreover, correlation of DAU to Volume and Alexa’s data is less than 0.03 in both cases.It is for this reason (primarily) I believe DAU, as currently tracked, is a poor indicator of DAPP health.VolumeOkay, if measuring the unique wallets is not a good indicator of DAPP health, what about transaction volume?First of all, volume is a difficult metric to standardize since some DAPPs (especially games or social platforms) do not produce high volumes.Take Steemit as an example:Secondly, even if we will try to judge such volume related categorys as blockchain casino, we can find clear evidence of manipulation and inflated volumes.Some people argue, since almost all casinos implement a dividend token, it is not in the best interest of the casinos to “wash trade” (wash bet in this case), since they will end up paying a percentage of their volume to users. But these people confuse house edge and trading fees. Casinos do not pay out dividends in direct relation to the volume of player wagers, they are doing it from the house edge (or the net loss of users in the game).Plus we can find a clear incentive for players to bet high volume on the lowest risk options, just to “mine” tokens. Here are example screenshot from websites.As you can see, all recent bets were set at the maximum threshold possible (95%) to “mine” dividends.So what to use?I believe that we need to develop some sort of a hybrid metric that combines Alexa visitor data, on-chain and social analytics. It is additionally helpful that Alexa is a 3rd-party data gathering site, and its data is relatively neutral.It is for this reason that I used Alexa visitor data as the main metric to rank DAPPs.Category rankingFrom the graph we can see that social is far ahead, but lets double click on it:Steemit accounts for 99.3% of the visits. Additionally DAU numbers makes sense for Steemit, since users can enjoy the service without transacting.Nonetheless, blockchain implementation in social media is just making its first steps. We’ll see how Voices by EOS will perform.CasinosCasinos generate the most volume, across the whole ecosystem. In this particular data set, they are accountable for 79% of overall transaction volume.There appears to be correlation between Alexa Data + Volume for the top 10 social casino games, except Playfun (for some reason transaction volume couldn’t be tracked through the blockchain for Playfun). These 10 websites account for almost 50% of the analyzed volume of gambling DAPPs, with TRONbet alone grabbing a huge share of 39%.But things are a bit different down the leaderboard.Look at this ratio of Wallets to Alexa users. A lot of projects are exploiting the popularity of dividends to grab cash and fly, leaving their token holders with a bag of crap.Overall, I’m a huge believer in the application of blockchain to gambling or betting use-cases. TRONbet has proven that people want to play, even when “mining by playing” becomes increasingly difficult in the game’s life cycle. In the end, though, what we need is better products, not just dividends on top of some basic gambling mechanics.You can expect a dedicated article about Blockchain Gambling from me in the near future.ExchangesHere we can see a more even distribution, signaling healthier market conditions. Plus since we are talking about DEXes, different protocols have a different set of exchanges, equating the chances on the market even further.Plus, we can notice a healthy ratio of Wallets to Alexa users — 20986 active wallets to 65212 visitors. It makes total sense. People use exchanges to check prices, and not everybody trades on a daily basis.GamesBlockchain games are even harder to estimate. First of all, if we speak about collectible games, due to the different nature of interaction with the game, DAU and engagement metrics are totally off.Secondly, with the industry trending towards mobile gaming, a lot of games could be accessed through mobile wallets, making it even harder to track metrics.Overall, Dapper Labs, with their 2017 success — CryptoKitties, is still at the forefront of the industry. Even though the hype around NFTs has been cooled down.Google trends for Crypto KittiesWe’ll soon see how a broader audience reacts to their Сheeze Wizards, but some reviews that I’ve already read are pretty flattering.To sum up, the gaming experience is much more important than the underlying technology that was used to create a game. It seems like the guys from understand it, and I am expecting some great releases from them.Protocol RankingOn-chain Transaction VolumeFrom a volume perspective, our top 3 protocols are Tron, EOS, and ETH. It also happens that the majority of popular gambling apps we discussed earlier are built on top of these protocols.What is really interesting, however, is how protocols are ranked by unique active wallets and website visitors.Again, I believe the number of website visitors should be more important for rankings than active wallets. Judging from the graph, it looks like the [Alexa rating?] and daily active wallets are pretty close. STEEM is a bit over the top, which is understandable considering our earlier analysis of STEEM.EOS’s metrics, however, are pretty doubtful from my point of view. That being said I don’t have a lot of exposure to the EOS community and DAPPs, so I invite you to share your thoughts.Individual RankingAnd here we are, the top 10 most popular DAPPs from our list, according to Alexa.You can love or hate TRON’s way of doing business, and Justin’s overall appearance, but TRONbet is the number one gambling DAPP right now, and they are supported by several exchanges that provide good liquidity for the ANTE token.It is important to remember that even though DAPPs have been around for several years we are still in the early stages of blockchain. I believe people are finally starting to understand that there is little value in the blockchain if it does not meaningfully improve user experiences or solve problems.We at Squilla Capital pay close attention to emerging trends in DAPPs and plan to make several investments in the blockchain field. If you have interesting ideas or know DAPPs with promising potential please reach out to me: danil@squilla.ioP.S.It is my first attempt to figure out a better metric to evaluate DAPPs and I will work further on developing a better approach. Next steps are to automate the data gathering process and add metrics, such as Telegram groups, Twitter followers, etc.Any suggestions and constructive criticism are more than welcome. are the New Wild West: In Search of Reliable Metrics was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.

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