Token Up is a new publication and podcast powered by Neufund. Here, we analyze the world of security tokens and shed light on key players in the space and important industry developments. Feel free to reach out to Alex Molé or Marlene Ronstedt if you have ideas for future topics!Listen
We’ve prepared a small syllabus for you if you want to learn more about the world of security tokenization. This includes our favorite podcasts, presentations and blog posts.
Using a decentralized application for your finances means you are your own boss without relying on intermediaries like banks. But that also means you bare the risk of loss yourself. Here we explain how to protect your funds.
The history of blockchain has seen many major hacks in which millions of coins got often irrevocably lost. Mt. Gox and The DAO count to the most prominent ones. To understand how to secure your coins from not getting lost or stolen, you have to consider one of the major differences between traditional finance and blockchain-enabled finance.
If a bank gets robbed it will to a certain extent reimburse its customers. Not so with blockchain. This is for technical reasons: tokens and coins are not physically stored anywhere, they are a mere entrance in a database and once they have been shifted from account A to account B there is no return. Since the database is decentralized there is no way to undo such a transfer.
Therefore, providers of browser wallets cannot be made accountable for the security of your own funds. They just offer a convenient interface. This is fair enough and certainly practical for small amounts of coins for daily usage.
However, if you wish to make higher investments we highly recommend storing them on a hardware wallet which is not connected to the internet. Think about your briefcase and your bank account. You wouldn’t carry all your savings in your briefcase either.
What is Blockchain all about? Why do people ascribe it such revolutionary powers? Here is a short summary and some useful links.
A blockchain is a decentralized, censorship-resistant database. Traditional database records are being kept on one server. Blockchain records are kept on thousands of computers which makes it close to impossible to manipulate them. The technology behind it was proposed by the mysterious Satoshi Nakamoto. In 2008 Satoshi published the Bitcoin whitepaper and in January 2009 mined the first couple of Bitcoin blocks, which marks the beginning of today’s most famous blockchain.
Satoshi solved an important technical question with Bitcoin. In computer science, it is being referred to the Byzantine generals problem. Satoshi found a way for thousands of decentralized participants to create consensus without a centralized entity confirming the validity of the consensus.
This is done through the process of mining. Every time a new transaction happens, miners race to encrypt the transaction details to validify the transaction. Thereby the miner transforms the transaction information into a string of characters. The miner’s goal is to create a string with as many zeros as possible. Once a miner has created such a string the miner broadcasts it to the rest of the network. Now the network decrypts the encrypted information, by taking the string apart and thereby confirming the transaction information.
As a reward, the miner automatically receives crypto coins. Then the game starts again from the beginning and the next block is being mined. In the next block, a reference to the previous block is included and thereby chaining the blocks to each other.
Ethereum is an advanced type of blockchain. In comparison to Bitcoin, it is not only an immutable ledger for record keeping and transactions, it is also a distributed computing platform. Ethereum can be used as an operating system with functionalities such as self-executing smart contracts. This added functionality allows Ethereum developers to create decentralized applications running on top of the Ethereum network.
Ether is the cryptocurrency of the Ethereum blockchain. It can be used to pay for services within the decentralized application network. Additionally, anyone can create their own token on top of the Ethereum infrastructure. New Ether is being created in a process called mining. A miner validates transactions and therefore receives new Ether.
In 2013 Vitalik Buterin proposed the outline for the technology behind Ethereum. One year later the project’s development was financed through a crowd sale and went live the year later.
In 2017 Utility Tokens gained prominence as a means of fundraising in form of Initial Coin Offerings (ICOs). Blockchain-based Startups sold the tokens to finance their projects. Thereby so-called Utility Tokens were sold as a voucher for future services. By selling those token vouchers upfront companies financed the development of their projects.
However, the different incentives for investors to buy Utility Tokens killed a lot of such projects. One investor group planned to use the tokens for their intended purpose. They preferred low token prices. The second group supported the project with their investment, but hoped for the token price to surge. And a third group, speculators, hoped for price fluctuation to make a quick buck.
Security Tokens, on the other hand, represent real-world assets. So an investor who buys Security Tokens receives a quasi-share in the company issuing the tokens. To speak bluntly, when investing in Security Tokens you get a piece of the airline instead of frequent flyer miles.