Whitepaper
Asset tokenization has become a very promising field during the last few years, especially in the area of finance and capital markets. We in BANKEX also believe that digitalization and tokenizations of real-world assets is bound to become a part of everyday practice someday.
That being said, we understand that there is a lot of technical and legal issues to be solved first, and transaction cost and speed in Ethereum also needs to be revisited. However, we leave the discussion of these issues out of this paper.
In this paper we will describe an open-source framework based on smart contracts in the Ethereum network, that we suggest as building blocks to form a wide range of tokenization applications, that can be a part of BANKEX ecosystem or be totally independent.
Tokenizations is a process of converting rights to a real-world asset like a money flow, real estate ownership, copyright, etc. into tokens.
There are two types: utility and security tokens. They might be applied to the same real-world assets, the difference between them lies in the way they are used to get a profit.
Let's take a vending machine as an example: if you have utility tokens, you can use them to purchase the goods. And if you have security tokens, this means that you are a shareholder of the vending machine, and you get a share of the profit it makes. A similar example is a real estate rental service: as a tenant, you can buy some utility tokens and pay rent with them, and as an investor, you can purchase security tokens that guarantee you a percentage of the profit, depending on the size of your share in tokens.
Our framework is designed to operate with both security and utility tokens.
Initial Smart Asset Offering is the process that results in issuing of tokens representing shares in a real-world asset. Unlike ICO procedure that is aimed at investments in the development of products that do not exist yet, the point of ISAO is to trade rights to an existing cash flow or something that already has value in the real world.
To meet this requirement, the tokenization must have a strong connection to the real world in terms of properties of the asset, and this includes KYC procedures, AML (Anti Money Laundering) laws, confirmation and transfer of ownership, and independent valuation of the asset.
All of this makes for a complicated process that we will illustrate in a simplified way with the diagram below, explaining the parties involved and the procedures that the process includes. As the diagram shows, there are three main roles in the tokenization process:
Asset owner is the owner of an asset in the physical world, e.g., a real estate owner. In order to tokenize their asset, they need to pass the KYC procedure and get verification for the asset, receiving a certificate which is basically a digital snapshot of the asset on the blockchain, confirming its existence in the real world, its value and the fact that the AO does indeed own the asset.
The originator is where the end user, i.e., Asset Owner, comes in order to have the rights to their asset tokenized and broadcast into blockchain. The Originator is a service that carries out all the procedures required for the tokenization. It is the responsibility of the Originator to compile the Asset Profile. The Asset Profile is then being run through verification, upon a successful completion of which the ISAO process can be launched, and ERC-20 tokens issued.
Note: Some specific details of the tokenization process like asset valuation, escrow, and connection to the oracles are left out from this diagram, but the toolkit elements for those parts are listed below too.
After the ISAO process, the tokens are being distributed between token holders, and the Asset Owner receives the funds collected in ETH, paying to the Originator the percentage or a fixed payment according to the deal initially signed between them.
Depending on what kind of token is issued, the holders should be able to get dividends, use utility tokens as payment for some service, or trade them on a public or private marketplace.
Here we enumerate the list of smart contracts that are basic primitives that we are going to implement under this project:
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ERC20 Dividends Token is an implementation of an ERC-20 standard with the ability to distribute funds received by smart-contract among token holders.
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Multitoken is an ERC-888 token implementation. Contract specification allows you to store and manage multiple ERC-20 tokens inside of a single ERC888 contract. During the creation of new tokens under the ERC-888 standard, smart contracts could spend about 15 times less gas. So, with ERC-888, the production of tokens will be much cheaper. In our implementation, we also going to add additional dividends payout feature.
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ISAO Smart Contract helps organize the very last step of Initial Smart Asset Offering (ISAO) - issuing, selling, and distributing of the tokens. ISAO Smart contract allows raising funding on any ERC-20 token in several steps, with a different amount of the tokens supply and price on each step of ISAO. It also implements a money back procedure in the case where not enough ETH was raised.
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Timestamping or History is a smart contract that allows to effectively store snapshots of a data flow like a video stream shots or sensor readings on the blockchain. Also, the contract allows easily check that sequence of snapshots on external storage is exactly the same as the sequence of snapshots on the external storage
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Caterpillar is a smart contract that collects approvals from several independent tokenization subjects; is all approvals are received, the smart contract marks the procedure as complete. Note that the contract has a tree structure: the authorities involved in the process might request an additional approval from any other authority before giving their own - much like it's done when a bank loan application is processed.
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Timelock contains ETH for a period of time and then gives it out according to the timestamp of the block. This might be used during the escrow procedure.
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Oracle is smart contracts that deliver data from external data sources to the blockchain. We going to optimize gas usage by using more specific data types than strings
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Funds Managment by Voting is a smart contract that allows taking funds distribution to a vote, generating events where the money was spent. Might be applied to distribute unspent funds or for the allocation of investments.
You can use these smart contracts to build numerous applications needed for a tokenization workflow implementation, for example, a KYC service.
The building blocks described above are not supposed to be something very sophisticated or innovative: the main challenge is to make them fully secure and effective in terms of gas consumption. We are going to provide well-tested smart contracts supplied with documentation and sample applications so that they are good to go.