Understanding Security Tokens
A security token refers to a digital representation of traditional securities.
Traditional securities can be categorized into three main types:
- Equities (stocks)
- Debt instruments (bonds)
- Hybrid securities
Examples of securities include stocks, bonds, ETFs, options, and futures.
Theoretically, any of these traditional securities can be tokenized to become a security token.
As we move forward, security tokens have the potential to emerge as viable alternatives and competitors to traditional securities like stocks.
Clarity in Terminology
It is important to note that security tokens should not be confused with cryptocurrencies.
Cryptocurrencies such as Bitcoin, Litecoin, and Bitcoin Cash operate on their own independent blockchains.
On the other hand, security tokens run on existing blockchains, and the Ethereum blockchain is commonly used for deploying security tokens.
Many companies utilize ERC-20 tokens, which are Ethereum-compatible tokens that can run on the Ethereum blockchain through the execution of smart contracts.
Clarity in Terminology
Holders of security tokens can potentially profit from the performance of the token.
They may also receive additional tokens as dividends and enjoy other benefits such as voting rights.
In this way, security token holders can gain many of the same benefits as traditional securities.