Preface

During 2017 and 2018, the market values of the majority cryptocurrencies went through some eye-popping roller-coasters. In the span of three months, the price of Bitcoin went up from $6,336.94 (USD) on November 12, 2017, to its highest price of $19,758.2 on December 17, 2017, before dropping to $7,389.79 on February 5, 2018. As cryptocurrency prices moved up, funding for blockchain projects poured in. Most of them were in the form of initial coin offering (ICOs). One example is in May 2017, when a web browser called Brave completed an ICO. It raised $36 million in USD within the first 25 seconds of the ICO. The dramatic declining in cryptocurrency prices eventually led to the cooling down of the ICO madness. Per statistics from ICODATA.IO, during the first quarter of 2018, a total of $3,874 million USD were raised via ICOs. In contrast, during the first quarter of 2019, only $100 mm USD were raised through ICOs.

A fundamental reason for the high volatility in cryptocurrency prices and the ICO bubble bursting is the lack of control and regulations on ICOs. This led to a high failure rate of ICO-funded blockchain projects. Fewer than half of ICOs have survived over four months after their offerings, and nearly half (around 46%) of ICOs taking place in 2017 had failed by February 2018.

Facing the ICO issues, the blockchain community has started soul-searching for an alternative solution. The mainstream view of the blockchain community changed from focusing exclusively on the initial ICO model of raising funds, to funding models involving other parties (for example, governments, investment bankers, and lawyers). A leading solution is the security token offering (STO).

To help our audience gain an overview on the context of STOs quickly, in this book, we explain the basic concepts behind the blockchain technology, traditional funding approaches for startups, and the basics of STOs. We made comparisons between ICOs and STOs to explore the differences between them and the reasons that STOs can potentially provide a viable solution to resolve some of the ICO drawbacks. To help the reader understand the implications of STOs better, we dedicate one chapter (Chapter 3, Monetize Digital Tokens Under U.S. Securities Laws) to covering some of applicable laws on STOs. For IT practitioners, we show a way to implement an end-to-end Dapp for the issuance of a security token. In fairness, STOs are not necessarily perfect neither. At the end of Chapter 2, STO – Security Token Offering, we point out some challenges faced by STOs.

Stablecoin is a solution that the blockchain community came up with to address the high volatility issue in cryptocurrency prices. In this book, we first cover the basics on money. We then proceed to illustrations on different types of money. This lays the foundation for explaining the concepts on stablecoin. In Chapter 7, Stablecoin Smart Contracts, we give a working example on how to implement stablecoin issuance.

Who this book is for

This book is ideal for blockchain beginners and business user developers who want to quickly master popular Security Token Offerings and stablecoins. Readers will learn how to develop blockchain/digital cryptos, guided by U.S. securities laws and utilizing some real use cases. Prior exposure to an Object-Oriented Programming language such as JavaScript would be an advantage, but is not mandatory.

What this book covers

Chapter 1, Introduction to Blockchain, gives an overview of blockchain technology, along with the key concepts involved, including the distributed ledger, transactions, blocks, proof of work, mining, and consensus. It covers bitcoin, the mother of blockchain technology, and Ethereum, which developed out of bitcoin, in detail.

Chapter 2, STO – Security Token Offering, talks about traditional fundraising methods such as angel funds, venture capital (VC) funds, private equity funds, and initial public offerings (IPOs). It then covers the blockchain project's specific funding method, ICO. Drawbacks of ICOs have been discussed as well. STO has been introduced as a promising alternative to ICO. The chapter compares STOs and ICOs. It ends by pointing out some of the challenges related to STOs.

Chapter 3, Monetizing Digital Tokens Under U.S. Security Laws, answers the question, "What is an STO under U.S. securities law?" It gives an overview of applicable U.S. securities laws, talking about the developments in U.S. securities laws related to blockchain and cryptocurrency. It then explains the process of STO launches, along with some legal considerations. The chapter mainly focus on U.S. securities laws.

Chapter 4, Stablecoin, talks about the definition of money, along with its basics. It then proceeds to a discussion on the concepts of cryptocurrency and stablecoins. It explains the rationale behind the implementation of stablecoins and discusses the types of stablecoins on offer. At the end, the chapter covers the challenges faced by stablecoins.

Chapter 5, Security Token Smart Contracts, covers popular security token standards such as ERC-1400/ERC-1410, R-Token, DS-Token, SRC-20, ST-20, S3, ERC-884, ERC-1450, and ERC-1404. The chapter helps to enrich the reader's knowledge of security token protocols. In addition, it talks about solidity programming fundamentals and explains how to write a smart contract.

Chapter 6, Building a Security Token Dapp, demonstrates how to develop an end-to-end product, from smart contracts to Dapp, to issuing an ERC-1404 security token. The chapter covers some basic concepts only. In a real application, the security token will be far more complex. Many security tokens run on an elaborate ecosystem and need to comply with the SEC's regulation on securities trading. For example, the security token smart contract needs to incorporate real-world legal contracts.

Chapter 7, Stablecoin Smart Contracts, reviews the basic features of popular stablecoins and covers three types of stablecoins, including fiat-collateralized stablecoins, crypto-collateralized stablecoins, and non-collateralized stablecoins. Then, it looks into USDT, DAI, TUSD, USDC, GUSD, and PAX stablecoin smart contract design, exploring the functions defined in these contracts. The chapter explains how each stablecoin type maintains the 1:1 price pegging through mint, burn, and other controllable functions.

To get the most out of this book

We've focused on organizing the book to fit business and IT beginners in blockchain technology. The chapters are arranged to ensure that they can be followed easily and flow naturally.

Business users can skip the chapters with detailed descriptions on how to develop STO and stablecoin applications and, instead, focus on the chapters with general descriptions of the STO and stablecoin concepts.

IT professionals should read all chapters to gain insights on the business and regulation context for STO and stablecoins, from which a reader will gain basic knowledge on how to build STO and stablecoin applications. It is recommended that IT users download the code and make modifications to adopt the code to their own use cases or exercises.

Chapter 3, Monetize Digital Tokens Under U.S. Security Laws, and other chapters of the book are for general knowledge of the U.S. securities laws and other laws, and shall not be considered as providing legal advice, opinions, or recommendations. For any legal issues concerning the STOs, please consult an attorney specialized in this area.

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