Blockchain technologies have pervaded modern crowdfunding and capital sourcing through a variety of financial instruments implemented as smart contracts. Smart contracts provide a unique mechanism not only to create a unique one-of-a-type financial instrument, but also to enable unique innovations atop existing financial instruments due to underlying efficiencies. The smartness comes from the flexibility that programs provide which can create extremely unique financial instruments that are often complex to implement, yet easy to create, maintain through versioning, trade and destroy. The purpose of this paper is to describe the security token architecture as an application of smart contracts. Further, the author illustrates the implementation and design of a commonly used financial instrument known as Simple Agreement for Future Equity (SAFE) using the security token architecture proposed and smart contract functionality. The author then models the transaction using relational algebra, and, models the utility maximization. The author shows how on account of reduced information asymmetry between the investors and SAFE users (i.e. startups) utility is positive when smart contract-based security tokens are deployed for each state in the SAFE contract.
Using an existing well-adopted instrument called a SAFE contract, the author illustrates the architecture of a smart contract-based security token system. The author illustrates how different components of a SAFE contract can be implemented as a smart contract and discusses the advantages and disadvantages of applying blockchain-based smart contracts to design SAFE instruments. The author deploys two methods: a state space diagram to explain state transitions and a utility model to explain the utilities.
The key findings of this research study are the design of a security token architecture, which can be used to convert any the physical or contract-based financial instrument to a smart contract that runs on the blockchain. However, there are limitations to the implementation of the same which can be overcome. The model illustrates the positive utilities derived for all economic actors, i.e. the contractors, the utility providers, etc., in the market.
This paper is an original paper. For the very first time, the author explored the architecture of a security token system. Using a well-known financial instrument, namely the SAFE, the author describes various components, e.g. the four contracts that form SAFE and then model the utilities for the system.
Subramanian, H. (2019), "Security tokens: architecture, smart contract applications and illustrations using SAFE", Managerial Finance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/MF-09-2018-0467Download as .RIS
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