New Ethereum Token Standard: How the ERC-1400 Security Token Protocol Works

New Token Standard: All You Need To Know About ERC-1400 Security Token

Yesterday, September 10th, a developer Stephane Gosselin proposed a new security token standard called ERC-1400. The new token standard is designed to enable better regulatory compliance for those who use Ethereum's network for offering securities.

A New Security Token Standard

The new standard is actually a product of multiple developers, including Stephane Gosselin, Pablo Ruiz, Adam Dossa, as well a Fabian Vogelsteller. According to the authors, the new token should be ERC-777 and ERC-20 compliant. However, it would be quite different from utility tokens, while the interactions between off-chain and on-chain actors would be significantly more complex. Because of this, it would require an entirely new standard.

According to EIP-based requirements, a new standard needs to have the ability to make forced transfers. This is necessary so that the fund recoveries or legal actions could be possible. Additionally, the tokens need to be non-fungible, or partially-fungible at best. This is needed so that they can transfer attachments or modifiable metadata. Basically, this token standard needs to allow those who offer securities the ability to deny or allow different transactions.

It is said that the token standard's primary component is partial-fungibility. What this means is that one ERC-1400 token could be non-exchangeable with another such token. This is due to a possibility that different tokens might have different properties. Right now, the most popular non-fungible tokens are CryptoKitties, which are based on an ERC-721 token standard. As such, the users would not exchange on kitty for another, since each of them is unique, and each has its own price.

Different Aspects Of ERC-1400

When it comes to ERC-20 tokens, the transactions usually get rejected if the sender lacks the funds to complete the payment. The new standard, as per the proposal, would come with additional conditions. Authors have listed a couple of examples, including whether or not the transferred security can be locked up for a certain period, as well as whether the sender and receiver have undergone KYC. Other conditions may include things like whether the issuer is accredited, and even whether the token contract is enforcing a maximum number of investors, or is the cap reached by a single investor.

Another big part of the new token standard includes the fact that it has the ability to separate the token holder's balance between different tranches. Tranche is a method of structuring investments based on debt. Basically, securities like these are combining different slices that belong to low-risk and high-risk debts that have different end dates. They are combined in a special pool, in order to reduce the risks and allow the investor to make a long-term investment in a safe way.

Additionally, the tokens need to allow the ability to ask whether the transaction will be successful or not. If the transaction fails, the reason behind the failure must also be known.

ERC-1400 token standard is still in its draft stage. This means that the Ethereum community has decided that it is worthy of consideration. It already has its own number, which is 1400. After the proposal gains the draft status, there is usually a certain period of time that follows before the final decision is made. This period can be quite long, and it serves for additional development, various implementations and edits, as well as for finding and fixing potential bugs. Basically, the new token standard has only started its long journey, and it has a lot to do before it gets officially implemented.

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