Changes Coming for Ethereum Smart Contracts with ERC-1400
ERC stands for Ethereum Request for Contract, and they are documents used by the Ethereum smart contract developer community. Each ERC defines various rules that affect how tokens can be used within Ethereum. There’s a formal process for approving ERCs, with revisions and commentary provided through the community.
The main reason for ERC-1400’s development is to improve the security compliance of security tokens offered on the Ethereum network. This is driven by the increase in the number of security token offerings (STOs) and the broader desire to expand the interest in STOs by solidifying them as legitimate investment vehicles. Security tokens are inherently more complex than other token use cases, and this complexity warrants continual ERC improvements. Ideally, security tokens are allowable within any jurisdiction and comply with any regulations, making it a truly global way to securitize real-world assets. This standard is still under development but promises to increase interest in security tokens and allay many regulatory concerns.
Key Improvements and Characteristics with ERC-1400
The main thrust of the improved new token standard is to bolster the security characteristics of security tokens. The technical aspects of ERC-1400 are designed to add transparency to token transactions and to enable everyone involved to see real-time status updates.
- Crediting of tokens to a wallet can be reversed. This is vitally important for STOs, as previously there was not a smooth option for recovering funds and forcing transfers of tokens. Legal mandates and regulations might require funds are recovered and returned to investors, so the ecosystem needed a way on the technical side to make this possible. This also accounts for human error and other mistakes, which can cause major headaches if they aren’t reversible.
- Creates a standard interface that enables users to check statuses and reverse tokens back to certain wallets.
- Metadata can be attached to a token holder’s balance, for example, shareholder rights or other restrictions on how or when any transfers can occur.
- ERC-1400 tokens are compliant with the previous ERC-20 and ERC-777 standards.
- Tokens can be separated into different tranches, which is a way to modify investments based on amounts of debt. This is a common tactic in the traditional financial world, and will further boost interest in Ethereum Smart Contract-based investing. For an example, a token balance could be separated into a group for the primary issuance of tokens and another for any tokens that are accumulated through trading.
Another key aspect of the new standard is making the token “partially” non-fungible. This means that transfers need to involve the same exact token because every single one is unique. With this standard in place, companies can offer non-fungible tokens with wildly varying values, which would allow them to be securitized under various assets such as real estate, artwork, or companies. Fungible assets include dollar bills and Bitcoin, in terms of someone that pays one of them can receive any others in return, they don’t need to receive the exact dollar or coin that they previously spent. The non-fungible nature of ERC-1400 tokens would make them similar in structure to CryptoKitties which are based on ERC-721.
The “partial” fungibility means a more flexible environment for a system that does not have a central authority. These tokens can cryptographically verify ownership and can stop or accept transactions, making it much easier to fractionalize real-world assets in a way that’s equitable and will stand up to compliance reviews.
The reversal feature of ERC-1400 is a proposed way to combat money laundering and other legal issues. These problems are harming the entire Ethereum and cryptocurrency and token markets, and rectifying them will encourage institutional investment and growth that might have otherwise remained on the sidelines.
The creation of ERC-1400 is needed for a truly global security token ecosystem. Individual investors and institutions need more trust and transparency in the token process, and the non-fungible capabilities of ERC-1400 add a layer of protection that does not currently exist within Ethereum smart contracts. It’s currently under review and in the capable hands of the Ethereum community which will offer bug fixes and other recommendations before it moves to market implementation. The new standard brings security and compliance, a tandem that is desirable for Wall Street, the investing public, and the government.
Companies that are currently involved or looking to jump into Ethereum Smart Contracts need to understand the different ERCs and how they relate to their particular security or utility token. Sphere offers expert guidance on blockchain strategy, including how to best navigate the Ethereum ecosystem and create security tokens that are transparent and fully compliant.