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Unlike rigid all-in-one platforms, Polymath’s token creation and management technology integrates smoothly with a large ecosystem of custodians, broker-dealers, legal firms, cap table management providers, token sale platforms, KYC/AML providers and others so that issuers can create a bespoke solution.
This best-of-breed approach bypasses the scalability and customization issues that can come with all-in-one solutions and lets each issuer create a logical and compliant process, regardless of their asset, goals or jurisdictional requirements.
Our experience with ERC 1400 and with its many proponents has allowed us to refine requirements for security tokens and gather feedback on market needs. While the standard goes a long way towards making Ethereum more suitable for securities, there are still gaps in functionality and scalability.
ERC 1400 goes a long way towards making Ethereum more suitable for securities, but as a general purpose chain, there are still gaps in functionality and scalability. Our experience with the standard and with its many proponents has allowed us to refine requirements for security tokens and gather feedback on market needs. Polymesh is a blockchain we are building specifically for security tokens. It uses ERC 1400 as a foundation and layers in additional capabilities around identity, compliance, confidentiality, and governance.
On general purpose blockchains, digital assets are programmed using smart contracts and as a result, custodians, exchanges and other market participants have to integrate each asset into their environment individually.
By contrast, assets on Polymeshare created at the protocol layer. What that means is that instead of having to create a smart contract for each asset, the issuer creates the token natively on Polymesh. As a result, no additional standard is needed to ensure that tokens are created consistently. What’s more, market participants can integrate once with the Polymesh blockchain and then quickly onboard new assets without having to set up each one individually.
The race toward market standardization isn’t about one standard winning over another; instead, the shift from a marketplace full of bespoke security tokens to a more homogenized approach provides clarity, guidance, and best practices for market participants. Developed with this belief in mind, ERC 1400 has evolved from a single ERC to a library of security token standards that each represent a different facet of the lifecycle, trading, and management of securities on Ethereum.
These standards are self-contained but can be combined in different ways to reflect the specifics of the asset class and jurisdictions across the globe, while still remaining interoperable across the ecosystem. ERC 1400 can apply off-chain data to transactions to include necessary real-world input and authorization, and because ERC 1400 smart contracts are modular by design, issuers on Token Studio can go back and make changes to rules and configurations without having to create a brand new token.
The early security token industry lacked standardization, so every security token was built differently. This created unnecessary friction where every market participant — especially custodians and exchanges — needed to perform not only business due diligence on every token they supported, but also technical due diligence.
To tackle this problem, Polymath proposed a unified standard for security tokens on Ethereum, with the goal of ensuring a token’s code met specific requirements and organizations could integrate it without costly and time-consuming technical due diligence. This standard, ERC 1400, is a collection of other standards integral to creating a security token and has since been adopted by organizations including ConsenSys and BNP Paribas.
ERC 1400 was built on Polymath’s earlier ST20 protocol and Polymath Token Studio creates tokens using the standard. It also laid the foundation for Polymesh.
Learn more about ERC 1400.
Node operators (or simply operators) run a program that verifies the mathematics associated with transactions and puts transactions into blocks. They do not ensure that transactions comply with securities regulation (that’s done by the compliance rules built into the security token).
Permissioned node operators are one of the aspects that makes Polymesh different from general-purpose blockchains. Transactions involving securities need to be written to the blockchain by known, trusted entities but most blockchains allow pseudonymous entities to author blocks. On Polymesh, only permissioned capital market participants that meet specific criteria can write transactions.
Polymesh is a proof-of-stake chain built using Parity’s Substrate framework. To secure the chain, operators and stakers work together. Stakers economically back the operators of their choice and both are then rewarded or fined based on the operator’s performance.
Learn how and why to become a node operator on Polymesh.
When it comes to creating and managing digital securities, Polymesh’s specificity gives it (and the applications built on it) a distinct advantage over those using general-purpose blockchains.
Polymesh is an institutional-grade permissioned blockchain built specifically for regulated assets. It streamlines antiquated processes and opens the door to new financial instruments by solving regulatory challenges around identity, compliance, confidentiality, and governance through key design principles built into the base layer of the chain, rather than as external add-ons.
Learn more about Polymesh.
Polymath’s white label solution allows broker-dealers, banks, and asset managers to integrate Polymath’s technology into their broader offerings. It lets them use Polymath’s technology for token creation, issuance, management and corporate actions, while branding and customizing the process and experience for their clients.
Read this case study to get the details on how Marketlend implemented Polymath’s white label solution in a matter of weeks.
Polymath provides technology to create and manage digital securities, but like any piece of tech, it relies on the user to set the terms and rules that need to be enforced. Polymath doesn’t provide any guidance or services around the issuing, buying or selling of securities.
Polymath Token Studio is a self-service application that allows users to create, issue, and manage security tokens through a simple, intuitive interface.
Token Studio lets issuers configure their token in a few simple but important clicks, by making choices about divisibility, ownership and transfer restrictions, and more. Once the issuer has input preferences and restrictions, the system automates their enforcement.
We built Token Studio on Ethereum as a means of market testing the need for a compliance-focused tokenization solution. It’s been used to create over 200 tokens, but after seeing traction and learning from other market participants, we identified the need for a purpose-built blockchain to drive industry adoption. The next-generation TokenStudio on the Polymesh blockchain is currently available on testnet.
To learn more about Polymath TokenStudio, visit our page for security token issuers.
Q1 2020. Until then, you can access the chain by participating in our second testnet – Alcyone. The testnet does not involve real assets, but is a great place for developer experimentation, testing the chain at scale, and giving node operators an opportunity to familiarize themselves with the network.
POLY is the token that fuels Polymath Token Studio on Ethereum. It’s used by issuers creating and managing digital securities on the platform. POLYX is the token that will power our Polymesh blockchain. It will be used for network processing fees, accessing smart contracts, and fueling the incentive structure for Operators and Stakers. To use their tokens on Polymesh, POLY holders will upgrade to POLYX using our POLY to POLYX Bridge.
Node operators are integral to the functioning and success of Polymesh. They manage and run authoring nodes that keep the Polymesh blockchain secure and operational at all times. All operators will be permissioned entities and regulated in their jurisdiction.
A node operator gathers transactions into a block and proposes writing that block into the Polymesh blockchain. To do that, the node operator picks transactions from a queue, verifies them, and inserts them into blocks. These blocks are voted on and approved by other node operators.
Node operators verify the mathematics associated with transactions and put transactions into blocks. They do not ensure that transactions comply with securities regulation (that is done by the transaction data built into the compliance and functionality of the security token).
To learn how and why to become an operator on Polymesh, click here.
Proof of work consensus relies on brute-force mathematical computation to secure the chain. Proof of stake relies on block producers staking a certain amount of cryptocurrency, which is taken away – ‘slashed’ – if they break the rules. In short, proof of stake is fairer, more scalable for transactions, and less reliant on electricity. It’s also more resistant to threats such as centralized power and 51% attacks.
The traditional securities lifecycle is very inefficient, which limits scale, cuts into profit, and constrains product offerings for banks, broker-dealers, asset managers, issuers and investors alike.
Digitizing securities on the blockchain can bring benefits including:
Learn how a blockchain built for digital securities can help enable these benefits by reading the Polymesh Pillar Series.
The early security token industry lacked standardization, which created unnecessary friction where every market participant - mainly custodians and exchanges - needed to perform not only business due diligence on every token they supported, but also technical due diligence. To tackle this problem, Polymath proposed a definitive standard for security tokens on Ethereum, with the aim of reducing the need for due diligence by enabling automation of the related processes.
This standard, ERC 1400, has been in use by organizations, governments and other blockchain companies since early 2019. To give one example of how Polymath has fostered industry collaboration with ERC 1400, securities services provider BNP Paribas used the standard for a proof of concept with crypto wallet provider Curv to demonstrate a fast, secure and transparent way to transfer security tokens.
ERC 1400 worked because it combined new and existing standards to create a unified framework for all security tokens. It was built on our ST20 protocol to introduce core compliance functionality, document handling and notification, security token controls and permissions, and better transparency of ownership rights for investors.
By doing these things, ERC 1400 reduced the threat of bad actors, encouraged regulatory acceptance, and improved auditability. It also took the onus off custodians and exchanges to perform technical due diligence, enabled due diligence on both publicly traded equity/bonds and traditionally illiquid assets like private placements, real estate and fine art, and gave investors a way to easily understand why trades had failed and what was needed for compliance. To learn more about ERC 1400, click here.
Despite the success of ERC 1400, it eventually became clear that Ethereum itself was not suitable for institutional adoption of security tokens. We realized Polymath needed to transition from the general-purpose Ethereum blockchain to a purpose-built blockchain optimized for security tokens. Thus, we began building Polymesh, which will further reduce the need for due diligence because standardization is baked into the blockchain rather than tacked on. What this means for custodians, exchanges and other market participants is that they integrate once with the Polymesh blockchain and can then quickly onboard new assets, instead of having to integrate each asset individually.
To learn more about Polymesh, read our whitepaper.
For Polymath, the Ethereum blockchain has been an excellent starting point for security tokens. But it fails to resolve critical problems holding back issuers, investors, institutions and regulators from adoption. These include:
Polymath addresses these issues with Polymesh, an enterprise-grade blockchain built specifically for security tokens. To learn more, read our Polymesh Pillar Series.
Polymath started because our founder, Trevor Koverko, had a problem. He wanted to tokenize his private equity fund and distribute dividends. Inspired by that vision, he got to work on finding a solution, but soon found that the complex technical and legal challenges made it very difficult to launch securities on the blockchain. This led him to a much larger vision: “Why launch a tokenized microfund, when I can build a platform that can launch thousands of them?" And with this idea, Polymath was born.
As a start-up, it made sense for Polymath to start with Ethereum because it already had the tools, the developers and the ecosystem for us to market-test our product. Once we’d confirmed there was a real appetite for our product, work began on our purpose-built Polymesh blockchain. Click here to learn more about Polymesh. Watch this video to learn more about our journey from Ethereum to Polymesh.
You can create a security token using Polymath Token Studio on the Ethereum network (mainnet) and the Kovan network (testnet). Creating a security token involves reserving and naming your token symbol, building a token that can programmably enforce regulatory compliance, and minting and distributing the token to investors via their Ethereum wallet addresses. Be sure to contact your lawyer and/or broker-dealer before creating your security token.
Here you can watch Graeme Moore, Polymath’s Head of Tokenization, walk you through the end-to-end token creation process on Polymath Token Studio.
If you’re an issuer who wants to create your security token using Polymath Token Studio, click here.
If you’re a broker-dealer or other entity that wants to offer security token creation and management services to your clients, you can white label Polymath’s technology. Click here to get started.
There are two ways that security tokens can be created. The first is through asset tokenization, which is when a traditional financial asset that exists off-chain is represented on-chain, making it a ‘tokenized security’. An example of this would be tokenizing an existing share certificate. The second is through asset origination, which is when a financial asset is defined and exists only on the blockchain. These assets are often described as ‘natively digital securities’.
Security tokens are digital representations of securities (like debt, equity, or real estate) on a blockchain. Much like traditional securities, security tokens are subject to regulation and need to conform to strict compliance standards.
By leveraging blockchain technology, security tokens (or digital securities, as they’re sometimes called) allow for many traditionally cumbersome and highly manual processes to be automated, and provide a golden source of truth that all parties can depend on.