Stellar’s SEP8 to Prevent Fragmentation of SDEX and Unlock Ultimate Liquidity for Security Tokens — Smartlands

Stellar decentralized exchange (SDEX) allows anybody to create a front-end application for managing and trading of any Stellar assets. Having various interfaces for a sole orderbook allows for the development of a robust ecosystem and pooled liquidity.

Regulation may become a major challenge for liquidity

It all works fine until the requirement for oversight of financial instruments circulation is in place. As we have previously described in our , we believe that Stellar is a blockchain of choice for issuing security tokens. Nevertheless, without a common protocol to coordinate transaction rulesets between different applications/interfaces, enforcement of regulation will result in fragmentation of SDEX. Each platform will allow trading of security tokens only through their own wallet/exchange application, and the SDEX would turn into a set of individual exchanges (regulated sements of SDEX).

SEP8 unites regulated segments

SDF is committed to the development of the ecosystem of financial services providers based on Stellar network. Thus SDF in cooperation with Interstellar developed the stellar ecosystem protocol SEP-0008 (SEP8) to “defragment” trading of security tokens.

SEP8 introduces a common protocol for defining an asset as a regulated one, and for pointing to a dedicated ruleset, or “signer service” — a program that governs the trading restrictions applicable to the asset. The protocol is flexible enough to ensure the application of all rules related to security tokens issued on Smartlands, such as fee reserve (SLT holding requirement) and trading fees.

The most practical application of SEP8 is the ability to trade security tokens in countries that restrict trading of securities for investors on foreign exchanges/MTFs. Listing of security tokens on local SDEX-based exchanges will enable trading in such restrictive countries.

Moreover, this protocol in principal may provide the opportunity to trade regulated assets on other SDEX interfaces (e.g. StellarX) while the Smartlands Platform handles all the compliance issues, fees, reserve issues.

How SEP8 compares to Ethereum smart contracts

Due to the nature of the Ethereum network, every token on it is a separate dApp on the network, and every controlling smart contract is isolated from the others, which makes on-chain trades, atomic swaps, etc. unnecessarily complicated (requires special smart contracts). Stellar tokens, however, are native to the network. The network allows on-chain swaps/trades, even path payments, and SEP8 introduces a unified protocol to allow regulated tokens to be supported by every Stellar wallet/interface via an off-chain ruleset. This means that trade restrictions for securities can be implemented quickly and easily, using widely adopted and safe programming languages like JavaScript, Go or Java.

Overall, the Stellar network provides platform/ecosystem that could be implemented on an industrial scale, while Ethereum is more like an advanced sandbox for blockchain experiments; it will likely fail should a full-scale project be built on it. You can find out more on Ethereum vs. Stellar .

Comparison of the Stellar network’s SEP8 and an Ethereum smart contract

Tokens model

native to the network, SEP8 allows for custom security token trading rulesets

each token needs to be programmed as a smart contract with many competing standards

Flexibility matters as regulations may change, and it would require changes in protocol/smart contract. Immutability of a smart contract that provides for trustless approach on Ethereum may become a significant problem, instead of being an advantage.

SEP8 employs standard features of accounts and tokens on the Stellar network, while Ethereum smart-contracts are written in Solidity, a language that is opaque to all who are not specialist Ethereum developers. Regulators are not likely to favour the idea of a smart contract written on-chain that is prone to vulnerabilities and hard to update and maintain.

SEP8 and Smartlands

SEP8 is essential for Smartlands’ aim to achieve the global coverage.Therefore, we’ve decided to join the Inter/Stellar and SDF workgroup to share our accumulated knowledge about security tokens and make the ecosystem standards for secur ities as comprehensive and versatile as possible.

SEP-0008 aside, we’re also planning to contribute to the Stellar Core features proposals related to security tokens ecosystem, like CAP-0016 and CAP-0018, to even better integrate regulated tokens into the Stellar Network core.

Smartlands Platform is a fully regulated platform for issuing security tokens (ST) on the Stellar blockchain. Armed with the crowdfunding license from the FCA, we are ready to proceed to the next step in shaping up the landscape on the Smartlands Platform. Together with the consortium of partners vested in the development of securities trading on blockchain we are entering the active stage of obtaining the Multilateral Trading Facility (MTF) license. The MTF license will allow us to make our Stellar-based solution for trading of security tokens fully legally compliant.

Originally published at https://smartlands.io on April 29, 2019.