Tokenize all Financial Products
By: Johannes Pfeffer
Tags: Ethereum, Tokenization, Blockchain, Polymath, Defi

Tokenize all Financial Products

While we are still very busy implementing the ACTUS mechanics and contract types for the ACTUS Protocol on Ethereum, we’re always looking for ways to integrate with the rising token economy and decentralized finance (DeFi).

Read in this article how we are working with Polymath to integrate the ACTUS Protocol with their security token platform and made it possible to tokenize nearly 100% of all financial instruments and derivatives.

Let’s quickly recap what ACTUS Protocol and Polymath are all about. Those who are familiar with the basics can skip the next section which gives a quick overview about the capabilities of the two projects.

Background

The ACTUS Protocol for Ethereum is a smart contract system built by atpar that allows anyone to issue financial instruments. Right now only a few contract types are fully implemented — but in future one will be able to choose from any of the ACTUS contract types, that cover nearly 100% of existing financial instruments, e.g. loans, swaps and bonds. To learn more about the ACTUS Protocol, read this article.

Polymath has been a big driver for the development of the ERC1400 and ST20 standards which make it possible to issue compliant security tokens. The Polymath solution includes all tools necessary to issue, distribute and manage trading of a regulated security token in many jurisdictions.

Overview

As we have seen with other blockchain finance applications, some of the most exciting use cases surface when different technologies are combined. The same is the case for ACTUS Protocol and Polymath.

We have created a prototype that combines ACTUS Protocol and the Polymath security token issuance platform. As a result, an issuer can hold a security token offering (STO) for any ACTUS financial instrument. The proceeds of the instrument, e.g. repayments of a loan, are owned proportionally by the holders of the security token.

Tokenize all financial products

This means an STO can now be a loan, a derivative, a bond or swap offering. Actually, one can offer any of the 32 contract types supported by the ACTUS Protocol.

ACTUS Protocol manages the instrument’s economics (who owes what to whom and when), reporting, conflict resolution, penalties and other intricacies of the instrument. It also forwards cash flows resulting from the instrument, e.g. loan repayments, to the security token which distributes it to the investors. The Polymath side has an ACTUS STO Module (which implements the compliant token sale), a security token contract and a module for distributing the returns.

In addition to this primary market example, where Issuer and Debtor are the same entitity, one can also quite easily realize a secondary market use case. With the integration existing ACTUS instruments can be tokenized as Polymath security tokens that represent fractional ownership in the future returns of the instrument.

To realize the integration between the two smart contract systems we authored two additional components:

an ACTUS STO Module based on the Polymath Capped STO Module

a payment adapter responsible for triggering the issuance of “dividends” to the token holders

Modules allow additional functionality to be added to Polymath ST20 tokens by third parties, with each ST20 token created through the Polymath protocol able to add both core Polymath modules as well as third party integration modules.

The ACTUS Protocol smart contracts didn’t have to be modified for this integration.

You can find the source code of the integration and further technical documentation in our GitHub repo.