If you think of blockchain, you probably don’t imagine creating security tokens. Unfortunately, some companies or consortia have learned that designing their standards without foresight can lead to roll-your-own security tokens. It’s not easy to create a security token standard from scratch while piecing together code and documentation from various sources. That’s why many companies rely on third-party APIs, SDKs, and other resources to create their security tokens and conduct internal token sales. This is where roll-your-own rollups can be helpful, too. Rollup is a tool that helps secure your smart contracts by preventing token issuers from creating new tokens on top of them.
This article will explain how they work, how you can use them now, and how they will make it easier for everyone to launch compliant security token offerings in the future.
What is a Rollup?
A rollup is a collection of smart contracts that allows a company to launch its token standard by including a standard set of terms and conditions that apply to all tokens created on that network. While it might seem like a way to sidestep the process of creating your token standard, it’s one of the most essential security features to be added to a blockchain network. That’s because the ability to launch a token on top of a network is critical to the network’s health. If a token issuer can create tokens perpetually, they can use them to control or manipulate the web in several ways. For example, they could issue tokens with terms and conditions that force token holders to give them financial or voting control over the network. They could also create tokens that grant them access to network resources, like the right to review transactions or use network infrastructure.
Why is it essential to use zero-knowledge rollups?
This is the big question. If a rollup does nothing but add a standard set of terms and conditions to a network, why does it matter? This is a fundamental question because it’s why many people are hesitant to use rollups. Unfortunately, there is still quite a bit of confusion and misunderstanding about rollups. We’ve seen several cases where companies have launched compliant security token offerings using only third-party APIs and SDKs with no security features. They’ve been successful because no one is sure what the consequences of doing so are. With the proliferation of ICOs and security token offerings, we’re seeing more regulatory attention directed toward these types of networks. This attention is focused on the fraudulent or unlicensed token issuers that have launched their tokens on top of other networks.
How does a Zero Knowledge Rollup work in practice?
This is the big question. If a rollup does nothing but add a standard set of terms and conditions to a network, why does it matter? This is a fundamental question because it’s why many people are hesitant to use rollups. Unfortunately, there is still quite a bit of confusion and misunderstanding about rollups. We’ve seen several cases where companies have launched compliant security token offerings using only third-party APIs and SDKs with no security features. They’ve been successful because no one is sure what the consequences of doing so are. With the proliferation of ICOs and security token offerings, we’re seeing more regulatory attention directed toward these types of networks. This attention is focused on the fraudulent or unlicensed token issuers that have launched their tokens on top of other networks.
How does a Zero Knowledge Rollup work in practice?
First, let’s step back and explain how smart contracts work. When a company launches its token standard, it will write its intelligent contracts on the blockchain. These smart contracts can represent everything from a company’s blockchain network to a digital asset representing a share of ownership in that network to a collection of financial terms and conditions governing all tokens created on that network. Once these contracts are written and deployed to the blockchain, the tokens created on the network obey their rules. This can be a powerful feature for issuers because it lets them create a custom token standard that supersedes any other token standards built on that blockchain. For example, imagine you have launched your token standard on top of Ethereum. You can now issue tokens that adhere to your terms and conditions instead of those of other networks. This means you can create unique tokens representing different assets, grant additional rights to token holders, and have different terms and conditions than other tokens on that network.
Advantages of using ZK Rollups
The most significant advantage of using a zero-knowledge rollup is the security it provides to your network. If a token issuer can create tokens perpetually, they can use them to control or manipulate the network in several ways. With a zero-knowledge rollup, token issuers can’t create tokens that grant access to network resources, like the right to review transactions or use network infrastructure. In addition, several terms and conditions are common to most security token offerings, like management and voting models, that are also banned in traditional token sales. Zero-knowledge rollups also provide several important features impossible with a conventional token standard. For example, a zero-knowledge rollup can create native token access to real-world assets like transportation, real estate, or other financial assets. This can provide significant value to token holders because it lets them use those tokens to purchase those assets.
Disadvantages of using ZK Rollups
When using rollups, there are some key points to consider. First, you need a functional blockchain that complies with the standard being rolled up. This implies that you won’t be able to conduct a compliant token sale on a blockchain that hasn’t been updated to meet the rolled-up standard. Additionally, you can’t roll up on a token sale network that distributes tokens outside of that sale, such as Ethereum, where tokens are sold on exchanges. Finally, you must be prepared to adopt a new standard and shift your development efforts to that network. Token issuers may be hesitant to do so since switching to a new network and mastering a new technology can be a significant distraction.
The Future of Zero Knowledge Rollups
Rollups are already a pretty established tool in the blockchain industry. They have been used in one way or another by many different blockchains like the EOS, SONM, and WAN networks. They are also being used by companies that might not be directly affiliated with an Ethereum-based blockchain. That’s important because the Ethereum network isn’t the only option for creating a distributed network for decentralized applications. Several other blockchain networks, like the NEO network, have been designed to solve similar problems. That means rollups can easily be used to create security tokens on a wide variety of different blockchains. That makes them a vital tool for creating compliant security token offerings. They are also a great security feature for any blockchain network.1
Wrapping up
The future of token sales is here, and it’s roaring. Unfortunately, there’s no sign of it slowing down, either. With new regulations and crackdowns on fraudulent token offerings happening worldwide, the only way to launch a compliant security token offering is by creating your token standard from the ground up. Zero-knowledge rollups can help you do just that. The key will be finding the right blockchain network for your needs.
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