Talking TOKO, the Regulated Tokenisation Engine Built on the Luther Platform
In light of the recent launch of our TOKO application that we built together with DLA Piper and our panel discussion at Hong Kong Blockchain Week 2020, we sat down with Luther Systems founder, Hossein Kakavand, to discuss the underlying technology of the Digital Asset Issuance and Transference, TOKO application.
How does the issuance of digital financial assets work?
HK: The issuance process involves a number of steps, each of which is executed by a separate entity. Generally, these steps can be divided into 2 parts. The first is the preparation of the issuance. And the second is what happens after the issuance. Under the preparation of the issuance, there is investor onboarding, KYC, token minting and transfer. And in the ‘after the issuance’ category we have dividend distribution, voting, announcement and exchange. All these different functions are performed by the custodian, exchange, broker/dealer, regulatory and legal advisory.
So traditionally this is a very fragmented process that involves several different siloed participants. And the real innovation here is that we have built an engine to automate the whole process which connects all these participants into a single, streamlined end-to-end process. Through this engine, we have been able to massively scale the process at a low cost, and also do this in a quick and standardized way where we can issue multiple assets per day and can also support numerous types of financial asset classes in a regulated environment.
Tell us more about the application. What has Luther built? What is the TOKO application?
HK: So TOKO is an engine which issues tokens. And the current primary use case for it is the private issuance for the ownership of art. Our engine that drives the entire process is built on Hyperledger Fabric with a Hedera Consensus Service center. And the tokens that TOKO issues are ERC standard Ethereum tokens.
So the engine really has 2 layers. The first layer is the platform layer, which uses Luther’s LEIA platform to automate the issuance process. As I mentioned, it is built on top of the private Hyperledger Fabric infrastructure with the Hedera consensus service. It brings together these siloed participants in the process. The platform layer also runs a smart contract which orchestrates the execution of the whole process and also ensures that each step is executed correctly and verifiably. The engine integrates with the various participants and providers along the process. The second layer is the token layer that actually mints the tokens. The platform smart contract triggers the mining of a public or private token that can then be transferred to the investor’s wallet. And tokens can be tracked for cap tables, exchanges, dividend distribution, redemptions and so on.
What’s next for the DLA application? Do you have an expansion plan in mind?
HK: Currently we are working on another issuance of a different asset class with different tokens. What we’re planning to do next is to expand this into more asset classes which could include property, enquiry, debt or IP rights. And we are also planning to expand the token types to cover Hedera and Hyperledger Fabric tokens, in addition to our current ERC standard Ethereum tokens.
What would I need to do if I wanted to digitize a financial asset tomorrow, say?
So the first thing that happens is we will work with you to create a process map. Then, together, we will structure the digital asset product. In this step, what you need to provide is the asset type and quantity, investor data and the jurisdiction.
Then we’ll map out your process and select relevant modules that we have for your asset class that provide the functionality used in your process map. We then add the set of rules which connect these functions which is the business logic guiding the execution of the process. Then we’ll deliver the product to you and train your users on how to use the engine.
What are the technological challenges that you are currently facing?
There are a number of challenges. The first is that the ecosystem is technologically maturing at varying rates. So certain parts are more advanced and prepared for integration into a unified ecosystem than others. And the automated process we have developed is an important step in solving this challenge.
The second is seen in the performance of blockchain networks which also have varying degrees of maturity, particularly in latency and throughput. Latency is the amount of time after a transaction is issued before the network fully accepts the transaction. In public blockchains, the latency could be relatively high which could limit the performance of certain applications. Throughput on the other hand is, the maximum number of consecutive transactions the network is able to process over a fixed period of time. In private blockchains, throughput inversely, could be relatively low which could limit the performance of certain applications. And this is why the work that we do focuses on using hybrid public private blockchains which harnesses the best of both worlds.
Another challenge is integration with public/private token service providers. Service providers use a myriad of bespoke systems which require custom integration to interact with. This poses the challenge of developing bespoke case-by-case connectors for each service provider individually. This is a challenge that we are working hard to solve. Our developers have developed a whole array of standard connectors into the most commonly used systems in various enterprises.
On top of all this, there is perhaps one of the most pervasive problems which is the necessity of enforcing regulatory and compliance rules which is why DLA Piper’s involvement in the process is so important.
And what makes Luther’s underlying technology different?
Luther’s tech is different because it enables the rapid development of automated complex processes. And this rapid development is enabled by our patented architecture, our LEIA platform where infrastructure, platform and applications layers are modularised and enabled by connectors. On top of the platform, we also provide development tools and act as an operating system that enables you to tokenize your assets in the most efficient way. This is how we are able to deliver an automated process for issuing digital assets.