Blockchain technology is evolving at a breathtaking speed, and tokenization is leveraging these developments to transform traditional ideas about ownership and investment in real-world assets. The demand for secure, flexible, and compliant token standards has never been higher, be it in real estate or investment funds. Zoniqx’s ERC-7518, the groundbreaking Dynamic Compliant Interoperable Security Token (DyCIST)standard has been a game-changer for this. ERC-7518 was specifically created to handle and manage the complexities of modern asset tokenization in a greatly enhanced way. It introduces innovative features that are expected to change security token management and interoperability as we know it. By building upon the versatile ERC-1155 standard, it reshapes the concepts of fractional ownership, semi-fungibility, and compliance management. Let’s delve into what makes ERC-7518 a trendsetter for the tokenized economy.

1.1 Abstract 

The proliferation of tokenized real-world assets necessitates a security token standard that offers robust compliance management, interoperability, and partitioning flexibility. TheERC-7518 standard, known as Dynamic Compliant Interoperable Security Token (DyCIST), builds upon the established ERC-1155 standard to introduce partitions that enable semi-fungibility within a single token contract. This innovation allows for fractional ownership, distinct share classes, and the efficient management of complex real-world assets such as commercial real estate and investment funds.

ERC-7518 is designed with security tokens in mind, incorporating features such as token locking for vesting or holding periods, forced transfers for recovering lost keys, address freezing for regulatory compliance, and dynamic compliance management through off-chain vouchers. By providing a standardized interface for these functionalities, ERC-7518 supports the development of a compliant and interoperable security token ecosystem, paving the way for widespread adoption in various asset classes.

1.2 Need for Tokenization

Tokenization is transforming the way assets are managed, transferred, and traded by converting real-world assets into digital tokens on the blockchain. This process offers several benefits, including increased liquidity, fractional ownership, and improved access to global markets. However, existing token standards fall short when it comes to managing the complexities associated with security tokens. These tokens require flexible partitioning to represent different ownership classes, stringent compliance management to meet regulatory requirements, and interoperability to function across different blockchain ecosystems.

As the demand for tokenized assets continues to grow, there is a clear need for a token standard that can accommodate these unique requirements. The ERC-7518 standard addresses this need by extending the capabilities of the widely adopted ERC-1155 standard. It introduces advanced features such as dynamic partitions, compliance management, and interoperability, making it ideally suited for the tokenization of complex assets like real estate, investment funds, and securities.

1.3 Why Blockchain

Blockchain technology provides the foundational infrastructure necessary for the tokenization of real-world assets. It offers a decentralized, immutable ledger that ensures transparency, security, and trust in transactions. Blockchain's inherent features, such as smart contracts, enable the automation of complex processes, including compliance management, payment distribution, and asset transfers, without the need for intermediaries.

For security tokens, blockchain's benefits extend beyond basic asset management. The use of smart contracts allows for the enforcement of regulatory requirements, such as Anti-MoneyLaundering (AML) and Know Your Customer (KYC) protocols, directly within the token contract. Additionally, blockchain's global reach and interoperability capabilities make it possible to tokenize assets that can be traded across borders, providing access to a broader pool of investors and liquidity.

ERC-7518 leverages these advantages by incorporating blockchain's strengths into a standardized security token framework. This ensures that tokenized assets remain compliant, secure, and interoperable, all while benefiting from the efficiencies and transparency that blockchain technology offers. 

2.Introduction

2.1 Introducing DyCIST Standard - ERC 7518

The ERC-7518 standard, known as the Dynamic Compliant Interoperable Security Token (DyCIST), represents a significant evolution in the tokenization of real-world assets. Designed to meet the stringent demands of security tokens, ERC-7518 extends the functionality of ERC-1155 by introducing a partitioning mechanism that allows for the creation of semi-fungible tokens within a single token contract.

This partitioning capability is essential for managing complex asset structures, such as fractional ownership, different share classes, or other distinct units. ERC-7518 also incorporates advanced compliance management features, including dynamic off-chain vouchers that ensure token transfers adhere to regulatory requirements. Additionally, it supports critical functions for security tokens, such as token locking, forced transfers, and address freezing, making it a comprehensive solution for tokenizing real-world assets while maintaining regulatory compliance.

The DyCIST standard's flexibility and interoperability allow it to integrate seamlessly with other blockchain standards, facilitating the development of a robust, compliant, and interoperable security token ecosystem. This standard is particularly relevant for industries such as real estate, private equity, and investment funds, where the need for granular control over ownership and compliance is paramount.

2.2 Evolution of ERC Standards

The Ethereum ecosystem has seen the development of several ERC standards, each designed to address specific use cases and technical requirements. Understanding the evolution of these standards is crucial to appreciating the innovations introduced by ERC-7518.

• ERC-20: The ERC-20 standard is the most widely adopted token standard on Ethereum, designed for fungible tokens. It provides a simple interface for     transferring tokens, approving tokens for use by other addresses, and checking balances. However, ERC-20 tokens are limited to representing identical, interchangeable units, making them less suitable for applications that require distinct or semi-fungible assets.
• ERC-721: Introduced as the standard for non-fungible tokens (NFTs), ERC-721 allows for the creation of unique tokens that can represent individual assets. This standard is ideal for use cases such as digital art, collectibles, and real estate, where each token must be distinct. However, ERC-721 lacks the flexibility needed for semi-fungible tokens or scenarios requiring complex compliance management.
• ERC-1155: ERC-1155 was developed to bridge the gap between ERC-20 and ERC-721, allowing for the creation of both fungible and non-fungible tokens within a single contract. This multi-token standard is highly efficient, reducing the gas costs associated with managing large numbers of tokens. It also introduces the concept of "batch transfers," where multiple tokens can be transferred in a single transaction. While ERC-1155 offers significant advantages over its predecessors, it does not natively support the partitioning and compliance management features required for security tokens.
• ERC-3643: Focusing on the regulated security token space, ERC-3643 introduces features for identity management and regulatory compliance. It builds on the functionality of ERC-20 and ERC-1400 to ensure that security tokens can be issued and transferred in compliance with relevant regulations. However, like its predecessors, it does not address the need for flexible partitioning or dynamic compliance management, limiting its applicability in more complex asset tokenization scenarios.
• ERC-7518: Building on the foundation of ERC-1155, ERC-7518 introduces a range of enhancements specifically designed for security tokens. The partitioning mechanism allows for the representation of different share classes, fractional ownership, and other distinct units within a single token contract. This flexibility is critical for tokenizing complex assets such as real estate or investment funds. ERC-7518 also incorporates features from ERC-3643, ensuring that tokens can be issued and transferred in compliance with regulatory requirements. Furthermore, it introduces dynamic compliance management through off-chain vouchers, enabling real-time compliance checks without the need to update the token contract.

The evolution of these ERC standards reflects the growing complexity and diversity of use cases within the blockchain ecosystem. ERC-7518 represents the next step in this evolution, providing a versatile and compliant framework for the tokenization of real-world assets.

3. Rationale

3.1 Enhancing Compliance Management

One of the primary challenges in the tokenization of real-world assets is ensuring compliance with a complex web of regulatory requirements that vary by jurisdiction and asset class. Traditional token standards often lack the flexibility needed to dynamically manage compliance, leading to increased risk and operational overhead. The ERC-7518 standard addresses this issue by introducing a comprehensive compliance management framework that is both dynamic and adaptable.

Dynamic Compliance Management:
ERC-7518 incorporates off-chain vouchers as a mechanism for dynamic compliance management. These vouchers, generated by an authorized compliance service, attest to the compliance of specific token transfers. When a transfer is initiated, the canTransfer function verifies the validity of the voucher before allowing the transfer to proceed. This approach enables issuers to enforce complex and evolving compliance rules without requiring updates to the token contract itself.

Granular Control:
The partitioning mechanism of ERC-7518 allows for granular control over compliance requirements at the token level. Each partition within a token contract can have its own set of compliance rules, which can be dynamically adjusted based on regulatory changes or issuer-defined policies. This granularity ensures that token transfers are always in line with the most current regulatory requirements, reducing the risk of non-compliance.

Security and Transparency:
ERC-7518 enhances security by including functions such as freezeAddress, lockTokens, and forceTransfer. These functions provide issuers and regulatory authorities with the tools needed to prevent unauthorized transfers, recover lost tokens, and enforce compliance actions. Additionally, the unlockToken function ensures transparency by enabling the release of tokens once compliance actions have been completed.

3.2 Interoperability with Other Standards

The tokenization ecosystem is diverse, with different standards emerging to address various needs. For tokenized assets to achieve widespread adoption, it is crucial that they are interoperable across different platforms and standards. ERC-7518 is designed with interoperability at its core, ensuring that tokens can interact seamlessly with other standards and blockchain ecosystems.

Cross-Standard Compatibility:
ERC-7518 extends the ERC-1155 standard, which is already widely adopted for its multi-token capabilities. By building on ERC-1155, ERC-7518 benefits from its established infrastructure, making it easier to integrate with existing wallets, exchanges, and decentralized applications (dApps). Additionally, ERC-7518 introduces methods for token wrapping and unwrapping, allowing tokens to be converted into other standards, such as ERC-20 or ERC-721, as needed. This ensures that ERC-7518 tokens can participate in a broader range of use cases and ecosystems.

Backward Compatibility:
To facilitate smooth integration with existing systems, ERC-7518 is designed to be fully backward-compatible with ERC-1155. This means that any ERC-1155-compliant wallet, marketplace, or dApp can interact with ERC-7518 tokens without requiring significant modifications. This backward compatibility is critical for ensuring that the adoption of ERC-7518 does not disrupt existing workflows or systems.

Future-Proof Design:
The modular nature of ERC-7518 allows for future enhancements and updates to be incorporated without disrupting existing functionality. For example, as new compliance requirements emerge or as new token standards are developed, ERC-7518 can be extended to support these changes, ensuring that the standard remains relevant and interoperable in a rapidly evolving ecosystem.

3.3 Payment Distribution

Efficient and secure payment distribution is a critical aspect of managing tokenized assets, particularly in the context of security tokens, where regular payouts may be required for dividends, interest payments, or other forms of income distribution. ERC-7518 introduces specialized functions to streamline and secure this process.

Payout Functionality:
ERC-7518 includes the payout function, which allows issuers to distribute payments directly to individual token holders. This function is particularly useful for one-off payments or event-triggered distributions. By automating the payment process through smart contracts, ERC-7518 reduces the risk of errors and fraud, while ensuring that payments are executed in a timely manner.

Batch Payouts:
For larger-scale or recurring payments, ERC-7518 offers the batchPayout function.This function allows issuers to process multiple payments in a single transaction, significantly reducing gas costs and improving efficiency. Batch payouts are ideal for scenarios where payments need to be made to a large number of token holders, such as quarterly dividends or interest payments on bonds.

Compliance-Aware Payments:
The payout functions in ERC-7518 are fully integrated with the standard’s compliance management framework. This means that payments can only be made to addresses that meet the necessary compliance requirements, as determined by the canTransfer function. This integration ensures that payments are always in line with regulatory requirements, reducing the risk of non-compliance and potential legal issues.

4. Specifications

The ERC-7518 standard introduces a comprehensive set of functionalities designed to meet the specific needs of security tokens. This section details the key components and features of the standard, focusing on how it enhances compliance, partition management, safety, and payment distribution.

4.1 Compliance Management

Compliance is a critical aspect of security tokens, ensuring that transfers and transactions adhere to legal and regulatory requirements. ERC-7518 provides robust tools for managing compliance through a series of functions that control token transfers based on predefined rules and regulations.

• TransferableBalance:
  The transferableBalance function allows issuers to query the balance of tokens that can be freely transferred by a specific account. This balance excludes any tokens that are locked or subject to restrictions, ensuring that only compliant transfers are executed.
• LockedBalance:
  The lockedBalanceOf function retrieves the balance of tokens that are locked and cannot be transferred until certain conditions are met, such as the expiration of a vesting period or the resolution of a compliance issue.
• RestrictTransfer:
  The restrictTransfer function enables issuers to impose restrictions on the transferability of specific tokens. This is particularly useful in scenarios where compliance issues arise, or where certain tokens must remain non-transferable until regulatory conditions are satisfied.
• RemoveRestriction:
  The removeRestriction function allows issuers to lift any restrictions previously placed on token transfers. This function is typically used when compliance     conditions have been met or when a transfer restriction is no longer necessary.
• SafeTransferFrom:
  The safeTransferFrom function, inherited from ERC-1155, is extended in ERC-7518 to incorporate compliance checks. Before a transfer is executed, the canTransfer function is called to verify that the transfer complies with all relevant regulations and restrictions.
• CanTransfer:
  The canTransfer function is central to the compliance management framework of ERC-7518. It checks whether a transfer is allowed based on factors such as token restrictions, frozen addresses, and transferable balances. It can also verify off-chain compliance vouchers to dynamically enforce compliance rules.
• LockTokens:
  The lockTokens function allows issuers to lock a specified amount of tokens for a particular account. Locked tokens cannot be transferred until they are explicitly     unlocked, ensuring that they remain non-transferable during vesting periods or regulatory reviews.

4.2 Partitions Management

Partitions are a key feature of ERC-7518, enabling the creation of semi-fungible tokens that can represent different share classes, fractional ownership, or other distinct units within a single token contract. The following functions support the dynamic management of partitions:

• Dynamic Allocation:
  The partitioning mechanism of ERC-7518 allows for the dynamic allocation of tokens across different partitions. This enables issuers to adjust token allocations based on changing investor needs or market conditions, ensuring optimal distribution and compliance.
• Temporary Non-Fungibility:
  ERC-7518 supports the temporary non-fungibility of tokens within specific partitions. This is useful in scenarios where tokens of the same underlying asset need to be treated as distinct during certain periods, such as during different offerings or regulatory holding periods.
• Granular Compliance:
  Each partition within an ERC-7518 token contract can have its own set of compliance rules and transfer restrictions. This granularity allows issuers to tailor compliance requirements to the specific characteristics of each partition, ensuring that transfers adhere to relevant regulations.
• Efficient Asset Management:
  The partitioning mechanism simplifies the management of complex asset structures by allowing multiple partitions to be managed within a single token contract. This reduces deployment costs and operational complexity, making it easier to manage large portfolios of tokenized assets.

4.3 Safety Features

ERC-7518 includes several safety features designed to protect token holders and ensure the secure operation of the token contract. These features provide issuers with the tools needed to prevent unauthorized transfers, recover lost tokens, and enforce compliance actions.

• LockTokens:
  The lockTokens function can be used to lock a specific amount of tokens for a certain period, preventing their transfer until the lock expires. This is particularly     useful for enforcing vesting schedules or regulatory hold periods.
• UnlockTokens:
  The unlockToken function releases locked tokens once the conditions for their release have been met. This ensures that tokens are made transferable as soon as they are eligible, without unnecessary delays.
• ForceTransfer:
  The forceTransfer function allows authorized entities to transfer tokens from one address to another, bypassing normal transfer restrictions. This function is typically used for recovering lost tokens or enforcing regulatory actions, such as transferring tokens from a non-compliant account.
• Freeze:
  The freezeAddress function prevents an address from transferring or receiving tokens. This is a critical feature for enforcing regulatory compliance, as it allows issuers to freeze accounts that are under investigation or associated with suspicious activity.
• UnFreeze:
  The unFreeze function reverses the effects of freezeAddress, allowing the previously frozen address to resume normal operations. This function is used when an account has been cleared of any compliance issues or regulatory concerns.

4.4 Payment Management

Efficient payment management is essential for distributing dividends, interest, or other forms of income to token holders. ERC-7518 provides specialized functions to streamline this process, ensuring that payments are secure, compliant, and cost-effective.

• Payouts:
  The payout function allows issuers to send payments to a single address. This function is ideal for one-off distributions or targeted payments, ensuring that     payments are executed securely and efficiently.
• Batch Payouts:
  The batchPayout function enables issuers to distribute payments to multiple addresses in a single transaction. This function reduces gas costs and improves efficiency, making it suitable for large-scale or recurring distributions, such as quarterly dividends or interest payments on bonds. 

5. Interoperability

5.1 Need for Interoperability

Interoperability is a crucial factor for the widespread adoption of tokenized assets. In a diverse ecosystem where multiple standards, platforms, and blockchains coexist, tokens need to interact seamlessly with different systems to unlock their full potential. The ERC-7518 standard is designed with interoperability at its core, ensuring that tokens can be transferred, exchanged, and utilized across various platforms and standards without friction.

The need for interoperability is driven by several key factors:

• Cross-Platform Functionality: As the blockchain ecosystem expands, there is an increasing demand for tokens that can operate across different blockchains and platforms. Interoperability enables tokens to move between different ecosystems, broadening their usability and increasing their liquidity.
• Compliance with Multiple Standards: Different regions and industries may require tokens to comply with various regulatory standards. Interoperability ensures that tokens can adapt to these requirements, allowing them to be used in diverse markets without compromising on compliance.
• Seamless Integration: Interoperability facilitates the integration of tokens with existing financial systems, such as exchanges, wallets, and payment platforms. This integration is essential for enabling smooth and efficient transactions, as well as for fostering broader acceptance of tokenized assets.

5.2 Methods for Interoperability

ERC-7518 introduces specific methods to enhance interoperability with other standards and blockchain systems. These methods ensure that tokens can be wrapped, unwrapped, and interact with other tokens across different platforms.

• SetWrappedTokenAddress:
  The setWrappedTokenAddress function allows issuers to specify the address of a wrapped token. This function is used to establish a connection between the ERC-7518 token and its equivalent on another standard, such as ERC-20 or ERC-721. By setting this address, issuers can enable seamless conversion and interaction between the two token types.
• WrapToken:
  The wrapToken function is used to wrap an ERC-7518 token into another standard, such as ERC-20. This process involves locking the original tokens and minting an equivalent amount of the wrapped tokens. Wrapping tokens allows them to be used in ecosystems that primarily support other standards, increasing their versatility and usability.
• WrapTokenFromPartition:
  The wrapTokenFromPartition function extends the wrapping functionality by allowing tokens from a specific partition to be wrapped into another standard. This is particularly useful for tokens that represent different share classes or ownership units within a single contract, enabling them to be used in different contexts or platforms.
• UnwrapToken:
  The unwrapToken function reverses the wrapping process, allowing wrapped tokens to be converted back into their original ERC-7518 form. This function is essential for maintaining the integrity and traceability of the original tokens, ensuring that they can be recovered and used in their original context when needed.

These methods enable ERC-7518 tokens to interact with other standards, facilitating their use in a wide range of applications and platforms.

5.3 Backward Compatibility

Backward compatibility is a key consideration in the design of ERC-7518. By ensuring that the standard is fully compatible with its predecessor, ERC-1155, ERC-7518 allows tokens to interact seamlessly with existing systems, wallets, and dApps without requiring significant modifications.

• Seamless Integration with ERC-1155:
  Since ERC-7518 is built on the foundation of ERC-1155, it inherits its interface and functionalities. This means that any wallet, marketplace, or dApp that supports ERC-1155 can also interact with ERC-7518 tokens. This backward compatibility is crucial for ensuring that the adoption of ERC-7518 does not disrupt existing workflows or require additional development efforts.
• Example of Backward Compatibility:
  An example of backward compatibility is the ability to manage both ERC-1155 and ERC-7518 tokens within the same wallet interface. A user holding both types of tokens can view, transfer, and interact with them without needing to switch platforms or interfaces. The additional features introduced by ERC-7518, such as partitions and compliance management, are seamlessly integrated into the existing ERC-1155 framework, providing enhanced functionality without sacrificing     compatibility.

By maintaining backward compatibility, ERC-7518 ensures a smooth transition for users and developers, enabling them to leverage the new features and capabilities of the standard without disrupting their current operations.

6. Stakeholders

The ERC-7518 standard is designed to cater to the needs of multiple stakeholders within the tokenization ecosystem. Understanding the roles and responsibilities of these stakeholders is crucial for implementing and managing the standard effectively. This section outlines the key stakeholders involved in the lifecycle of an ERC-7518 token.

6.1 Issuer

The issuer is a central figure in the tokenization process, responsible for creating and managing the tokens that represent real-world assets. In the context of ERC-7518, the issuer plays several critical roles:

• Token Creation and Partition Management:
  The issuer is responsible for creating ERC-7518 tokens and defining their partitions. This includes setting up the various partitions that represent different ownership classes, share types, or fractional units within the token contract. The issuer ensures that these partitions are aligned with the specific needs of the asset being tokenized and the target investor base.
• Compliance Enforcement:
  Compliance is a major concern for security tokens, and the issuer is tasked with ensuring that all token transfers comply with regulatory requirements. Using the compliance management features of ERC-7518, such as canTransfer, freezeAddress, and lockTokens, the issuer enforces rules around who can hold and transfer tokens. The issuer may also work with third-party compliance services to generate off-chain vouchers that attest to the compliance of specific transfers.
• Payment Distribution:
  The issuer is responsible for managing payments to token holders, such as dividends, interest, or other forms of income. ERC-7518 provides the payout and batchPayout functions to streamline this process, ensuring that payments are made efficiently and in accordance with the rules governing each partition.
• Interoperability Management:
  In scenarios where the tokens need to interact with other standards or platforms, the issuer uses the interoperability features of ERC-7518, such as wrapToken and unwrapToken. The issuer ensures that the tokens can be used across different ecosystems, maximizing their utility and market reach.

6.2 Investor

Investors are the primary beneficiaries of tokenized assets, holding ERC-7518 tokens that represent ownership or other rights to real-world assets. Their role within the ERC-7518 ecosystem involves several key activities:

• Token Acquisition:
  Investors acquire ERC-7518 tokens through primary issuances or secondary markets. These tokens may represent fractional ownership in assets such as real estate, investment funds, or securities. Investors benefit from the partitioning feature of ERC-7518, which allows them to hold tokens that align with their specific investment preferences, such as different share classes or risk profiles.
• Transfer and Trade:
  Investors can transfer or trade their ERC-7518 tokens within the limits set by the issuer. The safeTransferFrom function, along with the canTransfer compliance check, ensures that these transactions are compliant with relevant regulations. Investors can participate in secondary markets, providing liquidity to their investments and potentially realizing gains from token appreciation.
• Receiving Payments:
  Investors receive payments such as dividends or interest through the payout and batchPayout functions. The partitioning mechanism ensures that payments are     distributed according to the specific rules and rights associated with each partition. Investors benefit from the efficiency and security of automated payouts managed by the issuer.
• Engagement in Compliance:
  Investors must comply with the rules and restrictions imposed by the issuer, which may include KYC/AML requirements and transfer restrictions. Compliance checks are enforced through the canTransfer function, and investors may need to interact with third-party compliance services to obtain the necessary off-chain vouchers for their transactions.

7. Token Process

The lifecycle of an ERC-7518 token involves several key processes that ensure the token's creation, management, and transfer align with the standard's requirements for compliance, interoperability, and partitioning. This section outlines the typical steps involved in the ERC-7518 token process.

7.1 Token Issuance

Step 1: Asset Identification and Token Design
The process begins with the identification of the real-world asset that will be tokenized. The issuer determines the structure of the token, including the creation of partitions to represent different ownership classes, fractional ownership, or other specific units. Each partition is defined according to the asset's characteristics and the needs of the target investor base.

Step 2: Smart Contract Deployment
Once the token design is finalized, the issuer deploys the ERC-7518 smart contract on the Ethereum blockchain. This contract includes the necessary functions for compliance management, partitioning, and interoperability. The issuer sets up the partitions, assigns the initial token supply, and defines the rules governing each partition.

Step 3: Initial Token Distribution
The issuer distributes the tokens to investors through a primary issuance event, such as a Security Token Offering (STO) or private sale. Tokens are allocated to investors based on their subscription and eligibility, with each investor receiving tokens in the appropriate partition(s) that match their investment profile.

7.2 Token Management

Step 1: Compliance Management
Throughout the lifecycle of the token, the issuer continuously manages compliance using the ERC-7518 standard's built-in functions. The canTransfer function ensures that all token transfers adhere to the compliance rules set for each partition. The issuer may use off-chain vouchers to dynamically enforce compliance without needing to update the smart contract.

Step 2: Partition Adjustments
As market conditions or investor needs change, the issuer can dynamically adjust the allocation of tokens across different partitions. This may involve minting new tokens into a partition, merging partitions, or reassigning tokens from one partition to another. These adjustments are managed through the ERC-7518 standard's partition management functions, ensuring that the token remains flexible and responsive to changing conditions.

Step 3: Payment Distribution
The issuer periodically distributes payments to token holders, such as dividends, interest, or other forms of income. Payments are made using the payout and batchPayout functions, which ensure that distributions are made efficiently and in accordance with the rules governing each partition. The use of smart contracts automates the payment process, reducing the risk of errors and ensuring timely distributions.

7.3 Token Transfer

Step 1: Transfer Initiation
When an investor wishes to transfer their ERC-7518 tokens, they initiate the transfer using the safeTransferFrom function. This function triggers a compliance check through the canTransfer function to ensure that the transfer meets all regulatory and issuer-defined requirements.

Step 2: Compliance Verification
The canTransfer function verifies the transfer against the rules set for the token's partition, including checks for frozen addresses, locked balances, and other restrictions. If the transfer is deemed compliant, it proceeds; otherwise, it is rejected, and the tokens remain with the original holder.

Step 3: Finalization and Settlement
Once the compliance check is successful, the transfer is executed, and the tokens are moved from the sender's account to the recipient's account. The blockchain records the transfer, ensuring transparency and immutability. The recipient now holds the tokens in the appropriate partition, with all rights and obligations associated with them.

7.4 Token Recovery and Compliance Actions

Step 1: Force Transfer for Recovery
In cases where tokens are lost due to compromised private keys or other issues, the issuer can initiate a force transfer using the forceTransfer function. This function bypasses normal transfer restrictions, allowing the tokens to be moved to a secure address or reassigned to the rightful owner.

Step 2: Address Freezing and Unfreezing
If an address is found to be involved in suspicious activity or non-compliance, the issuer can freeze the address using the freezeAddress function. This prevents the address from transferring or receiving tokens. Once the issue is resolved, the issuer can unfreeze the address using the unFreeze function, restoring normal operations.

Step 3: Token Unlocking
If tokens are locked for a vesting period or due to compliance actions, the issuer can unlock them using the unlockToken function once the conditions for release are met. This function ensures that tokens become transferable as soon as they are eligible, maintaining the fluidity of the token ecosystem.

8. Technical Specifications

The ERC-7518 standard introduces a series of technical specifications designed to enhance the functionality, compliance, and interoperability of security tokens. This section provides a detailed overview of the core technical components and functions that define ERC-7518.

8.1 Smart Contract Interface

ERC-7518 builds upon the ERC-1155 standard by introducing additional functions and events necessary for managing compliance, partitions, safety, and payment distribution. The smart contract interface includes the following key elements:

• Events:
   
  • TokensLocked(address indexed account, uint indexed id, uint256 amount, uint256 releaseTime);
   
  • TokenUnlocked(address indexed account, uint indexed id);
   
  • TokensForceTransferred(address indexed from, address indexed to, uint indexed id, uint256 amount);
   
  • AddressFrozen(address indexed account, bytes data);
   
  • AddressUnfrozen(address indexed account, bytes data);
   
  • TransferRestricted(uint indexed id);
   
  • TransferRestrictionRemoved(uint indexed id);
   
  • PayoutDelivered(address indexed from, address indexed to, uint256 amount);
   
  • WrappedTokenAddressSet(address wrappedTokenAddress);
   
  • TokensWrapped(uint indexed id, uint256 amount);
   
  • TokensUnwrapped(uint indexed wrappedTokenId, uint256 amount);
 
• Functions:
  
   
  • Compliance  Management:
     
    • function transferableBalance(address account, uint id) external view returns (uint);
     
    • function lockedBalanceOf(address account, uint256 id) external view returns (uint256);
     
    • function restrictTransfer(uint id) external returns (bool);
     
    • function removeRestriction(uint id) external returns (bool);
     
    • function canTransfer(address from, address to, uint id, uint amount, bytes calldata data) external view returns (bool status);
     
    • function lockTokens(address account, uint id, uint256 amount, uint256 releaseTime) external returns (bool);
     
    • function unlockToken(address account, uint256 id) external;
     
     
  • Safety Features:
     
    • function forceTransfer(address from, address to, uint256 id, uint256 amount, bytes memory data) external returns (bool);
     
    • function freezeAddress(address account, bytes data) external returns (bool);
     
    • function unFreeze(address account, bytes memory data) external returns (bool);
     
     
  • Payment Management:
     
    • function payout(address calldata to, uint256 calldata amount) public returns (bool);
     
    • function batchPayout(address[] calldata to, uint256[] calldata amount) public returns (bool)
     
  • Interoperability:
     
    • function setWrappedTokenAddress(address token) external returns (bool);
     
    • function wrapToken(uint256 amount, bytes calldata data) external returns (bool);
     
    • function wrapTokenFromPartition(bytes32 partitionId, uint256 id, uint256 amount, bytes calldata data) external returns (bool);
     
    • function unwrapToken(uint256 wrappedTokenId, uint256 amount, bytes calldata data) external returns (bool);
     
     
  • Partition Management:
    
     
    • The partition management functions are inherent in the tokenId mechanism of ERC-1155, allowing for dynamic allocation, temporary non-fungibility,       and granular compliance controls.

8.2 Compliance Management

Compliance management in ERC-7518 is achieved through a combination of on-chain and off-chain mechanisms. The canTransfer function plays a central role in determining whether a token transfer can proceed based on regulatory requirements, frozen addresses, and other factors. Off-chain vouchers provide additional flexibility, allowing issuers to enforce dynamic compliance rules without modifying the smart contract.

Example:
A token transfer initiated through safeTransferFrom will first call canTransfer to verify compliance. If the transfer is restricted due to a regulatory hold or locked balance, it will be rejected. If compliant, the transfer will proceed, and the token balances will be updated accordingly.

8.3 Partitions Management

Partitions are managed using the tokenId feature of ERC-1155, which ERC-7518 extends. Each partition is represented by a unique tokenId, allowing for the creation of semi-fungible tokens. These partitions can represent different ownership classes, share types, or other distinct units.

Dynamic Allocation:
The issuer can dynamically allocate tokens to different partitions based on investor needs or market conditions.This is done through the standard ERC-1155 minting functions, with each mint operation assigning tokens to a specific partition (tokenId).

Granular Compliance:
Each partition can have its own set of compliance rules, which are enforced by the canTransfer function. This allows for granular control over token transfers, ensuring that each partition adheres to the appropriate regulatory requirements.

8.4 Safety Features

ERC-7518 includes several safety features to protect the integrity of the token ecosystem:

• Token Locking and Unlocking:
  The lockTokens and unlockToken functions manage the locking and unlocking of tokens. Locked tokens cannot be transferred until the conditions for their release are met.
• Forced Transfers:
  The forceTransfer function allows authorized entities to transfer tokens from one address to another, bypassing normal restrictions. This is useful in cases such as recovery of lost tokens or enforcement of compliance actions.
• Freezing and Unfreezing Addresses:
  The freezeAddress and unFreeze functions enable the issuer to freeze an address, preventing it from transferring or receiving tokens, and later unfreeze it if the     compliance issues are resolved.

8.5 Interoperability

ERC-7518 supports interoperability with other token standards through wrapping and unwrapping functions. These functions allow ERC-7518 tokens to be converted into other standards (e.g., ERC-20) and back, enabling their use across different platforms and applications.

Wrapped Tokens:
The wrapToken and wrapTokenFromPartition functions enable the wrapping of ERC-7518 tokens into another standard, making them compatible with a broader range of platforms.

Unwrapping Tokens:
The unwrapToken function reverses the wrapping process, converting wrapped tokens back into their original ERC-7518 form.

Backward Compatibility:
ERC-7518 is fully backward-compatible with ERC-1155, ensuring that existing wallets, exchanges, and dApps that support ERC-1155 can also support ERC-7518 tokens without modification.

Conclusion

ERC-7518 represents a significant leap forward for the tokenization ecosystem, addressing the critical need for secure and compliant asset representation on blockchain networks. With its dynamic compliance features, enhanced security functionalities, and ability to manage diverse asset classes, this standard is poised to drive the adoption of tokenized real-world assets across industries. By laying the foundation for a more interoperable and adaptable tokenized future, ERC-7518 is not just a technical innovation—it’s a pivotal step toward mainstream acceptance of blockchain in traditional markets.

About Zoniqx

Zoniqx ("Zoh-nicks") is a global fintech leader headquartered in Silicon Valley, specializing in converting real-world assets into Security Tokens. It offers an interoperable, compliant infrastructure for the RWA tokenization market, enabling global liquidity and DeFi integration through its end-to-end ecosystem of SDKs and APIs. Zoniqx pioneers on-chain, fully automated RWA deployment on public, private, and hybrid chains. To explore how Zoniqx can assist your organization in unlocking the potential of tokenized assets or to discuss potential partnerships and collaborations, please visit our contact page.