Asset-Backed Tokens

Understanding Asset-Backed Tokens

Asset-Backed Tokens are digital representations of physical assets that derive their value from those assets. These tokens can be created to represent a wide range of tangible assets, such as gold, crude oil, real estate, equity, soybeans, and more. The advent of asset-backed tokens has been made possible by the utilization of blockchain technology. While Bitcoin was the first token, it does not have any backing from physical assets. Since then, the cryptocurrency landscape has evolved, and there are now thousands of different cryptocurrencies available, including stablecoins that are pegged to fiat currency. However, the volatility of cryptocurrencies has led to the development of more stable tokenized assets that can store value and be exchanged between peers without the involvement of a financial institution.

The latest innovation in the cryptocurrency space is the introduction of asset-backed tokens that represent real-world assets. The value of an asset-backed token is directly tied to the value of the underlying asset. Financial regulators generally classify these tokens as securities. Owning an asset-backed token typically grants ownership rights over the underlying asset. Depending on the specific asset, owning the token may also come with the expectation of future returns as the asset appreciates in value. As the value of the asset increases, so does the value of the token.

Asset-backed tokens also present opportunities for individuals, companies, and other entities to seek investment by issuing tokens in exchange for capital. This can be facilitated through a blockchain-based system and is subject to financial regulations. Additionally, businesses can tokenize existing assets for sale, allowing individual investors to invest in real-world business assets without the need for physical storage or exchange. This not only reduces trade friction but also lowers logistics costs. Transactions involving asset-backed tokens can occur faster and more efficiently.

Asset-backed tokens offer a solution to the issues caused by inflated or devalued currencies and the unpredictable stock market. They provide individuals with a viable alternative that combines digital liquidity with the stability of hard asset values when necessary. The potential of asset-backed tokens is already being realized in various applications. Governments are exploring the use of official digital tokens tied to the value of crude oil, and the real estate market is gradually moving towards tokenized fractional ownership. These tokens are improving liquidity in previously illiquid markets and enabling cost-effective transactions without relying on a central party. They also promote security and transparency, revolutionizing the way we conduct business and perceive ownership and wealth creation.

Author: Johannes Schweifer is the CEO of CoreLedger, a company that enables businesses of all sizes to leverage the benefits of blockchain technology. Schweifer has co-founded several blockchain start-ups, including Bitcoin Suisse. With a master’s degree in chemistry and a PhD in distributed computing and quantum chemistry, he is a passionate problem solver.