What are asset-backed tokens?
Asset-backed tokens, a growing class of tokens, are by definition worth exactly what they are backed by. For instance, a representative token that corresponds to a real-world asset such as a unit of fiat currency, a security or even gold, will be valued at a 1:1 ratio. They are assets represented as tokens to be transferred and traded trustfully on a blockchain. Although tokens, most of the asset-backed tokens are classified as securities throughout the globe. More obvious is the tokenization of real estate, art, derivatives markets, attention, and other non-fungible assets that are currently festering in illiquid markets that are ripe with middlemen who assume counterparty risk. With $256 trillion of real-world assets in the world, the opportunity for asset-backed tokens is truly massive, especially with regards to asset classes like real estate and fine art that have historically suffered from limited commerce and liquidity.
Asset-backed tokens also offer an alternative to traditional cryptocurrencies (e.g. stablecoins), as well as traditional crypto investing (e.g. Crypto Traded Indices, Coin Traded Indices). Various kind of asset-backed tokens have emerged these past months, and we aim to provide with a short overview of these.
Various kinds of asset-backed tokens
· Fiat Stablecoins: Tether (USD backed), EURS by Statis (EUR backed), TrueUSD (USD backed)
Fiat stablecoins are crypto-assets that maintain a stable value against a target price (e.g. USD). Different kind of stablecoins exist (e.g. asset-backed, algorithmic and hybrid). Stablecoins aim to solve the volatility challenge posed by cryptocurrencies. Volatility, among others, is one of the key factor preventing the widespread adoption of cryptocurrencies as a mean of payment. With cryptocurrencies subject to large fluctuations, business owners are less tempted to accept digital currencies. With stablecoins, whether backed by fiat or real world assets, blockchain entrepreneurs are facilitating the massive adoption of cryptocurrencies.
· Metal Stablecoins: Digix Gold Tokens (Gold backed), Goldmint (Gold backed), Tiberius (Backed by a basket of physically-deliverable metals)
Similar to fiat stablecoins, metal stablecoins maintain a stable value against a selected metal. For instance, in the case of gold, they are issued tokens representing a value of gold (for example 1 gram of gold equals 1 coin). The gram of gold is stored by a trusted custodian (preferably third party), and can be traded with other crypto holders. Gold has proved itself as a stable asset over the past decades, and gold stablecoins are one of the most interesting alternatives to fiat ones at the moment.
· Cryptos: C20 (Top 20 weighted market cap backed), TaaS (Tokenized Crypto Asset Management), BCAP (Tokenized VC Fund), Trakx Crypto Traded Indices
Asset-backed tokens allow for the creation of tokenized investment vehicles where the token represent shares into the fund. Several crypto funds with different strategies have appeared, with the specific goal to invest in assets related to the cryptocurrency and blockchain space. These companies may invest into Bitcoin, Ethereum, Ripple, Litecoin and other major cryptocurrencies directly. They may purchase altcoins at ICO or pre-ICO sales. Some funds invest in emerging blockchain startups, others still invest in companies that benefit from the boom in crypto. Some more, like Trakx, aim to offer simple and cheap crypto passive investment solutions.
· Real estate, art and other real-world assets: Property Coin (Real Estate backed), Maecenas (Tokenized Art Platform), KWHCoin (Clean energy backed)
Tokenization is also happening with real things like KWH of energy, art, real estate, and even identity. It brings tremendous efficiency by creating liquidity pools thereby eliminating liquidity premium and driving price discovery. Asset-backed token, when regulated, will bring a truly new opportunity to these very illiquid asset classes.
· Equity and Debt tokens: tZero (Preferred equity token), Kairos Class T (Equity asset-backed), Steem Dollars (Debt token)
Equity and debt tokens represent ownership in a real-world security, whether that is equity, debt. As a fundraising vehicle, security tokens allow companies to raise capital without having to lean on investment banks and stock exchanges as intermediaries. Given the oversight from regulatory bodies that security tokens are subject to, investors are able to invest in an opportunity without worrying about lack of transparency and potential scams.
Why good practices are important
Examples above also include some disputable asset-backed tokens. Some, although widely used (such as Tether), have come to a point where the community is heavily doubting their real backing. Our view is that good practices in this domain are important if we would like to see emerging a real asset-backed token market. At Trakx, our plan is to implement good practice in terms of transparency and management of our Crypto Traded Indices:
• With reserves maintained in one-to-one ratio, Trakx.io CTIs should not face any market risk such as liquidity crunches and Black Swan events.
• One-to-one backing of offers the benefit of an easy understanding for non-technical users
• Trakx.io will offer a total transparency of its reserves. At any given time, the balance held in reserves will be equal to the number of CTIs in circulation, and easily verifiable. As the custodian of the backing asset, Trakx.io will act as a trusted third party responsible for that asset. The corresponding total amount of crypto held in reserves for crypto trackers will be proved by regularly publishing our balance and undergoing periodic audits by renown professionals (Big 4).
- Market makers will be able to intervene and benefit from arbitrage opportunities, always guaranteeing that our Crypto Traded Indices trade at their net asset value.
Trakx is building a one-stop shop for Crypto Traded Indices. Discover more about our project on our website and social media channels, such as Telegram http://t.me/trakx_io.
