Analyzing Asset-Backed Cryptocurrencies

Analyzing Asset-Backed Cryptocurrencies

By reedyzzx | Crypto Education | 18 May 2020


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Since Ethereum successfully became the second largest cryptocurrency in the world, many startups have been thinking of integrating real life assets into the blockchain through the utilization of smart contracts. They believe this type of “tokenization” would help the crypto space to become much more relevant in the future. After all, traditional cryptocurrencies have been criticized for its very volatile price movements. Meanwhile, asset-backed cryptocurrencies wouldn’t suffer from the same problem due to the underlying value behind them.

Stablecoins And The Rise Of Tokenization

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The very first concept of asset-backed crypto token was introduced many years ago. We can assume that stablecoin was the main trigger behind this tokenization concept. Tether, the sub-company of Bitfinex, popularized the concept of fiat-backed crypto token. The idea was that for every 1 dollar in the company’s bank account, there would be 1 Tether token issued on the OMNI blockchain.

Tether promised that its customers would be able to redeem their Tether tokens easily if they want to liquidate them straight to USD in the bank accounts. And this stablecoin eventually became hugely popular in the eyes of crypto traders. People believe that it’s much easier to transport money from country to country (or from one crypto exchange to another) compared to with USD. And of course the main benefit of stablecoin is that its valuation is protected from crypto volatility. There’s a good resource where you can easily learn more about Tether. Click here to check the article.

Anyway, Tether (USDT) is not the only relevant stablecoin as of today. There are also other stablecoins such as USDC, TUSD, PAX and they keep gaining more popularity nowadays among crypto traders.

And the popularity of stablecoins has also inspired the rise of other types of tokenization. Let’s use PAX Gold and DGX tokens as examples. Both of these token prices are pegged to the valuation of physical gold. They can achieve the peg because people can redeem their tokens for real physical gold bars. The concept is quite similar to how stablecoins work, just the difference is that they replace fiat currencies to gold.

Even though it still takes time before gold-backed crypto tokens and other asset-backed crypto tokens to be as popular as stablecoins, but at least they are gaining momentum.

 

The Potential Of Tokenization Is Theoretically Endless

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The potential of asset tokenization is theoretically endless. There are already crypto tokens that represent real-estate and property values. There are even crypto tokens that represent company equities (usually they are called security tokens). The potential is limitless and everything can be tokenized and represented in the blockchain.

And yes, just like stablecoins, the concept of these other asset-backed crypto tokens is also similar. For example, a real-estate crypto token can be redeemed and exchanged for real paper ownerships of the same real-estate represented by the token. 

But of course, some people might be asking “but how do you know the token issuer will honor the agreement?”, here’s where centralization plays its part. The answer is regulation. With countries where crypto tokens are already legal, it’s not hard to check whether the token is being treated the same way as paper ownership (which means you can sue the token issuer if anything goes wrong).

And by the way, many of these tokenized assets are usually launched on top of Ethereum blockchain. They do this by utilizing the smart contracts (if you are interested to learn more about Ethereum smart contracts, you can check out this link)

 

The Impact Of Asset-Backed Tokens To The Crypto Industry

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Unlike 5-6 years ago where people only traded cryptocurrencies based on belief of future values, asset-backed crypto tokens actually represent real value behind the currencies themselves. Either it’s a real-life company equity or a real-estate or physical gold, there are always underlying values behind them. Their crypto token prices represent those values that are pegged to the tokens.

The impact of these asset-backed tokens to the crypto industry will be massive. It’s widely believed that the crypto industry can be massively adopted when and if there are millions of people who choose to buy these asset-backed crypto tokens. 

So, yes, even those crypto skeptics who are not interested in “gambling” with BTC price might actually be interested to buy asset-backed crypto tokens. Especially in the time of COVID-19 like this year where everybody has been told over and over again to socially distance with each other, it’s safe to assume that transacting with crypto tokens would be much more effective compared to buying the real assets behind them (of course, as long as the tokens are legally tradeable in the country and there’s a written law to protect the buyers).


reedyzzx
reedyzzx

A Crypto believer and just want to share my opinion


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