11 min readWhat would happen if you took traditional investments and combined them with the latest most exciting investment opportunity in recent history?
What if you could put the US dollar on the blockchain, or assign tangible value to the Crypto market?
Well, first of all, you would have a brand new asset that has the potential to completely change the investment landscape.
Second, they already exist and are called asset backed Cryptocurrencies.
An asset backed Cryptocurrency derives its value from real world assets like real estate, currencies, metals and securities.
There are many advantages to this type of Cryptocurrency, which we’ll cover in this article.
Deciphering asset-backed Cryptocurrencies
Asset backed Cryptocurrencies are the latest and greatest innovation in blockchain technology. And it isn’t just holders and traders of Cryptos that are excited about it.
There are currently traditional institutional investors that have created their own digital asset or blockchain network. The “giga-bank” Goldman Sachs announced its Digital Asset Platform in January which lives on it’s own private blockchain.
The purpose is to expedite settlement times of bonds.
And the European Investment Bank was its first institutional customer.
Goldman Sach’s claims that with this financial innovation they can achieve a sub-60 sec settlement for high value assets such as bonds between financial institutions, and it has the potential to completely transform the global financial ecosystem. Or at least update it a bit.
The fundamentals: what makes a Cryptocurrency asset-backed?
An asset backed Cryptocurrency has it’s value backed by real world assets. If that seems confusing “how can digital currencies, hold the value of real world assets?”.
To simplify this paradigm – think of it as a Stock or Shares – which entitle you to a part of a company’s assets, essentially giving you partial ownership of the company.
Although presented as the polar opposite of digital assets, a fiat currency is essentially a symbolic certificate too, that a government has a certain value attributed to it and is defined by that government as the legal means of exchange for products and services.
In the past, the value of this certificate was “backed” by precious metals such as Silver, or was a promise for certain amount of goods (i.e. this paper certificate will grant the holder 10 eggs).
The selling points: advantages of opting for asset-backed tokens
Speed of transactions
Speed is one of the biggest benefits of the asset backed Cryptocurrency market. Transactions take only a fraction of time to be committed and confirmed than that of a tangible asset.
Cost
Convenience and cost is another important benefit.
Transparency
Using distributed ledger technology to track the ownership – or to even allow fractional ownership (to split the ownership of the underlying assets) something that may not be possible if the underlying assets aren’t held on the blockchain, like cars and real estate.
Built-in smart contracts remove the need for complex legal structures, compliance requirements and legal professionals since the contract is executed when predefined conditions are met automatically.
Accessibility
Additionally, these types of peer-to-peer transactions are more accessible – both in terms of time and location. Transactions involving traditional institutions need to be performed during business hours and may require the parties involved to visit a physical facility.
Additional Benefits
But not only do real world assets benefit from their integration with the underlying blockchain technology, Cryptocurrencies that are essentially an intangible asset, and are known for their price volatility can also benefit from RWAs.
An asset backed Cryptocurrency, can have its price stabilised by the underlying asset.
Steadiness in a volatile world: stability and reduced volatility
Continuing our previous point, we have seen the value of digital tokens or traditional Cryptocurrencies fluctuate wildly, often gaining and losing thousands of dollars of value in a single day.
Unlike conventional Cryptocurrencies whose value is largely based on supply and demand, asset backed Cryptocurrencies are “pegged” to real assets.
These assets have physical properties that are often connected to other aspects of the market. Stock and bonds for example are inversely correlated and also have a correlation with the general economy.
When the economy is a growth cycle, you will often see Stocks rally, but when the economy is in recession, you will also see bonds grow in value.
As you can probably gather, if an asset backed Cryptocurrency is pegged to one of these two assets, this can give it more predictable price movements.
Trust in transparency: how verifiability builds confidence
There is another benefit that asset backed Cryptocurrencies offer that traditional currencies or other real assets don’t – they are practically tamper proof, they can not be forged, faked or counterfeited because of the blockchain technology they are based on.
Furthermore, transactions are visible on the ledger, and although anonymous, the public addresses of the wallets can be seen, allowing the verification of the owner and the ability to follow the chain of previous owners.
A safer bet: lowering counterparty risks
The smart contracts which are integral to asset backed Cryptocurrencies, ensure that conditions of the agreement are met to execute a transaction.
This means that both parties must meet the predetermined conditions, and if one party does not, the transaction can not be completed.
Due to the speed and efficiency of asset backed Cryptocurrency transactions, this can lower the risk of one of the two parties not completing their side of the transaction – i.e. a seller not delivering the asset, or the buyer not paying for said asset.
The use of a smart contract also minimises or completely mitigates the risk of fraud.
Beyond borders: global accessibility and financial inclusion
Blockchain technology allows more access to investment opportunities, that wouldn’t be available to them otherwise.
A great example of this is real estate. Usually due to local laws, it is challenging if not completely impossible to buy or invest in real estate in certain regions.
This obstacle is removed when this asset class is added to the blockchain providing access to anyone with an internet connection and a Cryptocurrency wallet to invest.
Asset backed Cryptocurrencies offer completely new investment opportunities, improved liquidity and even new projects directly tied to a long list of physical asset.
The investment spectrum: diversification and fractional ownership
The ability to have fractional ownership in tangible assets through digital assets is undeniably novel. Until now owning part of an asset was largely restricted to a few very specific markets – usually public companies which issue Stocks or Shares, which allows partial ownership of the company’s assets.
Asset backed Cryptocurrencies have the ability to issue shares of tangible assets, no matter the market or asset class.
And this means completely novel diversification and investment opportunities. For example, the economy in general may be wavering causing bonds to drop – but the housing market may be robust (as it is for the past few decades).
This allows investors infinite diversification options, essentially anything valuable, from bonds to real estate, from precious metals to collectables.
This way, asset management can be more effective and, ultimately, potentially more profitable.
Top contenders: the leading asset-backed Cryptocurrencies
There are numerous asset backed digital tokens at the moment, backing various types of assets. The first asset backed tokens primarily used Fiat currencies and precious metals as their underlying asset.
Most preferred the markets’ strongest and most stable currencies and metals like the USD and precious metals, but soon they expanded to include other real world assets, even virtual land and other Cryptocurrencies.
Here are just a small sample of today’s top asset backed tokens.
Tether – USDT
When it comes to trading volume, Tether surpasses the seemingly omnipotent Bitcoin.
Tether USDT is a Cryptocurrency backed by the US Dollar.
Tether has another interesting characteristic – its supply is not fixed like Bitcoin and Ethereum for example, but is increased and decreased in response to USD withdrawals and deposits.
PAX Gold – PAXG
PAXG is a ERC-20 asset backed Cryptocurrency, i.e. an asset backed token based on the Ethereum network.
Working with Brink’s, a UK based gold broker, the token is backed by one of the most popular physical assets – gold bars.
The total of the PAXG equates to 400 oz of the certified yellow metal, so when you buy PAXG the asset backed tokens give you partial ownership of those aforementioned gold reserves.
And to further prove PAXG’s popularity, liquidity-wise in is just behind Tether.
The pantheon: an overview of popular asset-backed tokens
If you are looking for an asset backed Cryptocurrency then there are tons of choices and more are being added on a daily basis.
There are certain asset backed tokens that tend to see more market demand though, which in turn makes them more valuable.
Distinguishing features: what sets asset-backed tokens apart?
As mentioned previously, compared to traditional Cryptocurrencies, asset backed ones base their value on the assets they unpin on the blockchain.
This normalises their high volatility, making them an attractive option for investors and traders alike.
More than just code: the underlying tangible assets
As the widespread adoption of these backed tokens increase, new tangible assets will be added to what they offer, increasing future interest among investors and interest of course means higher liquidity.
Regulatory safeguards: enhanced compliance and risk mitigation
Cryptocurrencies that are backed by Commodities, or other regulated assets, will likely adopt their standards. Keep in mind that many of these regulations are in place to ensure the health of the market, and if tokens are changing the value of said market, regulation will be necessary for them to be viable.
The tech behind the token: the role of smart contracts
Smart contracts are intrinsic part of asset backed Cryptocurrency. Without them a large part of their benefit to investors is negated.
The engine of automation: how smart contracts manage assets
Smart contracts not only control the transactions made in tokens back by real assets, but also ensure that the transactions are legitimate and the conditions are met by both sides of the deal.
Additionally they are executed automatically allowing for increased accessibility and lower legal costs.
Reinventing transactions: speed, security, and decentralisation
Further emphasising the power of smart contracts when talking about Cryptocurrencies that are backed by physical investments, they allow for expedited transactions (when compared to their institutional counterparts), security and are of course decentralised.
Conclusion: the future relevance of asset-backed Cryptocurrencies
As you can surmise, this new type of investment has the potential to completely disrupt and reinvent the financial markets.
The next step is waiting to see the technology, the framework and the market mature.
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