It’s hard to imagine that just a few years ago, only a small, hardcore group of Bitcoin enthusiasts would have understood the term “blockchain.” Now, anyone who uses social media is at least familiar with the term, and the technology is proving its worth across a wealth of use cases, from supply chain to cloud computing. So much so that, according to Deloitte’s 2020 Global Blockchain Survey, “a sample of nearly 1,500 senior executives … suggests that initial doubts about blockchain’s usefulness are fading as business leaders now see it as integral to organizational innovation. As a result, they are putting money and resources behind the technology in more meaningful and tangible ways.”
Bitcoin is the original cryptocurrency, designed to serve as a store of value that can be exchanged between peers without the need of a financial institution to mediate. Today, there are a plethora of cryptocurrencies available, from purely digital ones, to stablecoins pegged to a currency. Their core defining feature is that they are purely used for payments, functioning much like any fiat currency.
Utility tokens were the next to develop. Ownership of a utility token allows users to access a specific function within a particular blockchain-based ecosystem. Pure utility tokens should confer no rights of company ownership or promise of future value to the holder. For example, the Binance token (BNB) allows token holders to trade on the Binance exchange with reduced transaction fees. These tokens were incredibly popular during the short-lived ICO era, used as incentives for fundraising crypto-startups.
Asset-backed tokens are the most recent development. Asset-backed tokens are digital claims on a physical asset and so are backed by that asset. Gold, crude oil, real estate, equity, or just about anything else can be tokenized. An asset-backed token’s value is directly affected by the worth of its underlying asset. Asset-backed tokens are generally classified as securities by financial regulators. Ownership of the token represents a right of ownership over the asset (or at least the part represented by the token), and often comes with the expectation of future returns when the asset appreciates in value.
The Benefits of Tokenization and Asset-Backed Tokens
Asset-backed tokens offer many benefits for investors, businesses, and private citizens alike.
1. Leveling the Playing Field for Illiquid Assets
There are untold trillions worth of assets in the world today. But many of the traditional asset classes, like real estate or fine art, are often low in liquidity, depending on market conditions. This makes them difficult to sell or transfer.
Consider the scenario of selling a valuable artwork. The pool of buyers is limited to those who can physically take custody of the piece, and can afford the full price. Using a digital token that represents the piece of art introduces these real-world assets to a much larger pool of investors and participants. Someone on the other side of the world can now buy and sell the art-backed token without needing to take custody of the piece itself. As a result, goods and services become more liquid, and companies and traders can reach larger customer or investor groups.
2. Introducing Fractional Ownership across New Asset Classes
One of the most revolutionary aspects of Tokenization is that it enables fractional ownership of existing assets. Perhaps due to financial or logistical reasons, it may be difficult for an individual to buy into a high-end asset like art, precious metals, or real estate. Let’s come back to our fine art example. This time, rather than issuing a single token representing one painting, the art can now be digitally “broken up” into a series of tokens — the seller can choose how many. Each token is pegged to an equal fraction of the artwork, much like a share. These art-backed tokens can then be traded individually, or in groups, similarly to how company shares are traded today.