The Rise of Asset-Backed Cryptos
The digital world is changing the way we think about everything we own, from real estate to cars and beyond. This is especially true in the rising world of cryptocurrencies. Everything from collectables to precious metals is now able to be digitized and backed by a cryptocurrency. This new category of asset-backed cryptocurrencies, while relatively new, has the potential to significantly change many industries for the better.
Digital Gold: The Original Asset-Backed Cryptocurrency
Contrary to popular belief, cryptocurrencies did not start with Satoshi Nakamoto and Bitcoin in 2009. In fact, the idea for cryptocurrencies was around decades prior.
In 1996, a cryptocurrency going by the name of E-Gold rose on to the scene. E-Gold was a digital currency fully backed by physical gold. At its high-point, E-Gold had over 5 million accounts and was backed by 3.8 metric tons of gold, worth about $85 million at the time. E-Gold would eventually run into problems with the legal courts in the United States, where it was viewed as operating an illegal money transmitter. Even though this first iteration of the asset-backed crypto failed in the end, it was the first step in the development of this new asset class.
Benefits of Asset-Backed Cryptos
Detractors of cryptocurrency claim it is a fad and waste of precious time and money. Yet, it is clear from examining potential use cases, cryptocurrencies, and their underlying blockchain technology provide stark improvements to other asset classes. These benefits will improve efficiencies in markets, and even create new markets where they never existed in the past.
The cryptocurrency industry is riddled with wild market fluctuations. These price changes are unpredictable and leave most investors on the sidelines, not wanting to take part in a wildly fluctuating market.
Asset-backed tokens provide, on the other hand, a sort of price stability which has yet to be seen in the crypto industry. This stability, whether it be through the price of gold or a piece of real estate, can provide investors a way to invest in the digital economy without the uncertainty of market changes. At the same time, investors can flow between cryptocurrencies and asset-backed cryptocurrencies easily, without pulling their money from the crypto markets altogether.
Easier Road to Mass Adoption
Major cryptocurrencies, such as Bitcoin, have been caught in the crossfire of public perception. Those who believe in cryptocurrencies do so while fully knowing the cryptocurrency has no intrinsic value. Meanwhile, the majority of the world still sees no value in something which is not only invisible, but not backed by anything in this world.
Asset-backed cryptocurrencies may prove to be the perfect middleground to ease new users into the world of digital currencies. These cryptocurrencies are actually backed by real-world assets, making them easier to understand. Previously skeptical consumers and businesses are much more likely to trust a digital currency with real-world backing. This could be the bridge that brings cryptocurrencies toward the mass adoption they have been seeking for many years.
Tokenize Any Asset
It isn’t just precious metals or currency which can be tokenized. Any asset of value brings with it the opportunity to create an asset-backed token. This includes:
- venture capital
- real estate
- intellectual property
- product merchandise
- and more
This opens up a world of opportunity for cryptocurrencies. Entire markets have been built upon the exchange of such assets, but these marketplaces are often inefficient and expensive. Some believe the advent of asset-backed tokens will bring trillions of dollars into the cryptocurrency markets.
The average consumer cannot afford to invest in a high-price real estate venture. The minimum investment in these ventures is generally exorbitant, and they are therefore excluded from these opportunities.
A cryptocurrency has the ability to be subdivided into smaller and smaller portions which are more cost-effective for the smaller investor. Instead of one share of a $1 million property being out of the question for the average investor, a token worth 0.0001 shares costing $100 is more reasonable. In this way, everyone gets the opportunity to share in the profits, no matter the investment size.
Create New Marketplaces
Some assets, such as precious metals and equities, are easy to buy and sell. Yet, there are many assets which don’t have sophisticated marketplaces on which trades can be executed easily. Furthermore, some assets aren’t even available for buying and selling and are open to new ways to create methods of exchange.
Take venture capital as an example. There are very few venture capital firms in the world which have the opportunity to invest in startups and reap the financial benefits in the future. Currently, the general public has no opportunity to invest alongside these firms as they are extremely exclusive. By tokenizing venture capital and other similar assets, new markets are created by which any investor can take part. The creation of new markets via cryptocurrencies could lead to new innovation and creative thinking about market pricing and stability.
When the Securities and Exchange Commission (SEC) ruled in 1999 that trading firms could have full access to stocks listed on the New York Stock Exchange, electronic trading took off. With electronic trading came an influx of new entrants in a market which was increasing in efficiency at a rapid pace.
This technological advancement in the securities industry was not felt across other asset classes. Buying and selling real estate, high-value goods, and other assets are still relegated to inefficient marketplaces and methodologies. Creating tokens by which these assets can be bought, sold, and easily verified, is the next technological advancement to create better, more efficient markets. Buyers and sellers can now trade assets around the globe at a fraction of the cost and all while ensuring the assets being traded are authentic.
While the idea of asset-backed cryptocurrencies is generally being met with positivity, there are reasons to be skeptical about this new asset class. Most of these concerns revolve around the claims made by asset-backed tokens and whether they are really backed in the way they claim.
Tether Loses Its Peg
The most notable asset-backed cryptocurrency, Tether, has been under pressure as of late. Tether is a cryptocurrency backed by the US Dollar. It had been designed such that 1 US Dollar equals 1 USDT, with its price never to fluctuate.
However, there have been rumors that the company which have accused Tether of operating under shady business practices. Many claim Tether is not fully backed by the US Dollar, and it is currently operating under a fractional reserve system. This would mean Tether does not have enough US Dollars in its reserves to back its cryptocurrency, making its claim to be completely tied to the US Dollar falsified.
The result of these rumors had brought the price of Tether crashing down. At one point, the cryptocurrency was trading for about $0.80 on major cryptocurrency exchanges.
Tether has since redeemed and burned close to 500 million USDT. This is clearly a measure to assuage those who believed Tether had significantly more tokens outstanding than the company had in reserves. The price of Tether has recently stabilized and is back close to $1. This won’t, however, rid the project of rumors of its fractional reserve, and could lead to another significant price drop at any moment.
The idea of a centralized government controlling a stable cryptocurrency does not sit well with many blockchain purists. Still, Venezuela’s Petro, proposed by president Nicolas Maduro, is a new spin on the idea of an asset-backed cryptocurrency, set to be backed by one barrel of the country’s oil reserves.
Currently, the Petro can only be purchased directly through the government using fiat currency, although secondary markets are expected to open once there are enough Petro in circulation. Many are holding skepticism about the idea and whether Venezuela will be transparent and truthful about its oil reserves.
“Venezuela has been known for misappropriation of assets in the past and the central bank has just created hyperinflation so I imagine there’ll be trust and transparency issues,” Longview Economics director Harry Colvin told CNBC.
Are Asset-Backed Tokens Even Cryptocurrencies?
The method of digitizing real-world assets and creating tokens and new markets does not appeal to many technologists. They claim these new asset-backed tokens are not cryptocurrencies at all, and instead, some form of digital asset which should be reclassified in another manner. This argument may indeed hold water, as cryptocurrencies are backed by the technological backbone of blockchain networks, and not any tangible asset. However, this tends to be an argument of semantics, and misses the bigger picture benefits of tokenizing assets on a blockchain.
The biggest allure of blockchain technology is its ability to operate without trusted third parties. Ownership for traditional cryptocurrencies, such as Bitcoin, can be verified via a decentralized network.
Yet, when it comes to asset-backed cryptocurrencies, there is an added layer of trust which requires adding another layer of trust to the industry. How can a token holder be assured their token is worth one bar of gold, a piece of real estate, a fiat currency, and so on? Behind each of these asset-backed cryptocurrencies lies a trusted third party who is vouching for its backing, and who token holders must put significant faith in the moment they purchase a cryptocurrency. If the company backing the cryptocurrency is not being forthright in their claims about the cryptocurrency (such as what could be the case with Tether), the token may in fact be useless, and token holders could be left holding an empty bag of nothing.
Asset-Backed Token Projects
While Tether has displayed a reason to distrust asset-backed cryptocurrencies, there is reason for optimism. That is because there are many projects working on building tokens backed by assets which could provide significant value in the future.
Digix Gold Token
While E-Gold is no longer in existence, its idea lives on through Digix. Built on the Ethereum blockchain, Digix is backed by gold, with 1 DGX token equal to 1 gram of gold. Digix claims its gold is composed of 99.99% gold cast bars from London Bullion Association-approved refiners, adding to its marketplace legitimacy. With the DGX token, investors can hedge against crypto-markets without transferring capital from the digital marketplace.
Polymath is taking the idea of asset-backed tokens to a whole new level. Using a new security tokens standard it dubbs “ST-20”, Polymath allows anyone to tokenize and sell a security on the blockchain. This makes everything from real estate to venture capital to equities available for trading via a securitized token. Polymath customers can create their own ST-20 tokens for a range of assets and attempt to sell them on the open market to potential buyers.
An entire ecosystem unto itself, NAKED is backed by a variety of real-world assets. The NAKED financial marketplace is comprised of:
Owners of the NAKED coin “NKD$” are part-owners in these growing businesses. This not only allows NKD$ holders equity in NAKED companies, but also the option to purchase NAKED products and services with their tokens. The company already has a co-branded VISA debit card and can be used at Bitcoin ATMs around the world. NAKED is working on patenting its financial ecosystem and marketplace.
There has never been a marketplace on which to buy and sell assets which are less tangible and easy to value. One such asset is intellectual property, which is worth billions of dollars a year but is rarely bought or sold because of a lacking marketplace. Lexit is looking to change this by tokenizing and creating a marketplace to buy and sell intellectual property as well as conducting mergers and acquisitions. This is certain to create new methods of valuing assets which have previously been hard to value.
A relatively straightforward concept, ATLANT is tokenizing real estate property around the world. Property owners can utilize ATLANT when they are having trouble selling a property. ATLANT creates a special purpose vehicle (SPV) and tokenizes a property where 1 token equals 1mm2 of the property. These tokens are then listed on the ATLANT marketplace where they can be purchased by individuals and businesses who acquire fractional ownership of the property directly correlated to their token purchase. Token holders are then able to earn rental income on the property, or sell their tokens at a later date.
Arianee wants to connect brands and brand owners around the world to create a database and marketplace on which products can be accurately verified as authentic. Arianee is utilizing the Ethereum blockchain’s ERC-721 non-fungible token standard to ensure all brand assets are unique. This allows any unique product to be registered on the blockchain and confirmed via independent verification. When the product is listed on a marketplace any potential buyer can view the blockchain-based history of the product to ensure its authenticity. This also allows owners and brands to be in direct communication about their products.
The Future Is Backed by Assets
There is a whole new world of asset-backed cryptocurrencies with untapped potential. New ideas and innovations are coming to the surface which are sure to have a massive impact on markets.
Capital which was once allocated to traditional assets is likely to move to digital markets in the form of asset-backed cryptocurrencies. In fact, there is no reason why entire asset markets, such as precious metals or real estate, won’t one day be commoditized. Until then, it is a race to determine who will get there first.