Understanding Asset-Backed Tokens: A Complete Guide

Asset-backed tokens are one of the best applications of blockchain technology. They are bringing liquidity to illiquid markets, with the potential to free up trillions in economic value.

Most utility tokens lack intrinsic value as they are not backed by anything tangible. Although utility tokens have value within the platform on which they operate, they have no unique value proposition. This is the reason that the value of utility tokens, both during ICO and post-ICO, is based on speculation rather than the soundness or legitimacy of the tokenomics model.

Asset-backed tokens carry an actual value since they correlate with a real-world asset’s value. Asset-based tokens offer secure, quick and minimal cost trading of traditional assets through blockchain technology. In addition, they have the potential to enhance liquidity for traditional securities.

Why should you tokenize an asset?

Asset-based tokens maximize fundraising opportunities for businesses. This is why STO development services, to tokenize real-world assets, are gaining traction globally. Another reason to tokenize an asset is to enhance its liquidity. Usually, assets like stocks and bonds enjoy high liquidity. Conversely, real estate, vehicles, art, jewelry and collectibles lack secondary market trading and liquidity. Secondary market is where investors buy and sell securities that they already own.

The importance of liquidity can be understood from the fact that liquidity correlates with the trading volume of an asset and affects its price. Good liquidity can improve an asset’s value. It mitigates the risk associated with being unable to exit quickly.

A tokenized trading market that operates round the clock improves price discovery, minimizes price volatility and allays flash crash risk.

Use Cases of Asset-Backed Tokens

Tokens backed by external assets can be compared to gold-backed paper currencies. However, things become complex when tokens are linked to non-fungible assets like real estate. The real estate market is illiquid and afflicted with inefficiencies. For example, middlemen receive a portion of investment for the assumption of counterparty risk. These pain points can be reduced by asset-backed tokens, which tokenize a portion of an individual’s ownership in a real estate asset.

The most novel asset-backed token use cases are emerging from tokenomics model backed assets having limited liquidity, like private equity, derivatives, real estate, collectibles and other non-fungible assets. Besides, the largest asset-backed token use cases, which can accelerate fundraising, emerge from tokenizing a portion of debt or equity of a large established company.

Some of the use cases of asset-backed tokens include:

• Tokenization of corporate debt or equity.
• Tokenization of Real Estate Investment Trusts (REITs). These tokens can be customized and sold to investors seeking a certain level of credit risk and duration.
• Tokenization of commercial real estate equity or rental income. The commercial real estate sector is currently unaffordable to multitude of people. Fractional ownership through STO development services provides an opportunity to democratize commercial and rental investments.
• Tokenization of debt collateralized by payables and receivables. These tokens can replace supply chain finance and factoring with tokens and data flowing between accounts payable and accounts receivable in ERP systems.
• Tokenization of intellectual property such as royalty payments and film licenses.

Tokenization of real-world assets on the blockchain provides access to potentially large addressable markets.

Opportunities for Security Tokens

Bitcoin is regarded to have greater fungibility, transferability and divisibility. Asset-backed tokens retain most of these benefits.

Asset-backed tokens are less volatile compared to utility tokens and cryptocurrencies. Tokens listed on exchanges may trade constantly with full price discovery. Markets operating irrespective of geographical location or time zones may provide more opportunities for security token trading globally. The market may see a considerable increase in demand of STO development services as more established companies begin to issue asset-backed tokens.