HomeTechnologyWhat Are Asset-Backed Tokens? (Asset-backed tokens)

What Are Asset-Backed Tokens? (Asset-backed tokens)

Security tokens or asset-backed tokens increase potential investment growth for crypto and traditional funds. However the main reason why fund managers benefit from investing in cryptographic counterparts of traditional assets.

Is to increase the liquidity of the underlying assets defined. As the speed at which assets are bought or sold at a market price.

Typically bonds and stocks are highly liquid assets unlike assets such as vehicles. Real estate jewelry art and collectibles that do not have access to large trading volumes.

But why is liquidity so important?

Liquidity is highly correlated with an asset’s trading volume and subsequently affects the asset’s price. Good liquidity can increase the value of the underlying asset. As it negates the risk of not being able to get out of the asset quickly.

For example it is easy to exit a position using the exchange but closing your position in a real estate property is a much longer process. As simply put it takes more time to find a buyer.

The tokenized asset trading market which is active 24 hours a day 7 days a week and 365 days a year. Not only provides liquidity but also reduces the risk of a sudden drop in asset prices.

Use Cases for Asset-Backed Tokens Asset-backed

Tokens are somewhat comparable to fiat currencies (fiat) backed by the gold standard as are many traditional fiat currencies that fall under the gold standard. But the situation becomes more complicated when we look at tokens associated with “irreplaceable” assets such as real estate.

The real estate market is rather illiquid and suffers heavily from inefficiencies for example. Intermediaries who receive part of the investment to take on counterparty risk.

Therefore use cases for asset-backed tokens emerge from tokenomics models that rely on assets with limited liquidity such as derivatives. Private equity real estate collectibles, and other assets for which direct buyers have traditionally been difficult to find.

Currently assets that are not fungible are worth trillions of dollars.

With the exception of illiquid assets the most common use cases for asset-backed tokens. Which have the greatest potential to raise funds during STO (Security Token Offering). Usually manifest themselves in the tokenization of part of the debt or equity of a large established company.

A brief overview of some use cases for asset-backed tokens:

Real Estate Investment Trusts (REITs) for investors who want to diversify their portfolio and take on certain credit risks within a predetermined time frame.

Commercial real estate equity and rental income.

Retail investors with small capital are currently unable to diversify their activities in the commercial real estate and rental market. Tokenization provides an opportunity to democratize investments in commercial and rental assets.

Tokens backed by intellectual property assets, such as movie licenses and royalty payments.

Accounts payable and accounts receivable represented by security tokens. Replace supply chain factoring with tokens and data transferred between accounts receivable and accounts payable in ERP systems.

Real assets represented as tokens on the blockchain provide access to potentially large addressable markets.

Smart contracts associated with tokenized assets can also improve access to trading opportunities. While professional investors can now use the legal and other services provided to properly.

Screen new investments investors with smaller amounts of capital usually cannot afford to take on such a risk.

Tokens with embedded smart contracts can automate due diligence. Which in turn can open markets for retail investors who do not have access to due diligence providers creating even more liquidity.

Turning a traditionally low liquidity asset class into a passive income generating investment.

This gives startups and venture capital firms more opportunities to fund, save money and make a profit.

Four Main Categories of Asset-Backed Tokens

Debt and equity tokenization Debt and equity backed tokens are primarily used to fund start-up companies. Which in turn bypass intermediaries such as investment banks and traditional exchanges (for IPOs).

Fractional share ownership is not a new concept—share certificates and mutual funds have been around for decades. But what asset-backed tokens now offer is percentage digital ownership representing a company’s debt or equity.

Anyone can access the blockchain protocol on which the token backed by the asset resides, including the exchange of security tokens, and can verify the ownership of the token and the authority of said person to trade. Arbitrage opportunities for market makers should support trading of asset-backed tokens within their true net worth.

Debt and equity are already tradable assets today, but blockchain makes the process more efficient, which could greatly increase the STO market.

Hedge funds often hold assets with relatively low liquidity, which often requires investors to hold assets for at least a few months. Therefore, increasing liquidity through asset tokenization will increase asset value for hedge funds.

Tokenization of goods (commodities)

Trading in other cheaper commodities such as renewable hydropower wind power and solar power can also be facilitated through blockchain-based exchanges. As a result governments utilities and individuals can participate and operate jointly on the same platform.

A mature market already exists for auditors who verify the safety and security of warehouses for storing goods. These same auditors can take advantage of the new possibilities of blockchain technology.

Blockchain technology

While gold is typically traded as fiat through gold ETFs, gold that has been tokenized is fundamentally different.

Therefore, those who tokenize gold or other commodities must resolve issues with providers in order to realize the widespread adoption of asset-backed tokens.

The current advantages Bitcoin has over physical gold is its relatively easy divisibility.
Tokenization of hard assets

Hard assets are tangible and physical items or objects that are owned by an individual or company. There are many opportunities to tokenize hard-asset assets on the blockchain.
Real estate tokenization.

As we briefly touched on earlier, compared to REITs or private equity, real estate funds can be a limitless, more profitable, and more democratic way to invest in things like a portfolio of rental properties, retirement homes, or hotel chains. With the rise of real estate backed tokens and rental income, investors from every wealth category can build a diverse and flexible real estate portfolio with minimal exchange fees.

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