What Are Asset-Backed Cryptocurrencies?
It’s no secret that cryptocurrencies are now a worldwide phenomenon, and perhaps you already know a thing or two about them. However, asset-backed cryptocurrency is a new concept that most crypto enthusiasts are yet to understand.
First-generation cryptocurrencies have been accused of lacking intrinsic value. As a result of this weakness, some people are still skeptical about cryptocurrencies. For instance, the high volatility and unpredictability of Bitcoin make it a risky medium of exchange for merchants and a poor store of wealth for investors.
Asset-backed cryptos are different from first-generation cryptos as they are characterized by liquidity, security, and stability. With this added advantage, these assets are likely to overthrow their predecessors such as Ethereum and Bitcoin.
As your caring partner, we decided to launch a series of articles where will explain everything you need to know about asset-backed cryptocurrencies. In this post will explore:
- What is an asset-backed cryptocurrency?
- What makes an asset-backed cryptocurrency different?
- Benefits of asset-backed cryptocurrencies
- Popular asset-backed cryptocurrencies
- Challenges of asset-backed cryptocurrencies
Let’s dig in.
What is an Asset-Backed Cryptocurrency?
Just as the name suggests, asset-backed cryptocurrencies are crypto coins that have a link to an object with economic value. In other words, asset-based cryptocurrencies are used to digitize an asset, and the record is stored on a blockchain.
For instance, a real estate property is sold to the public, and the information is digitized instead of using traditional paperwork. Records such as; deeds, location of the property, as well as ownership history of the property are stored on the blockchain.
Asset-backed cryptocurrencies that exist on top of the blockchain are then used to transfer ownership to anyone who decides to buy the property.
So, What Makes an Asset-Backed Cryptocurrency Different?
First, as we mentioned earlier, asset-backed cryptos are hinged to tangible assets. They include; fiat currency, gold, and real estate. Blockchain, at its core, is a secure ledger that offers transparent visibility of historical transactions and ownership. It is for this reason that it is perfectly suited for the asset management industry.
Secondly, the prices of cryptocurrencies that are linked to physical assets are less likely to be as volatile as those of ordinary crypto coins. Being backed by tangible assets also helps to define the mechanics that influence cryptocurrency price swings.
Asset-backed cryptocurrencies are tied to the external markets on which the asset they are linked to is traded. For this reason, should the tokens value drop below the real value of the underpinned asset, investors can still cash out the physical asset.
Obviously, crypto coins supported by systemized operations for managing assets will be particularly enticing to both mainstream and institutional investors. Such systemized services include; clear, accessible and easy to understand valuations, verification channels, and outlined auditing procedures.
Let’s dive deeper and discuss the benefits in details.
Benefits of Asset-Backed Cryptocurrencies
From examining their potential use cases, here the improvements that asset-based cryptos bring to the crypto industry:
The cryptocurrency market is highly volatile. The unpredictable price swings discourage many investors from taking part in the market.
Asset-backed crypto assets bring with them price stability that is new in the crypto market. Investors, therefore, have the chance to invest in digital currency without having to deal with the uncertainty of market changes.
What is more, investors can move from asset-backed cryptocurrencies to other cryptocurrencies without necessarily having to pull their money from the crypto market.
Easy Road to Mass Adoption
Cryptocurrencies such as Bitcoin are invisible and intangible. They also lack intrinsic value because they are not supported by a real-world asset. As a result, a majority of the public consider them worthless.
Asset-backed cryptocurrencies provide an ideal middle ground to usher in new users into the crypto sphere. Since tangible assets back these tokens, they are easier to understand. Naysayers are more likely to believe in a cryptocurrency that is backed by something in the real world.
Backing cryptocurrencies with assets such as real estate and minerals could be the answer to the mass adoption problem that has been crippling the crypto industry.
Tokenize Any Asset
It is not just real estate and minerals that can be tokenized. Any asset that has value can back a crypto token. Such assets include; intellectual property, equities, venture capital, product merchandise, commodities, and many more. Asset-backed cryptocurrencies are poised to bring trillions of dollars to the cryptocurrency market.
The exorbitant minimum investment in high-priced real estate excludes the average customers from such opportunities. On the other hand, cryptocurrencies can be subdivided into smaller portions that are more cost-effective.
An average investor with $100 can invest in a $1 million property by purchasing a token worth 0.0001 shares. Such an investment would otherwise be out of reach. This gives everyone an opportunity to share in the profit irrespective of the size of the investment.
Popular Asset-Backed Cryptocurrencies
a) Stable Coins
Stable coins are the most popular asset-backed cryptocurrencies.
These coins have the liquidity of fiat currencies and the transparency and decentralization of digital currencies.
Should the price of a stable coin take a nose-dive, their users can still get their reserve of fiat currency.
Stable coins have proved resistant to price fluctuations. Experts are even hoping to use the concept of stable coins to end the volatility that has always been a problem in the crypto market.
b) Gold-backed Cryptocurrency
Gold-backed cryptocurrencies is another group of asset-backed cryptocurrencies that is quickly gaining traction.
As per the name, these are digital currencies whose price is tied to the value of real-world gold. In this case, a trusted third party is used to store the gold. A digital exchange is used to trade the gold.
Tokenized gold is much easier to trace than physical gold. What is more, the owner of the gold enjoys the liquidity that tokenization provides. It is easy to redeem the token since it is traded in several digital exchanges.
Gold-backed cryptocurrencies have their own flaw. The crypto company that issues the token has no control of the gold since third party stores it. It is, however, worth noting that cryptocurrencies that have gold as their underlying asset, have a good value proposition for investors since the minimum price of the token is equal to the prevailing rate of gold.
It is due to these benefits that gold-backed cryptocurrencies are gaining much more popularity than their first-generation predecessors. Here are a few examples:
Digix gold is among the most popular gold tokenization projects in the crypto market. Digix Gold trades as DGX. The tokens are backed by physical gold. A single token is worth99.99% of LBMA gold.
The gold that the tokens are hinged to is kept in a secure vault in Singapore. Token holders can choose to travel to Singapore and redeem their tokens there, or they can have their gold sent to them over mail.
Onegram is a Sharia-compliant cryptocurrency company based in Dubai. It is also tokenizing gold.
Sharia law does not allow Muslims to participate in a speculative investment like cryptocurrencies. As a result, gulf nations did not invest in cryptocurrencies before the inception of Onegram.
Onegram is changing all this with its OGC token. One OGC token is tied to a gram of gold.
Onegram plans to increase the amount of gold while keeping the tokens constant. They will, therefore, invest 70% of the transaction fees into gold.
Ekon is a gold-backed stable coin based in Switzerland. They have an ERC20 standard token that is equal to one gram of gold 999.
The company conducts an audit every ninety days to confirm the number of gold bars in their vaults.
Unlike the other gold-backed cryptocurrencies, Ekon cannot be used to withdraw the monetary value of the gold. It is not a security token; hence it can only be used to redeem tokens for gold.
c) Oil-backed Cryptocurrencies
Nicolás Maduro, the president of Venezuela, announced the first oil-backed cryptocurrency in December 2017. The cryptocurrency named ‘Petro’ is underpinned by the oil reserves in Venezuela.
Petro was used to solving the problem of hyperinflation in Venezuela that was caused by the plummeting oil prices in 2014. Bolivar, the national currency for Venezuela took a massive hit that it has not yet recovered from.
The runaway inflation and the sinking economy caused the country to lose international funding.
The resulting hyperinflation led to the creation of a new currency known as the Sovereign Bolivar, which was tied to the Petro. One Petrol is equal to a barrel of oil. This makes it less volatile than other cryptocurrencies that are not based on physical assets.
Due to inconsistencies in its white paper, Petro did not appeal to the masses at launch. That being said, Petro is the first cryptocurrency that is backed by an asset and a government. Should it succeed as a cryptocurrency, it will pave the way for more government-issued crypto coins.
d) Security Backed Cryptocurrencies
Blockchain startups are now tokenizing securities by creating digital coins that represent ownership and also generate passive income for the token holders.
Tokenization brings much-needed liquidity to the securities industry.
Tokenized securities are quickly gaining popularity because more investors and bankers are embracing them. They allow for cost-effective yet safe and secure trading and also bring automation and liquidity to the securities industry. And since these class of crypto assets is heavily regulated, investors are more likely to trust digital securities. Here are a few examples:
Polymath is a blockchain startup that is tokenizing securities. Its platform, which is based on smart contracts gives developers a place to launch their security token offering.
The platform connects different actors in the developing chain such as KYC developers, blockchain investors, smart contract developers among others. They, therefore, eliminate middlemen.
This is a subsidiary of the GSX group that owns the Gibraltar stock exchange.
They aim at providing a world-class ICO and token sale platform that is based on the blockchain. They are also looking into providing a crypto exchange and marketplace for token traders, investors, and developers. Additionally, they are working on the world’s first tokenized security exchange.
They have a native digital currency that you can use to list an ICO on their platform. If their plans come to fruition, GBX will be a game-changer in the tokenized securities industry because it is the first regulated exchange.
Challenges of Asset-Backed Cryptocurrency
Although cryptocurrencies backed by real-world assets come with a guarantee, there are a few challenges they need to overcome. They include:
Regulatory Vacuum- there is not enough regulation in the fields of asset-backed cryptocurrencies, tokenization, and cryptocurrency. This introduces a lot of risk to potential investors and customers.
Legal Enforceability of Property Rights — there’s lack of clarity over whether or not owning the tokens and assets backed cryptocurrencies bestows ownership of the corresponding asset. It is not clear who is answerable for a non-existent asset and how the owner can recover damages.
Technical Infrastructure– safety and security standards have to be improved to ensure that asset-backed cryptocurrencies are actually connected to real-world assets.
All said and done. Asset-backed cryptocurrencies will be the getaway to a wider application as the crypto market continues to grow, mature, and evolve. Crypto enthusiast anticipates that capital that is locked up in traditional assets will gradually trickle into the crypto sphere through asset-based cryptocurrencies.
What say you? Share your thoughts in the comment section below.