Concept

An asset-backed token (ABT) that is backed by commodities such as gold, silver, oil, or agricultural products. Each token represents ownership of a specific amount of the underlying commodity, and hence holders can have access to commodity markets via blockchain technology. Blockchain is used as a venue for trading commodities with the benefits of decentralization, accessibility, security and universality. Decentralization involves elimination of intermediaries and corresponding costs in negotiating transactions, as such transactions are carried out directly between all parties involved using a technique called digital wallets. Users (e.g., investors, market participants) can invest or trade in tokens at any time during a day. Furthermore, the digital ecosystem is highly secure, designed in such a way to prevent fraud and no duplicate use of a token is imaginable. Also, users, irrespective of their countries, can transact with other users in any other region of the world.

Linkage with underlying assets

Asset-backed tokens, at large, derive their value from physical assets or other digital assets that have a sort of stable value, whereby supporting such the stability of such a token. The underlying assets may widely vary depending on the scope of tokenization, including real estate properties, precious metals like gold or silver, and other commodities, or artworks, and collective interests (fanship). The linkage with a commodity (particularly those in active markets) helps reduces the volatility of a token thanks to the direct relation between the value of the cryptocurrency and tangible assets. This instills the aspects of confidence and stability in the tokens as investment compared to highly speculative cryptocurrencies. Furthermore, asset-backed tokens allow investors to have fractional ownership of valuable assets- that is, a portion of the asset without having to purchase the whole of it.

Commodity-backed tokens are backed one-to-one by the reserve asset (the underlying commodity). Examples of such tokens are gold-backed tokens and silver-backed tokens.A commodity-backed token could be designed to track the price of gold, and holders have the option for redemption of the physical gold. Gold remains the most popular commodity-backed token (with a market share of such tokens of 85% as of the time of writing).