Asset-backed tokens
An asset-backed token (ABT) is a cryptographic asset (cryptoasset)- and a specific type of security token– that is pegged to another underlying asset (as a reserve) to maintain its value over time. Asset-backed tokens 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, commodities, or artworks, and collective interests (fanship).
An asset-backed token is created and issued converting ownership of real-world assets (RWAs) like real estate, properties, gold, and the like into digital tokens. The linkage 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.
Asset-backed tokens also represent a claim or right as to a certain economic resource. They are stored on a blockchain– being a decentralized digital ledger (DDL). ABTs carry the features of both digital tokens and tangible assets (or certain financial assets), such as instantaneous transferability and accessibility, reflecting the tangible or financial worth of the underlying assets. By tokenizing real-world assets (RWAs), firms and individuals can tap into wider potential of capital and investment opportunities.
How do asset-backed tokens work?
Asset-backed tokens are directly linked to the underlying asset, which is external to the network. The structure combines classic asset management (and all its assets classes) with blockchain technology. First, a token issuer identifies an asset or set of assets to tokenize (i.e., convert into tokens by means of the tokenization process). Identification implies that the asset is verified to exist and his value is established and validated by third-party validators or trusted parties. After verification, the process initiates for creation of digital tokens representing the asset’s value, using the blockchain technology and certain tools such as smart contracts. The tokens are issued and can be exchanged, transferred, or sold on digital exchanges in the same way cryptoassets/ cryptocurrencies trade and transfer. Tradability and transferability depend on the type of tokens (see: types of asset-backed tokens). Asset-backed tokens with redemption features allow owners to convert (exchange) their holdings of digital tokens for tangible assets such as gold and real estate. Transactions are verified and made permanent, supported by the network’s possibilities (transparency, security, and immutability).
