What are Asset Backed Tokens

In this guide, you will first learn what asset-backed tokens are and how they function. Next, we’ll cover the main benefits and use cases for these tokens. Finally, you’ll discover the role of smart contracts in asset-backed cryptocurrencies. We will also highlight some of the most popular asset-backed cryptocurrencies.

With that in mind, here’s all you need to know about these types of tokens and their role within the crypto ecosystem.

What Is Asset-Backed Cryptocurrency (ABC)?

An asset-backed cryptocurrency (also known as ABC) is a digital token that derives its value from real-world assets like gold, oil, and precious metals. It combines blockchain technology with the reliability of physical assets.

Unlike traditional cryptocurrencies like BTC and ETH, which rely on supply and demand for their value, ABCs are supported by real assets. This provides them with greater security and transparency. An asset token is linked to its underlying asset, making it less vulnerable to price swings since it has intrinsic value. If the value of the underlying asset rises, the value of the ABC token will increase as well, and the same applies in reverse.

Since their value is linked to their underlying asset, ABCs are considered a security, unlike BTC, which is considered a commodity. This makes asset-backed crypto tokens suitable for beginner investors.

What Is the Purpose of Asset-Backed Tokens?

ABC tokens aim to reduce volatility and provide stability. They function similarly to stablecoins, as they are pegged to their underlying assets. ABCs also make the process of transferring asset ownership much faster and simpler. Moreover, they are designed to bridge the gap between crypto and traditional markets by offering new ways to invest in real-world assets.

Their other purpose is to enhance verifiability since their underlying assets are held in public reserves. This means that everyone will be able to see their transaction history and ownership. In short, ABCs enable investors to transfer real-world assets into digital space, i.e., to trade real-world assets on the blockchain. ABCs are also used to make the asset market more liquid.

How Do Asset-Backed Tokens Work?

Now that you know what crypto is backed by and what the purpose of ABC tokens is, here’s how they work. A middleman will transfer ABCs to a custodian who will become their legal owner. Token holders will claim the right to the underlying asset and will automatically receive cash flow linked to the asset. That said, the tokenization process includes:

Collateralization: ABCs are backed by a collateralized asset that is kept in public reserves.
Validation: ABCs are subjected to third-party audits. This ensures that they comply with regulatory standards.
On-chain minting: After getting validated, ABCs are minted on-chain.
Smart contract implementation: All asset-backed tokens will be governed by smart contracts.
Token distribution: Investors will be able to buy ABCs through private sales. They’ll also be able to trade them on crypto exchanges and secondary markets.

What Are the Advantages of Asset-Backed Cryptocurrency?

Here are the main advantages of ABCs:

Stability and Reduced Volatility

As mentioned before, ABCs function as stablecoins, which means that they are pegged to their underlying assets. This makes them more stable than conventional cryptocurrencies, like BTC and ETH.

Since their price will depend on the value of real-world assets, like gold and real estate, ABCs will be less volatile and more predictable. This makes them suitable for all types of investors, from beginners to professionals. On top of that, ABCs are immune to tampering, making them less prone to fraud since all transactions are visible.

Transparency and Verifiability

The goal of ABCs is to enhance verifiability and transparency. This means that ABCs will be cryptographically verifiable; their transaction details will be public. Moreover, their underlying assets will be held in public reserves. Since ABCs will be publicly audited, their value will be directly pegged to the underlying assets.

This makes ABC transactions transparent and immutable, increasing their credibility among investors. In addition, asset-backed tokens can be audited independently, which means their transparency will lead to broader adoption.

Lower Transaction Costs

ABC transactions are processed via automated smart contracts. They don’t require intermediaries, such as crypto exchanges or brokers, which automatically reduces transaction costs. ABCs are 35% to 65% cheaper than standard securities. ABCs also cut down the fees for cross-border transactions since the entire process takes place on a single blockchain.

Besides being cost-effective, ABCs facilitate faster and safer transactions. Their operations are based on predetermined conditions, meaning transactions are completed only when they meet certain criteria.

Lower Counterparty Risk

Standard financial systems often include more than one intermediary, making transactions more susceptible to risks. On the other hand, ABC transactions take place on-chain, without the use of third parties, reducing the risk of fraud. Furthermore, smart contracts will ensure that both parties meet the conditions.

This will prevent them from not honoring the agreement, that is, not paying. The transaction process will also be automated, which means that no one will be able to tamper with it.

Increased Accessibility and Inclusion

Asset-backed tokens will enable all types of investors to dip their toes into crypto trading. This is especially beneficial for investors who have issues with traditional financial institutions. Anyone with internet access and a smartphone will be able to invest in ABCs, contributing to greater financial inclusion.

Since ABCs enable investing in traditional assets through blockchain technology, they will aid in creating new investment opportunities. ABCs that are listed on reputable crypto exchanges will also contribute to the wider adoption of these visionary tokens.

Fractional Ownership and Liquidity

The tokenization process will enable fractional ownership. This means that large assets will be broken into smaller tradable units. This will allow investors to own a fraction of high-priced assets, such as artwork and real estate. Likewise, ABCs provide higher liquidity since they can be traded on crypto exchanges. They can also improve the liquidity of historically illiquid assets and traditional securities.

High liquidity reduces the possibility of price manipulation, offers more stability and less volatility, and helps investors analyze market trends.

Portfolio Diversification

Many investors who want to build a diversified crypto portfolio invest in ABCs. Why? Because they enable them to invest in many traditional assets, from real estate to gold and artwork. That said, portfolio diversification reduces investment risks and enables higher returns.

A good diversified portfolio often includes prominent coins, like BTC and ETH. It also includes cryptos with the most upside and tokens whose value is less prone to price fluctuations. Some investors will consist of a mix of large-cap, middle-cap, and small-cap cryptocurrencies.

Global Reach and Efficiency

Asset-backed tokens enable instant transactions without the need to use third parties, making them cheaper and faster than standard securities. Moreover, these types of tokens enable owning a fraction of real-world assets. These are the main reasons ABCs are an attractive investment for beginners and professional traders. First of all, anyone with internet access can buy and sell them, which increases their accessibility on a global level.

Secondly, ABCs are useful for businesses since they give them access to a global investor base. This global reach gives ABCs a competitive edge over traditional securities.

What Are Use Cases in Asset-Backed Crypto Token Development?

The main use cases of ABCs include the following:

Fractional Ownership: ABCs enable their holders to own a fraction of a real-world asset. This means that investors will be able to buy a fraction of high-value assets, like art and real estate.
Cross-Border Transactions: Since ABCs don’t rely on intermediaries, they will enable cross-border transactions. This will enable investors to conduct more affordable transfers.
Tokenized Investment Funds: ABCs will help investors diversify their crypto portfolios with fractions of real-world assets. Tokenized funds will also enable them to trade their assets for lower fees.
Intellectual Property Monetization: ABCs enable investors to monetize their intellectual property. This will contribute to creating a collegial relationship between creators and investors.
Real-Time Settlements: ABCs enable real-time settlements, meaning that transactions will be settled immediately after they are processed.
Supply Chain Financing: ABCs simplify supply chain financing by offering investors access to capital, whose value will depend on the value of physical assets. This will increase liquidity in the supply chain and enable greater flexibility.

The Role of Smart Contracts in Asset-Backed Cryptocurrencies

The role of smart contracts is to facilitate the issuance and creation of asset-backed tokens. They contain details like governing rules, ownership rights, and token supply and distribution. They will also automate the transaction process to ensure transparency and reduce the need to use third parties. Moreover, automation will lower transaction costs.

ABCs, like all cryptocurrencies, must comply with regulatory requirements. These requirements will be embedded into smart contracts, which will be executed once the predetermined conditions are met. All terms will be recorded on-chain, making them visible in real time. That is, everyone can see the owners and transaction details. Due to their decentralized nature, smart contracts are immutable, making them less susceptible to manipulation and fraud.

In addition, smart contracts can act as guarantee agents. They can hold the asset until the conditions are met. If a dispute arises, their codes can also contain a procedure for resolving it.

Examples of Asset-Backed Cryptocurrencies

The best examples of asset-backed cryptos include:

Tether (USDT): Tether is a stablecoin pegged to the US dollar at a 1:1 ratio. Thus, the USDT price will be equal to the US dollar price. If the dollar’s value increases, the same will happen with Tether, and vice versa.
USD Coin (USDC): USDC is a stablecoin that’s also pegged to the US dollar at a 1:1 ratio. This means that its value will be equal to the US dollar, regardless of the market conditions. UDSC is typically deployed in DeFi protocols.
PAX Gold (PAXG): As its name suggests, PAX Gold is an asset-based token backed by one fine troy ounce of gold. This token is issued by Paxos and can be converted into physically allocated gold, unallocated gold, and fiat. At the time of writing, 1 PAXG trades at $2,358.
Binance USD (BUSD): This stablecoin is issued by Binance, one of the biggest crypto exchanges. BUSD is backed by the US dollar at a 1:1 ratio.
CryptoFranc (XCHF): XCHF is a collateralized stablecoin pegged to the Swiss Franc at a 1:1 ratio. This ERC-20 token is issued by Bitcoin Suisse AG.
Terra (MOON): Terra is an algorithmic stablecoin that’s pegged to multiple fiat currencies, such as the US dollar (TerraUSD), the euro (TerraEUR), and the British pound (TerraGBP). The best Terra Luna wallets also support TerraSDR, a blend of international reserve currencies.

Conclusion

Asset-backed tokens are backed by real-world assets, such as fiat and gold. They provide stability and reduce volatility, making them a less risky investment than traditional securities like BTC and ETH. They also enhance verifiability and transparency and come with lower fees.

What makes them a good investment is their ability to enable fractional ownership, that is, to break larger assets into smaller fractions. Their use cases include cross-border transactions, intellectual property monetization, and supply chain financing.