Why asset backed tokens will be mainstream

Ethereum was the first smart contracts computing platform and its adoption as a facilitator for blockchain based crowdfunding has grown significantly over the past two years, leading to the current token sale or initial coin offering (ICO) phenomenon.

The most common types of tokens issued through these ICO’s are so called utility tokens in the form the ethereum ERC20 standard token. While many tokens do not provide any value or utility, (besides perhaps being a security) there will be some decentralized applications and protocols that will challenge and transform traditional industries. The valuation of utility tokens is currently very subjective or driven purely by speculative market forces, while the potential value of asset backed tokens is easier to rationalize.

What is an asset backed token (ABT)?
An asset backed token is a blockchain token that is connected to a tangible or intangible object that has economic value. There are fungible (often referred to as security tokens) and non-fungible asset backed tokens that can represent various real-world (physical) assets. Non-fungible means that one unit is not equal to another similar unit, two diamonds of equal dimensions are still not interchangeable. An asset backed token essentially digitizes an asset and records its associated information on a blockchain. For example, a real estate property could have a digital record, instead of a standard paper deed. A token that represented a specific property could be created, which would store information about the house, such as the deed, ownership/renter history, financing, geographic location, and anything else desired. The ABT could be easily transferred to another owner when the property was sold.

Types of ABT’s
While there a few different types of token models for asset backing, ERC721 is currently the most common non-fungible token (NFT). ERC721 will likely become increasingly popular throughout 2018 although the ERC821 NFT standard looks like it could be promising as well. But, the question remains, why would you want to tokenize a reareal-worldset?

General benefits of ABT’s:
Asset backed tokens can provide many benefits including:

Liquidity
Securitization of assets
Ownership rights
Decreased volatility of cryptoassets
Definable intangible assets
Liquidity
Liquidity in the simplest terms is how quickly and easily something can be bought or sold based on the volume of trading activity in a market. Stocks and bonds can be sold almost immediately at a market price, while other assets like cars, real estate, or collectibles require much more time due to the lower volume of secondary market trading activity.

The primary reason that real world assets would want to be on the blockchain is to increase their liquidity. Real estate is a typical non-liquid asset that requires lots of time to sell. Ask anyone who has every sold their car or house, finding a buyer can take lots of time.

Liquidity is arguably more important than some realize, as it enables investors to enter and exit markets much more efficiently. This is incredibly valuable when considering how fast things can change. When the global financial market started to crash in 2008, if you could have sold your house or apartment instantly you might have saved (hundreds of) thousands of dollars. When liquidity is provided to a market it enhances the value of the underlying asset because it mitigates some of the risk that would be associated with not being able to quickly sell that asset.

Securitization of assets
Many assets require a primary owner of the underlying asset, not all assets allow for joint ownership and for those that do, it can be very difficult to obtain. Tokens increase the potential for fractional and shared ownership because tokens are divisible. A tokenized patent could be easily divided among the inventors and then the royalties could be distributed directly and proportional to each individual’s ownership. Beyonce’s hit song, “Single Ladies” could be tokenized and once downloaded or played, the royalties would be paid to Beyonce, her producers and whoever else owned a stake in creating the “Single Ladies” song. Of course Beyonce would receive the all the proceeds from her song sales because she is the Queen, but any other non-Beyonce song could easily be securitized on the blockchain.

Ownership Rights
Imagine having undeniable ownership of your assets. While this idea may not seem too revolutionary to those who live in advanced economies, those who live in more corrupt and less economically efficient countries know the realistic possibility of a government seizing their property simply because they don’t possess a property deed.

Even in countries like the U.S, Britain, and France the government is able to seize land for the public using the legal rights of eminent domain. U.S landowners on the Mexican border could have their land seized without compensation in order to build President Trump’s border wall. With digital asset ownership you’ll have undeniable proof that you own your property, which can’t be easily destroyed like a piece of paper. Ownership records cannot be altered by centralized authorities and a bank or government would not have ability to seize the digital ownership of your land, car, or equipment.

Reduced volatility
One of main challenges for cryptocurrencies becoming mainstream is price volatility. Cryptoassets are incredibly volatile and are likely to remain volatile until a rational and more liquid market develops. Asset backed tokens have the ability to take traditional assets, such as real estate, precious metals, intellectual property, and combine them with decentralized blockchain asset properties (efficient securitization, trustless transactions, etc). These new hybrid traditional-crypto assets will naturally be less volatile than current cryptoassets, helping the market stabilize.

Another important note is that assets connected to traditional markets only trade Monday through Friday.

Cryptoassets trade twenty-four hours a day, seven days a week, 52 weeks a year. The ability to open markets regardless of geographical location or arbitrary time differences will provide more trading opportunities for everyone around the world. Although it may make it harder to sleep at night.

Definable intangible assets
Conceptually it will be easier to back intangible assets because they already exist in digital formats and have no physical presence. Copyrights, trademarks, and patents can all have asset backed tokens that would allow for a more transparent system. Intangible assets are generally illiquid and have few secondary marketplaces. Having a tokenized version of these assets will provide more transferable ownership for intangible assets. Purchasing licensing rights to a song or patent will be fast and cheaper with definable tokens.

Real Estate
Tokenized real estate has larger applications besides acting as deed to your house or apartment. Divisible and proportional ownership is one of the more interesting applications for real estate. The Burj Khalifa, the building Tom Cruise A.K.A Ethan Hunt scaled in the movie Mission Impossible: Ghost Protocol is one of the most expensive buildings ever built with a price tag of around USD 1.5 billion. The Burj Khalifa is currently owned by Emaar Properties, but partial ownership could allow say 150,000 people to own and share the revenues of the property with a small investment of USD 10,000. The ability to suddenly democratize property that was once unaffordable to millions of people is a powerful application of ABT’s.

A common question is how could that many people actively agree on property and business management decisions. Management decisions could be agreed upon based on proportional voting system or even delegated to other companies or individuals. A smart contract could further specify certain duties any owner must perform in order to receive profits or maintain legal custody of their Burj Khalifa token. While there are still major steps before this becomes a reality, democratizing ownership and equally distributing resources in a common and inevitable trend throughout history.