Asset-backed tokens – the antidote to crypto volatility?

September 18 21:15 2022

The total market capitalization of cryptocurrencies has plunged from the USD2.2 trillion seen at the start of the year to just under USD1 trillion. The global macroeconomic uncertainties and recent mishaps in the crypto industry extinguished the decentralized finance (DeFi) and non-fungible tokens (NFTs)-driven hype seen towards the end of last year.

Crypto newcomers – mostly retail investors entering the market during the recent bull run – were burned by the ensuing correction, but does it spell the end of this nascent industry? Those who have been in the space for a while would know that volatility is a mainstay of this space.

While retail investors may revel in the speculation-driven volatility of the blockchain space, this aspect of cryptocurrencies is often seen as an unnecessary risk for the more “traditional” and risk-averse investors – those that prefer to rely on more grounded metrics to value their investment.

This volatility stems from lacking an underlying real-world utility or physical asset. As a result, some projects are looking to address this gap in the blockchain space through asset-backed tokens.

These tokens would instead be based on the value of underlying asset, as opposed to being influenced by pure speculation.

The concept of tokenizing physical assets on the blockchain is nothing new, although interest in this space has recently been gradually picking up.

During a recent panel by the Monetary Authority of Singapore, Umar Farooq, CEO of Onyx by JP Morgan, discussed the possibility of new use cases for tokenizing assets such as stocks, bonds and even real estate.

He added that the bank is seriously considering building the infrastructure to support the tokenization of assets, preparing itself for what he believes to be the next cycle.

“All of the banks are looking at this as a way to rethink the future of their business,” he was quoted as saying.

Governments are also looking into tokenization as a means to improve efficiency. The Colombian government, for example, has partnered with Ripple Labs in exploring the tokenization of land titles to enhance the efficiency and transparency of processes relating to real estate transactions.

BNY Mellon previously said that tokenization allows for better liquidity, quick settlements, lower costs, and bolstered risk management.

Take the real estate market, for example – the tokenization of property opens up the way for investors to acquire tokens representing a fraction of the property, thus broadening the investor base to include smaller retail investors.

Besides that, the bank said tokenized assets could also reach broader geography due to the inherently global nature of public blockchains, opening up a more liquid market for traditional assets such as property and jewelry.

Several projects are exploring the tokenization of physical assets through the use of NFTs, including luxury goods, rare wines and whiskies, and gemstones.

Diamond Alpha is one such project which incorporates the tokenization of lab-grown diamonds through the use of ERC20 fractionalized-NFTs (F-NFTs), setting it apart from most NFT projects in the market currently, that do not have an underlying physical asset.

While NFTs linked to purely digital assets such as art, videos, music or game assets could literally see their value drop to zero, this is not the case with asset-backed NFTs. The value of an asset-backed token would always reflect the value of the underlying asset.

The use of F-NFTs by Diamond Alpha, powered by Frac, also lowers the barrier to entry for those who would like to invest in lab-grown diamonds, as investors can purchase just a fraction of a batch of diamond seeds instead of committing to the entire batch.

The ability to fractionalize the ownership of physical assets will certainly unlock higher liquidity levels for traditionally illiquid assets.

About Diamond Alpha

Diamond Alpha is the World’s 1st Asset-backed Fractional-NFT Yield Program, powered by Frac, a “FracTech” provider that brings unforeseen and unprecedented levels of liquidity to high-value items through fractionalizing NFTs. Through its yield program, Diamond Alpha aims to decentralize participation and access to high-margin opportunities.

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