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Tokenised Asset Classes

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Tokenised Assets.

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TLDR below. This is not financial advice.

General Conclusion

Like asset classes, the tokenised asset class is a way of grouping the types of tokens that exhibit similar characteristics. The way of grouping the tokens is based on the value it represents.

A tokenised asset class is a group of tokenised representation of value which has similar characteristics and behaves similarly in marketplaces. In this article, we focus primarily on tokens created on blockchain by decentralised ecosystems. It is possible for similar tokens to exist that are created by the government (central bank digital currencies, CBDC) or tokens issued by banks. We are only focusing on tokens created by the decentralised community.

Market Size

In research and surveys from institutions such as WEF, they forecast that up to 10% of GDP will be stored and transacted with the help of blockchain technology by 2025.

At the same time, Finoa Banking also forecasts that the tokenised asset market will reach ~$24trn by 2027. This does not include currently not measured (or not existing) asset classes or unidentified tokenization use cases of intangible assets (eg patents, where they expect significant usage rights, where they expect significant usage innovation and growth.

Source: Finoa Banking

Tokenised asset classes

  • Commodities: tokenised silver, tokenised gold, Bitcoin

  • Tokenised Securities: off-chain securities on blockchain like real estate, equities (stocks), fixed income (bonds), derivatives (i.e., structured products)

  • Security token: tokens that represent on-chain securities like equity of a revenue generating protocol

  • Exchange (Money to trade and exchange inside the ecosystem): cash and cash equivalents (money markets)

  • Stable token (to trade and exchange outside the ecosystem): tokenised USD, tokenised GBP

  • Utility: the ability to get a discount, social token of an individual, loyalty points

  • Intellectual property: music, art, patents, copyrights, licenses

There are many ways you can define the specific token functions, especially from a legal perspective, and start specifying what the token can and cannot do. But we are not there yet. This is a general classification of tokenised asset classes, based on the design of token-based ecosystems.

Commodities

In economic terms, commodities are components of commerce that are standardised and hence easy to exchange for goods of the same type, have a fairly uniform price around the world (excluding transport costs and taxes) and help make other products.

Commodities are fungible. That means they are interchangeable with one another. The fundamental value of commodities comes from its usability to carry out commerce. they can be traded on spot and derivative markets. Brand name also matters in commodities.

Tokenised securities

Tokenised securities are the tokenised version of financial securities that exists outside of blockchain.

Tokenised securities are fungible. The fundamental value comes from the investment asset itself, outside of blockchain. Blockchain is a tool to allow the security asset to be traded in a different ecosystem; in a jurisdiction specific ecosystem or a token specific ecosystem.

Security Token

The main difference is where the asset is created, either on-chain or off-chain. Unlike tokenised securities, security tokens are created on-chain with the asset being blockchain native.

Security tokens are fungible. The fundamental value comes from the revenue generated from the token-based ecosystem. This value is more than just cash flow, but also the impact of mechanism and token design affecting the economic relationships between agents.

Exchange

Exchange token functions like money within the specific token-based ecosystem. Money is used as a standardised mean of measurement to trade, transact and exchange between economic agents in the specific market. When we trade, we are capturing information to engage in a social contract with another agent in the same market. Thus, money is a barometer of information in that specific market.

Exchange tokens are fungible. The fundamental value comes from its ability to exchange for other goods and services within the market by its acceptance from a large number of participants. Another important value is its ability to remain relatively stable as a means of exchange within the market.

Stable

Stable token functions like exchange token. However, instead of just exchanging between agents of a particular market, this class of tokens allows economic agents to exchange across various markets. For exchange tokens, the token is a barometer of information in the particular market, agreed by agents in the market. However, when transacting across markets, this barometer of information captured by exchange tokens might not be accepted by agents of another market. Thus, a stable token exists as a wider barometer of information to allow agents to transact across markets.

Stable tokens are fungible. Its fundamental value comes from the underlying asset that it is pegged to. The important value is that it is accepted and used as a means of transaction (or currency) between agents of different markets.

Utility

Utility token are a class of tokens to allow an economic agent to access the platform. Think of your university giving you credit to book the university’s facilities. Or perhaps the airline’s frequent flyer programme, where you can access hotel and car rental partners and upgrade your flights in exchange for points (miles) that you have earned. These are tokens used to access the platform (university facilities) or network (network of airline partners). Users of the system use these tokens to interact with each other in the market.

Utility tokens can be fungible or non-fungible, depending on how it is designed, structured and created. Its fundamental value comes from its inherent utility in the market to access goods and services. This market could be decentralised or centralised.

Intellectual property

There are two main classes of intellectual property, token representing the recognition of the IP itself and token representing the financial benefit by to the creator for work done by others.

Both can be fungible or non-fungible. Token representing the recognition of the IP itself is usually non-fungible.

TLDR:

Tokenisation of assets includes physical assets and digital assets. Tokenisation of digital assets is very simple and currently is not too difficult a problem, it is just that they have a value equal to the value of the original asset.

The tokenisation of physical assets is a new thing and a good direction for development. Currently, tokenisation of securities is the most successful application, and in the future we will have many types of tokenised assets. However, in order to tokenise physical assets like real estate or gold, they must be secured at another party with transparency. Right now this is still a problem.

Imagine if we had a good enough solution to bring physical assets into the DeFi space how powerful this market would grow. Hopefully we will soon have the optimal solution to tokenise physical assets into the DeFi space and turn it into the most vibrant financial market on the planet.

Ps: Order the textbook “Economics and Math of Token Engineering and DeFi” today!