Cryptocurrencies are often treated with skepticism as they are volatile and do not appear to have intrinsic value. However, first-generation coins such as Bitcoin represent only the initial steps in a broader revolution taking place in financial markets.
The original motivation for Bitcoin was to create a means of making payments without the need for a trusted 3rd party. Later developments have made it possible to go beyond payments to create decentralized equivalents of lending, insurance, and security exchange.
This ecosystem of blockchain-based solutions is known as Decentralized Finance or DeFi. It rests on two foundations:
Smart contracts: allow agreements to be executed automatically and with precision, eliminating bureaucracy along with its associated costs and slow settlement times.
Tokenization: allows formerly illiquid assets to become divisible, tradable, and therefore accessible to a wider pool of investors via fractional ownership.
By associating a real-world asset, such as an artwork, building, or infrastructure project with a token using a smart contract, it is possible to create an asset-backed token – the cryptographic equivalent of a share certificate or title deed.
Asset-backed tokens (ABT) enjoy the benefits of the blockchain protocols on which they are created (speed, low cost, and reliability). They also have intrinsic value, unlike crypto-native currencies like Bitcoin that are based entirely on code. This creates a floor price and offers stability that crypto-native tokens (i.e. relying entirely on code) lack.