In 2021, we live in a digital world where digital assets are everywhere. From the photos stored on your iPhone to the movies you stream from Netflix or Hulu, the documents you store in the cloud, and more, most people are interacting with digital assets hundreds, if not thousands, of times throughout the day. What exactly are digital assets and why should you care about them in 2021?
Types Of Digital Asset
The definition of a digital asset is “anything that exists in binary data which is self-contained, uniquely identifiable, and has a value or ability to use.” In the mid-90s when the term originated, it was used to reference assets such as videos, images, audio and more. Recent technological advances, such as blockchain technology, has given the term “digital assets” a new meaning.
Digital assets have evolved rapidly due to blockchain technology. Blockchain creates new efficiency in the market as well as the possibility of completely new markets. The transparency of blockchain is unprecedented and allows one to prove certain aspects of digital assets such as ownership, transaction history, and location with no involvement from third parties.
Digital assets can take many forms. The types of digital assets that we will reference in this article are those which represent financial assets. There are three types.
- Assets tied to regulated instruments. Examples include the following:
- Security Tokens: digital, liquid contracts for fractions of any asset that already has value, like real estate or corporate stock
- Commodity tokens which represent investments in commodities and future contracts
- Stable coins which represent investment in underlying fiat
2. Assets which are non-regulated markets such as distributed finance (DeFi). DeFi is an umbrella term for a variety of financial applications in cryptocurrency or blockchain. Examples include:
- Uniswap (UNI)
- ChainLink Token (LINK)
- Wrapped BTC (WBTC)
- Dai Stablecoin (DAI)
3. Utility Tokens. Utility tokens are blockchain-based assets people buy with the intention to use for something in the future
Why Is the Digitization of Assets Important?
Digitization of assets is a process in which the rights to an asset are converted into a digital token on a blockchain. Ownership rights are transmitted and traded on a digital platform, and the real-world assets on the blockchain are represented by digital tokens.
Many types of financial assets are already digital, such as when cash is represented as numbers on a screen. However, tokens enable certain assets to move swiftly across digital platforms or networks. This has numerous benefits, such has increased opportunities for cross-border trade as well as expanding into untouchable markets that were previously frozen, underutilized, or illiquid. Tokens also offer new possibilities of fractional ownership.
The digitization of tangible things includes fungible (e.g. gold) and non-fungible goods (e.g. artwork). The transformation of real assets to tokens is disrupting many sectors, including the $2 trillion global payments industry. This makes all types of properties more liquid, exchangeable and able to command the best prices from worldwide auctions. With added liquidity, asset owners may be able to shield themselves from inflation by obtaining non-inflationary payments like limited-quantity tokens, as well as stablecoins (a type of cryptocurrency) that are backed by gold, to name two examples.
What Are the The Benefits of Digital Assets in 2021?
Digital asset adoption is growing at an exponential rate. Tokenization alone is expected to be USD 24 trillion by 2027, a figure that represents 10 percent of global GDP. The development of digital currencies could alter the way we look to exchange value. We have listed potential opportunities for Digital Assets
Improve accessibility: An important benefit of digital assets, as mentioned by several experts, is improving accessibility to products and services. Currently there are high entry barriers for some assets. When such real life assets are digitized, the digital assets allow for other investors to participate as well. In short, digital assets may lower the entry barrier for companies to participate. Where first only a few large players could participate, now medium sized companies can participate, too
Reduce complexity: complexity of existing processes can also be reduced with digital assets. The primary reason for this is that all parties agree and stick to an up-front agreed protocol.
Reduce Cost: There is a lot of effort ongoing in checks, regulatory and operational control of processes. Such controls and checks can be automated and improved by, for example, digitizing assets and combining digital assets with distributed 5 ledger technology, Such a process improvement will reduce costs, according to several experts.
Improve efficiency of existing processes: Digital assets allow for an improvement of such processes by better aligning parties, reducing the number of steps that have to be performed, automation of protocols, and instant settlement and valuation. In the end, this will result in a more seamless process, significantly improving its efficiency.
Improve transparency: DLT-powered platforms are being introduced to administer private equity funds, including interactions between general and limited partners. In the future, such platforms can be extended to help minimize costs and administrative tasks at the individual asset level. Transfer of equity tokens will also feature transparency of price and governance, including right of first refusal, proxy voting and divided payments. Automated administration would allow investors such as pension funds to more easily co-invest in specific parts or assets within a private equity fund portfolio.
Reduction of intermediaries, saving costs and less errors: Digital assets, again in combination with distributed ledger technology, can reduce the number of intermediaries. One example provided by several experts is the removal of existing clearing agents, as their role can be embedded on DLT which can potentially save time and cost.
Exemplar Digital Asset and Blockchain Experts
The rapid rise of blockchain is disrupting and transforming how we do business, and will change the future of commerce as we know it. This technology that enables digital assets such as Bitcoin and Ethereum, is taking us to a new frontier of openness, decentralization and globalization, and as cryptocurrencies become more mainstream, the need to understand blockchain will likewise become inevitable.
Whether your company is a startup, preparing for a strategic event, or expanding into new markets the Exemplar Digital Assets team can provide the technical advice you need to navigate through the rapidly changing regulatory landscape.
Chief Executive Officer, Exemplar Companies, PBC
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