Tokenization Of Assets And The Problem Of Centralization
Since the creation of Tether (USDT), things started to change in the crypto space. Previously, people were trading BTC against altcoins, and they only withdraw back to fiat whenever they want to take profit. However, the rising popularity of Tether has allowed crypto traders to use the stablecoin as their actual base cryptocurrency as the valuation is pegged to USD.
Since then, there have been dozens of new pegged tokens. Gold-pegged crypto tokens have been around with us since a few years ago. We also have real-estate tokens and traditional equity tokens on the blockchain.
The crypto space is getting all these tokenizations of real assets. Many crypto enthusiasts actually feel optimistic about these moves, as they believe tokenization will only help the crypto space to be taken seriously by governments and the non-crypto community.
However, there’s one big problem with this trend of tokenization - it allows a single point of failure aka centralization. Before we go on with the post, it’s important to know the basic idea of smart contracts. After all, tokenization is made possible thanks to the usage of smart contracts. Click here to check the article.
What’s The Big Deal With Tokenization?
Let’s start with the positive points. First of all, tokenization of assets, physical metals, fiat currencies, and all that are actually good for the crypto space. Why? Because they allow the crypto space to be taken seriously.
Stablecoins are valued 1-to-1 to fiat currencies and it is what the crypto people like to hold to have peace of mind regarding crypto volatility.Gold-pegged tokens can also give you a certain peace of mind because many of them are audited regularly and you can swap the tokens with real physical gold as long as you pass KYC.
And then, we also have real-estate crypto tokens on Ethereum blockchain where the token ownership indicates that you legally own a piece of the real estate.It’s kind of a big deal because tokenization of assets allow crypto space to have its own appeal outside the speculative trading instruments. People can actually HODL something that has real value behind the token and it makes the blockchain much more appealing to people who don’t like to speculate with crypto valuations.
When These Tokens Get More Popular, There’s A Risk
The problem with these tokens is the fact that they keep getting more popular. You might want to ask “what’s the problem with that? Isn’t that good?”, well, yes and no. Yes because it’s good when you see them getting more popular, but no because nobody addresses the real risk behind it.It’s important to admit that the crypto world is all about decentralization.
Decentralize the hash rate, decentralize the token ownership, and decentralize the need for trust. That’s the essence of cryptocurrencies. Whenever there’s a single point of failure, it gets criticized and rightfully so.The asset-pegged crypto tokens are exactly that. They are centralized.
These tokens are issued by private companies. The fact that they are regulated and regularly audited doesn't mean much if there’s only one company that can ruin it all for these tokens. More often than not, being at the mercy of a private company is worse than being at the mercy of a central bank.
Take a look at USD as an example. If you hold a $100 bill, you know you can just exchange it anywhere you want, because the central bank is guaranteed by a country. But if you hold a specific asset-based token, you are at the mercy of the issuer. The chance of a private company to fail is much higher than a country like the United States
The Future Of Tokenization
However, the future of tokenization would not be only a bad thing. There are, perhaps, some asset-pegged crypto tokens that can mimic the idea of DAI, a stablecoin with 1-to-1 valuation to USD, but it uses an algorithm instead of a centralized fiat deposit/withdrawal process.
Whatever the future has for tokenization of real-life assets, I just hope they would be much less centralized in the future versions. If you want to study more about tokenization, it’s important to start with smart contracts as they enable this exact concept. Click this link to learn more about smart contracts.