Tokenized Assets Unlock New Currencies

Introduction

Global currencies are facing significant challenges, including high inflation and rapid devaluation.

Reserve Protocol introduces the concept of an RToken, which is a new type of stablecoin backed by a basket of assets. Traditional USD-backed stablecoins are only as good as the underlying USD collateral, and are therefore prone to issues such as inflation and censorship. By instead using a basket of assets as collateral, it’s possible to form new currencies that appreciate in value due to yield on the underlying collateral.

These currencies can in turn be quickly converted to fiat in local economies, providing users with an improved means of storing and transferring value.

In order to see this vision come to light, more assets must first be representable on blockchains through the process of tokenization. This enables them to be used as money lego in order to design an optimal form of currency for global users. Gold is one asset that’s already quickly becoming increasingly tokenized, but in the future, the landscape of tokenized assets will look very different.

The tokenization of gold, real estate, and other assets, and their subsequent use as money legos, revolutionizes the very concept of currency as we know it. Families will be able to transfer wealth through generations, and it’s even possible that an alternative global reserve currency may be formed.

RTokens as Money Legos

The optimal currency has yet to be designed and the current designs have many flaws. For example, many countries are experiencing both drastic inflation and currency devaluation to the detriment of the citizens. While Americans worry about 7.7% inflation, both Argentinians and Turkish are experiencing nearly 90% inflation.

https://www.statista.com/chart/27480/projected-annual-inflation-by-country/

These countries are also at the mercy of external factors such as governmental monetary policy decisions, censorship, and geopolitical risks.

It’s important to remember that even the U.S. Dollar, acting as the global reserve currency, does not have any intrinsic value other than the collective belief in its value. In the past, the U.S. Dollar was backed by gold but that changed in 1933 when they nullified the rights of creditors who demanded payment in gold. The government now issues money backed by debt instead, with a swelling U.S. budget deficit that may not be sustainable forever, leading some to predict a potential collapse of the U.S. Dollar. Even if this is not the case, the USD faces 7.7% inflation and it’s one of the strongest currencies. Most other nations do not have this luxury and face serious monetary issues.

What if there were an alternative?

Reserve Protocol makes it possible for anyone to propose a new currency (a type of stablecoin known as an “RToken”) that’s backed by a basket of real-world assets. For example, this stablecoin could be backed by a mix of 40% gold, 30% U.S. Dollar, and 30% other assets (such as a basket of commodities). By open-sourcing the creation of a customizable currency, innovation and competition will follow and help users to decide what the optimal currency design may look like.

The underlying collateral that backs any given RToken essentially acts as a money lego enabling customizability, while at the same time generating yield.

This means that anyone can propose what the optimal basket of assets may look like, while generated yield makes them inflation-resistant. For example, one may argue that an inversely correlated basket of assets is the best form of collateral, while another may argue for collateral that generates the highest yield possible.

However, a large challenge exists: most assets are yet to tokenized.

Tokenization refers to representing a real-world asset on the blockchain. For example, a USD-backed stablecoin like Tether represents a real-world U.S. Dollar, and therefore is a tokenized USD. At the present moment, only a small percentage of real world assets are tokenized, meaning that the potential innovation of RTokens is restricted.

Moving forward, Boston Consulting Group has predicted that the value of tokenized assets will hit $16.1 Trillion by 2030. This includes the tokenization of equities, bonds, real estate, precious art, and so on. Several barriers are currently in the way, including unclear regulations and a lack of tokenization infrastructure, but this is expected to change in the near future.

In turn, institutions and entrepreneurs will be incentivized to propose RTokens for various reasons including:

Revenue sharing of yield generated.
Strategic maneuver for branding.
Censorship-resistant currencies (through wrappers).
Branded baskets of assets.
Reduced barriers between off-chain and on-chain investments.

Another big reason is that RTokens have default protection through the staking of RSR tokens, providing recourse in the event that a collateralized asset falls in value significantly.

What potential might this unlock? One possibility is that of a safer reserve currency.

Safe Reserve Currencies

Reserve currencies are widely used for conducting international trade and financial transactions and are important for several reasons, such as:

Indicating an ability to repay foreign debt.
Reducing foreign exchange risk.
Providing liquidity during economic distress.
Helping to peg domestic currencies to a given rate.

Currently, the U.S. Dollar is the world’s most dominant reserve currency.

Many bright minds including Ray Dalio and Robert Kiyosaki have predicted that the USD is not destined to remain the global reserve currency forever due to swelling debt levels. Should a switch occur, this could have an extremely negative impact on the U.S. Dollar and all of those holding it as a safe reserve currency (hint: most countries).

What is truly needed is an alternative stable currency that can hold its value for ages, without erosion of value.

An alternative reserve currency would not only be inflation-resistant through yield generated, but could in fact accrue value. Additionally, being native to blockchain technologies means that global financial transactions would be immensely simplified if countries were to adopt it. Transactions could be done near-instantaneously, with low fees and increased transparency.

Countries could propose their own reserve currencies based on their specific needs, including debt levels, inflation levels, trade surplus/deficit, available assets to tokenize, and so on. In turn, global countries could vote on their preferred reserve currency by simply using it.

The potential is therefore that Reserve Protocol enables a default-protected and globally accepted reserve currency that builds upon the issues of the current U.S. Dollar and the challenges of the traditional financial system.

However, two large challenges remain the way:

As mentioned, most assets are yet to be tokenized, limiting potential RTokens. Even as more assets are tokenized, it may take time to determine the optimal RToken structure.
Decentralized governance systems are inadequate at the moment. Given that RTokens are decentralized with cutting-edge governance structures, the optimal structure must be established in order to align incentives and avoid any current currency failures. Doing so on a country-wide scale or global scale could be immensely complex.

The Near Future

The potential for customizable stablecoins that are both censorship-resistant and inflation-resistant is hard to understate. This will take time to implement, however, so we must start somewhere. The tokenization of more assets is a great place.

One asset that is becoming increasingly tokenized at the present moment is gold. For example, in 2021 the Canadian gold retailer Kitco Gold partnered with Stably to create gold-backed tokens on the blockchain. More recently, the Dubai Multi Commodities Center announced a partnership with Comtech Gold to digitize tokenized gold trading as well.

The tokenization of gold, a $12 trillion industry, makes complete sense:

Fractionalization: any value of gold can be purchased.
Speed: no need to go buy or sell in person.
Security: relying on blockchain technology rather than a trading platform’s website or an in-person store means much greater security.
Fees: intermediary fees are significantly reduced.
Accounting & Transparency: transactions are publicly verifiable and viewable, enhancing transparency and simplifying accounting processes.
Interoperability: gold tokens may be used in the rest of the blockchain space, such as being collateral for an RToken.

While gold may already be accessed online in developed nations using trading platforms, most of the world is forced to either purchase it in person at horrendous rates.

Using blockchain tokenization enables global access to gold, with price fluctuations being reflected in the proportional composition of a corresponding RToken.

In the distant future, it’s hard to imagine what the collateral potential of an RToken may look like. The range of potential assets will surely look different, as the tokenization of real estate, financial instruments, commodities, fine arts, and more continues.

Imagine companies tokenizing their real estate, and bundling it alongside other assets to create a branded RToken that’s inflation resistant and spendable in any given country.

The potential will only be limited to what entrepreneurs and institutions can dream of.

Conclusion

Currencies as they exist today are not sufficient and a new system is needed. Currencies should not only be a medium of transfer, but a strong store of wealth which is not currently the case is most regions.

RTokens on Reserve Protocol are a viable solution that enable the creation of new currencies that are customizable based on available collateral, which acts as a form of money lego. More assets are becoming increasingly tokenized which opens up the short-term potential for new currencies. Longer term, the potential is exponential and hard to predict what will happen. Likely, consumers and institutions will form novel types of RTokens based on custom needs that are not only inflation-resistant but actually gain in value over generations, revolutionizing how wealth is transferred. This also presents other interesting possibilities, such as a safer reserve currency that could be used for global trade.

In the meantime, we require more assets to be tokenized and stronger models of decentralized governance. This will unlock immense potential for global citizens, especially in developing nations where new forms of currency are needed most.

Providing liquidity during economic distress.
Helping to peg domestic currencies to a given rate.

Currently, the U.S. Dollar is the world’s most dominant reserve currency.

What is truly needed is an alternative stable currency that can hold its value for ages, without erosion of value.

The potential is therefore that Reserve Protocol enables an insurable and globally accepted reserve currency that builds upon the issues of the current U.S. Dollar and the challenges of the traditional financial system.

However, two large challenges remain the way:

As mentioned, most assets are yet to be tokenized, limiting potential RTokens. Even as more assets are tokenized, it may take time to determine the optimal RToken structure.
Decentralized governance systems are inadequate at the moment. Given that RTokens are decentralized with cutting-edge governance structures, the optimal structure must be established in order to align incentives and avoid any current currency failures. Doing so on a country-wide scale or global scale could be immensely complex.