Tokenization has been one of the hottest trends in the crypto industry. But what exactly does the popular saying, “bringing real-world assets on chain,” even mean? Tokenization is not a new concept but rather one that has recently regained popularity. I feel that it is vital to point out the obvious: not everything needs to be tokenized, nor do all assets benefit from such — quality matters.
In order for an offering to be viable in token form, it should be appealing, understood, auditable, liquid, and redeemable. Precious metals check all of these boxes and are one of the few asset classes that are truly benefiting from the technology.
Tokenization:
What is tokenization? At the most basic level, tokenization is the process of creating representations of real-world assets on the blockchain. This involves taking physical goods and issuing tokens that provide ownership of those goods. Precious metals such as gold, platinum, and palladium are perfect use cases for tokenization.
Accessibility:
Tokenization makes it easier for investors to access metal markets, reducing the logistical challenges related to traditional markets. It removes the need to physically own or store the asset and enables investors to buy and sell metals at any time and from anywhere. Furthermore, if an investor wants to exchange their tokens for physical metal, protocols such as xMetals offer redemptions starting with just 1 token!
Physical metals have numerous issues related to their transportation. Sending metal bars in the mail is a tricky process. Only certain mailing agencies will accept the package, and the risk of theft is high, as many different people handle the item while it is in transit. If you travel on a plane with bullion, you would need to declare the value of such and might be subject to tariffs when landing. Compare this to being able to hold an unlimited amount of precious metal in a digital wallet, with theft only being possible by giving someone access to your private keys.
Fractional Ownership:
Tokenization allows investors to own fractional amounts of metals, which means that investors can buy small amounts of metals that would otherwise be difficult or expensive to purchase. This also allows for a more diversified portfolio, as investors can allocate smaller amounts to different metals, reducing their exposure to any one particular metal.
Physical metal bars can only be bought in whole form. If an investor or customer wants to purchase a smaller amount, they will be forced to pay a large premium. The premium on 1 gram of physical gold, for example, can often be as high as 40% over the spot price. Compare this to a tokenized version that allows the investor to purchase less than $1 worth of gold.
Liquidity:
Tokenization provides greater liquidity compared to traditional metal investments, as investors can easily buy and sell their tokens on digital exchanges. This allows investors to react quickly to market conditions and take advantage of opportunities as they arise.
Traditional metals markets, on the other hand, are limited to market trading hours. If you want to sell physical bullion, you would need to go in person to an authorized dealer who will likely quote you a price significantly below the spot price.
Furthermore, what we believe can be a catalyst for the growth of tokenized metals is the potential for lending and borrowing across DeFi. The lending and borrowing markets across Solana have proven to be more efficient than traditional markets, due to the elimination of middlemen. Precious metals typically represent a ‘safe-haven’ asset due to their minimal price volatility. The ability to gain liquidity by borrowing against your digital bullion can allow investors to unlock liquidity in an asset that they might want to hold for the long term, without having to worry about liquidation due to the stable nature of the asset. The capacity to earn a yield on your digital bullion by lending it out represents an opportunity that is not fully present within the traditional or physical metal markets.
Transparency:
The blockchain technology used in tokenization ensures that all transactions are recorded and transparent, which helps increase trust and accountability in the market. This can also reduce the risk of fraud and manipulation in the market.
Oracle services, such as Chainlink, add additional transparency to tokenized offerings through their off-chain proof of reserves. These services connect to the physical custodian’s API to publish real-time attestations and prevent issuers from minting tokens that are not backed. Furthermore, holders of tokenized metals can utilize the protocol’s blockchain allocation tool to view the serial number and additional information about the specific bar of bullion they are holding.
Security:
Tokenized metals are often stored in secure, off-site locations, which reduces the risk of theft or loss. In addition, the use of blockchain technology provides an extra layer of security, as it is virtually impossible to hack or alter the blockchain ledger. xMetals stores their metals in world-class facilities that are insured by Marsh, a global leader in insurance.
We are strong believers that eventually, all assets will reside on the blockchain. Metals are one of the largest asset classes in the world and are a perfect fit for the industry. xMetals offers tokens (xGold, xPlatinum, and xPalladium) that are backed by precious metals and are redeemable on a 1:1 basis. To learn more, visit xMetals.io or write to us at info@xMetals.io.
