One of the innovations that are exciting about Centrifuge and other similar collateral-asset systems is the blending of public and private data on privacy-enabled NFTs.
Decentralized finance has changed our financial world in a big way. The emergence of cryptocurrency and consensus-based verification, the innovation of decentralized lending, and other phenomena related to the blockchain are integrating new digital money systems, and making old traditional banking systems obsolete.
However, one of the average investor’s biggest concerns around decentralized finance is the volatility of cryptocurrencies and smart tokens.
In the open market, much of the value of Bitcoin or any other type of digital money is likely to spike and plummet based on changing market factors and the psychology of asset holders. As with individual equities on the stock market, the numbers go up and down a lot.
That makes traders nervous when they’re making a play on the cryptocurrency market itself, and trying to stay diversified in case the road gets rocky.
With that in mind, there’s another path that savvy investors are making toward decentralized finance assets that are collateralized by real-world assets.
Ethereum and Asset Tokenization
The basic idea here is that the digital coins and tokens that people are holding will have a value related to actual real-world assets like real estate, royalties, or intellectual property.
These real-world revenue streams get tied to the token or digital asset in a way that builds fundamental value into these systems, and importantly to some traders, that’s uncorrelated from the basic coin market itself.
Take the example of Ethereum, which is commonly known as the runner-up cryptocurrency in the market after Bitcoin.
The price of Ethereum’s coin Ether fluctuates a lot, too. Just a few years ago, ETH was worth dozens of dollars, and now it’s worth thousands. It goes up and down.
But people who really understand the nature of Ethereum know that it was built to handle smart contracts that can have value totally divorced from the value of ETH itself.
In other words, this type of blockchain behavior and asset holding is more geared toward facilitating a contract than it is to owning a digital coin. For example, if you hold an Ethereum token that is tied to real estate value, and ETH price drops, the housing market doesn’t. And your portfolio has a better chance of staying afloat.
Public and Private Data for NFTs
Let’s talk about another kind of functionality that is really helping the collateralized digital asset market to thrive.
Non-fungible tokens or NFTs are a big new thing in decentralized finance. These digital assets are essentially tokenized the same way that other collateralized assets are – maybe to a piece of artwork or something with collectible value.
One of the innovations that are exciting about Centrifuge and other similar collateral-asset systems is the blending of public and private data on privacy-enabled NFTs. In the peer-to-peer system, sensitive data for the holder is kept private, where tracking data, as per blockchain conventions, is public.
Here’s another example of revenue streams tied to collateralized digital asset tokens and smart contracts: It’s called invoice factoring. Invoice factoring companies sell the probability of future client payments and new smart tokens can attach to these real-world values as well.
Benefits of Collateralized Tokens/Digital Assets
It’s easy to see some of the real-world applications of these types of assets. For one thing, being able to trade in something that is supported by consensus-based verification systems provides an alternative to the many un-banked who are not served by traditional commercial banking systems. Scaling is easier and again, the volatility of a single cryptocurrency can be diversified into much stabler holdings.