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The Difference Between Protocol Tokens and Traditional Asset Tokens


  • Regular Member | Tip FlatBlack

    In the last two years, hundreds of digital tokens have emerged. To avoid confusion we can break up “digital tokens” into two broad sub-groups;

    Protocol Tokens (PTs)
    = Digital tokens that are governed by a coded protocol. The rules of the protocol are enforced by the underlying blockchain technology. They are generally not linked to any “centralised” entity or any “traditional” real-world assets.

    Traditional Asset Tokens (TATs)
    = Digital tokens that represent a “traditional” asset, such as fiat currency (e.g Tramonex’s ERC20 GBP on Ethereum, Decentralised Capital’s ERC20 Euro) or precious metals (Digix’s ERC20 token representing gold). These assets are still dependent on traditional financial and legal systems.

    It is important to distinguish between these two sub-groups because they will have different properties over time.

    Protocol tokens benefit from a very interesting collection of properties which is why we believe they will soon be a critical element in the achievement of diverse portfolio construction.
    Some of the reasons for protocol tokens having low correlation to other asset classes come about from their independence from today’s financial system. They are bound by the rules of their underlying protocol, which is supposed to be “un-corruptible”. As such, they are not so exposed to any hidden erosion in value (eg. Quantitative Easing) or traditional financial risks that have emerged over the years in financial markets.

    Since the total market cap of all protocol tokens is less than 1% that of gold, there is extreme upside potential in this asset class.

    The way that Traditional Assets are being tokenized — the processes involved, how they then connect back to the “real world” — is intriguing, and clearly part of a growing trend. The underlying asset of a Traditional Asset Token is typically a “real world asset” which is governed by one (or more) centralised party but exists independently of the token’s existence on a blockchain.

    Adding traditional assets onto blockchain technology requires for them to first be held in custody by a centralised party. They can then be tracked via an issuance of tokens which represent the ownership of assets on chain with the security guarantees that blockchains provide. Trading and settlement can happen in a matter of seconds and at minimal cost (compared to t+3 + high fees, for example) due to the underlying technology. In theory, these assets are also divisible into smaller units, and as a consequence become more easily accessible.