Advantages of tokenized securities that matter to investors
As a rule, this blog covers the advantages of tokenization for businesses raising capital. However, in this article, we’ll talk about the benefits of investing in tokenized securities from the investors’ point of view and discuss the unusual aspects of it.
Enhanced yield. Options to earn extra income on your tokens
The first and foremost advantage of DeFi is enhanced yield. Unlike regular private or public securities, located mainly on the brokerage account or existing in the form of register records, tokenized shares are programmable. They are actually smart contracts, which can interact with the same smart contracts and other objects located in the blockchain, particularly Decentralized Finance protocols. Thanks to them, it’s possible to use various instruments to increase the profit above the one you are already acquiring from the mere investment in the asset.
There are plenty of patterns to raise this additional income; they depend on technical integrations and token implementation. Some issuers provide an option of staking ― a chance to earn extra income on the owned tokens. It can also be liquidity mining ― depositing the tokens in your possession into the liquidity pool, thanks to which you’ll also earn additional income for facilitating the transactions with the given tokens. Putting them into the credit protocols so that it’s possible to take a loan in your tokens is also a great way to achieve stable income. Alternatively, even switching sides in this matter to use the tokens as collateral to get a loan is also possible, which can be further invested to earn additional yield.
If you are not familiar with the decentralized finance protocols and the terms of their usage, take a look at our article “How does DeFi unleash the potential of tokenized securities?“
To put it in a nutshell, the possibilities of using security tokens to increase revenue are almost countless, whereas classic finance doesn’t allow that. Therefore, tokenized securities are superior compared to conventional ones.
Enhanced liquidity. Three distinct mechanisms of tokens liquidity
Enhanced liquidity, the second benefit of tokenized securities, is often spoken about very vaguely as a kind of magic, which doesn’t add credibility to such claims. In practice, though, liquidity is achieved very straightforwardly and is enabled via three distinct mechanisms.
Mechanism number one is the diverse pool of investors. Instead of working with only one or a couple of big investors, businesses can have several larger and hundreds of small investors at the same time. They may come from different jurisdictions and offer different investment amounts; this increases the potential number of counterparties for a transaction, making it easier to trade and increasing the trading volume.
The second mechanism is a more straightforward transactional process. A convenient digital form in which the securities can exist eliminates the red tape and lets the user complete all the necessary procedures faster. Signing, changing or transferring anything in a blink of an eye becomes possible. Due to simplicity and automation, transactions also become cheaper, so the minimum trade amount is reduced. Thanks to this, they are also completed more often.
Mechanism number three suggests that within decentralized finance, systems are making private securities trading possible, namely automated market-making protocols. The AMM systems enable trading the company shares within the liquidity pool, which is an excellent alternative to a stock exchange or P2P trading.
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Access to more asset classes. Technologies that will enable surveying the transactions of a company
For a long time, individual investors couldn’t work with assets like commercial real estate or private companies, as those have always been utterly expensive. Inability to diversify their portfolio and invest in great asset classes with attractive returns used to be their burden. Thanks to the rise in efficiency, tokenization reduces the investment threshold, opening access for retail investors.
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Thanks to the transparency of blockchain, investors can monitor the performance of their tokenized securities at any time. The technologies that will enable the collection and processing of all the company transactions are developing fast. Soon, the reporting and auditing will be completely automated. Thanks to such progress, investors will be able to make better financial decisions related to exit, utilization of tokens in DeFi protocols and oversight of corporate management. Thanks to this reporting, the investors’ chance to get scammed is significantly reduced.
Store of value for crypto investors. The way to preserve assets in cryptocurrency
The problem crypto investors face every day is that most crypto instruments are very risky and volatile. Such assets are great for making money but are bad for preserving your earnings. Traditional financial instruments don’t suit such investors. Firstly, they simply don’t trust them. Secondly, the returns on saving instruments in conventional finance are minimal and barely cover the inflation if you’re merely opening a bank deposit.
Respectively, crypto investors need a way to store value in cryptocurrency. There are two ways in which this can be done. The first is investing in major crypto brands like Bitcoin or Ethereum. From a very long-time perspective, their volatility doesn’t matter, and overall they tend to grow in value. The problem with this strategy is that it’s way too long-term: even major cryptocurrencies may fall at 50% in the medium term. This reduces the flexibility in cashing out money whenever you need it and negatively impacts your portfolio overall. It’s also bad from a psychological point of view, as people are emotional in their essence. To avoid selling volatile assets under pressure and fear, it’s crucial to have strong tactics. We have a video on making sound financial decisions:
The second option of storing value in crypto is stablecoins. The problem here is that stablecoins do not generate any return. Of course, they might be staked in some liquidity pools or credit protocols with the means of getting an income, but it also creates additional risks. Not every stablecoin is fully backed by cash or safe assets; the protocols for staking or farming are subject to technical, legal and liquidity risks. All of the above doesn’t make it such an excellent choice either.
On the other hand, security tokens represent real-world assets that have historically proved their systematic growth, safety, and profitable increase. Such assets are land, real estate, natural resources, etc. It’s a golden niche for investors desiring to keep their money safe by bypassing traditional finance.