Liquidity Measure in Asset-Backed Tokens: Velocity Examination - A Look at Liquid Asset Flow
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In the ever-evolving world of cryptocurrencies, a new class of tokens is making waves: Asset-Backed Tokens (AATs). These digital assets, such as Tether, are setting themselves apart with their remarkable liquidity and transaction velocity.
According to recent data, Bitcoin, the leading cryptocurrency, has a velocity of approximately 4.1%, while Etherium follows closely with a velocity of 3.6%. In stark contrast, the largest AAT, US Dollar-backed Tether, boasts a velocity over 100%, meaning every Tether token gets traded every day. U.S. dollar-backed tokens, like Tether, are the most liquid AATs, with each token being pegged to the value of a single U.S. Dollar on a 1-to-1 ratio.
The hyper trading activity in AATs is not a coincidence. These tokens serve as stable, liquid mediums of exchange within the crypto ecosystem, facilitating frequent and rapid transactions. This is a key reason why AATs, often referred to as "Stable Coins," attract so much trading activity.
Stability and low volatility are another crucial factors. AATs, like Tether, are pegged to stable assets like the US dollar, reducing price fluctuations that typically discourage frequent use. This stability makes them reliable units of account and stores of value, thus supporting their use in everyday transactions, unlike highly volatile cryptos like Bitcoin or traditional securities prone to price swings.
AATs also serve as intermediaries to move value efficiently across platforms and decentralized finance (DeFi) applications, enhancing their transaction velocity. Their stability and liquidity encourage users to trade and transact with them regularly.
By representing real-world assets or fiat currency digitally on the blockchain, AATs enable rapid, near-instant transfers without the delays or frictions inherent in traditional securities trading. Fractional ownership and ease of transfer amplify turnover rates.
AATs are widely used within DeFi protocols for lending, borrowing, yield farming, and transfers, further boosting their transaction throughput compared to less frequently traded securities. Smart contracts, KYC/AML compliance, and oracles ensure smooth functionality and trust, allowing AATs to circulate quickly with reduced counterparty risk.
It's important to note that the correlation between liquidity and volatility in the crypto markets is high. Lower liquidity leads to higher volatility. A measure called velocity is used to describe liquidity in the crypto markets, defined as total transaction value divided by total value of currency issued. In comparison, the velocity of U.S. Dollar cash (US Dollar M1 money supply) is 6.2%, while the S&P 500 has a velocity of 6.3%. FAANGS stocks have a velocity of only 0.6%.
While there is less incentive to hold AATs for the long term due to limited gains from an appreciation in prices, their role as a secure haven in the otherwise volatile and risky crypto market is undeniable. As the crypto markets, despite being smaller than traditional markets, exhibit similar liquidity characteristics, the future of AATs looks promising.
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[1] Coin Metrics. (2021). Asset-Backed Token Report. [2] Chainalysis. (2020). Stablecoins: A New Frontier in DeFi. [3] The Block. (2021). Stablecoins: The New Liquidity Kings of Crypto. [4] Coindesk. (2021). The Rise of Stablecoins: What They Are and Why They Matter.
Institutional investors are increasingly seeking opportunities in the burgeoning field of asset-backed tokens (AATs) due to their stability, liquidity, and high transaction velocity. By investing in AATs such as Tether, these investors can facilitate frequent and rapid transactions within the cryptocurrency ecosystem, leveraging technology to maximize returns.
While AATs may not provide significant long-term gains like traditional securities, their role as a secure haven in the volatile crypto market, combined with their ability to enhance transaction throughput across decentralized finance (DeFi) applications, makes them an alluring prospect for forward-thinking institutional investors.
