In this model, the underlying assets of a token are stored with an escrow service such as a commercial bank. This model mitigates exchange risk but has counterparty risk and external dependencies. Regular audits are needed to ensure the existence of the underlying collateral.

Off-chain collateral (backing model)

A model where assets are locked on the blockchain within a smart contract

On-chain collateral (backing model)

This model has the highest counter-party risk as the promise is entirely trust based.

No collateral (backing model)

* Off-chain collateral
* On-chain collateral
* No Collateral

New York University

The process of adding assets to a blockchain ledger. This is done to make assets easier to access and transfer.

Asset tokenization 

Schär, Fabian, Decentralized Finance: On Blockchain- and Smart Contract-based Financial Markets (March 8, 2020). Available at SSRN: https://ssrn.com/abstract=3571335 or http://dx.doi.org/10.2139/ssrn.3571335 



Decentralized Finance: On Blockchain and Smart Contract-based Financial Markets

Issuers may introduce tokens with a promise of providing the user with future compensation such as interest payments or dividends. However, if the issuer cannot deliver on their promise, the token will be devalued.

Issuer Risk of Tokenized Assets

Backing models for promise-based tokens

In an initial coin offering, a venture gains financing by selling a stock of tokens to investors with the promise that the tokens would be the only medium of exchange to access the venture's products in the future.

Initial Coin Offering (ICO)

Refers to the launching of a cryptocurrency on a decentralized exchange (DEX). In an IDO, a blockchain project makes a coin's first public debut on a DEX in order to raise funding from retail investors

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