Representation Token

A representation token is a digital bearer instrument that provides a verifiable, on-chain claim to an underlying asset. This claim is enforced by smart contract logic, not a central custodian. The token's value is directly derived from the value of the referenced asset, which can be:

• Physical assets (e.g., gold, real estate)
• Financial instruments (e.g., stocks, bonds)
• Other digital assets (e.g., staked ETH, wrapped BTC)
• Protocol governance rights

The ability to redeem or unwrap the token for its underlying asset is a fundamental feature. This mechanism, defined in the token's smart contract, ensures the peg to the underlying value. Common models include:

• Direct 1:1 redemption (e.g., wBTC to BTC via a merchant)
• Algorithmic stabilization using collateral and arbitrage incentives
• Trusted custodian model where a designated entity holds the underlying asset Without a clear redemption path, the token is merely a synthetic derivative.

By existing as a standard token (like ERC-20), representation tokens become composable building blocks within DeFi. They can be seamlessly integrated into:

• Decentralized Exchanges (DEXs) for trading
• Lending protocols as collateral
• Yield farming strategies and liquidity pools
• Cross-chain bridges to move value between networks This interoperability unlocks liquidity and utility far beyond the original asset's native environment.

Unlike traditional asset claims, representation tokens are governed by smart contracts. This enables automated, conditional logic for features such as:

• Automated yield distribution from staking or lending the underlying asset
• Time-locked vesting schedules for token releases
• Multi-signature governance for redemption approvals
• Cross-chain messaging to trigger actions on other networks Programmability transforms static claims into dynamic financial instruments.

All transactions, holdings, and mint/burn events for representation tokens are recorded on a public blockchain. This provides unparalleled transparency:

• Real-time audit of total supply versus underlying collateral
• Public verification of custodian reserves (e.g., via attestation reports)
• Immutable history of all token movements This transparency is critical for establishing trust in the token's backing and mitigating counterparty risk.

Holding a representation token introduces specific risks distinct from holding the native asset. Key risks include:

• Smart Contract Risk: Bugs or exploits in the governing contract can lead to total loss.
• Custodial Risk: Reliance on a third party to hold the underlying asset securely.
• Bridge Risk: For cross-chain tokens, vulnerabilities in the bridging protocol.
• Regulatory Risk: Uncertain legal status regarding the claim and its enforcement. Understanding these vectors is essential for risk management.

A Representation Token (or receipt token) is a fungible ERC-20 token minted to a user when they deposit an asset into a protocol. It programmatically represents a claim on the original asset plus any accrued rewards. Holding the token is proof of ownership and is required to redeem the underlying value. Common examples include Lido's stETH (for staked ETH) and Aave's aTokens (for supplied assets).

These tokens solve the liquidity problem of locked capital. Instead of being illiquid, a user can trade, lend, or use their staked position as collateral elsewhere in DeFi. This creates composability—the ability for protocols to interact seamlessly. For instance, you can supply stETH as collateral in MakerDAO to mint DAI, effectively leveraging a staked position.

Representation tokens often have built-in yield accrual mechanisms. There are two primary models:

• Rebasing Tokens: The token balance in your wallet increases automatically to reflect accrued rewards (e.g., stETH).
• Value-Accruing Tokens: The token's exchange rate against the underlying asset increases over time, while your balance stays static (e.g., Compound's cTokens, Rocket Pool's rETH).

Using these tokens introduces specific risks:

• Smart Contract Risk: Vulnerability in the issuing protocol can compromise the token's value.
• Peg Risk: The token may trade at a discount or premium to its underlying asset's net value.
• Liquidity Risk: Secondary market liquidity can dry up.
• Regulatory Uncertainty: May be classified differently than the underlying asset. Users must audit the issuer's collateralization and redemption mechanisms.

• Liquid Staking: Lido's stETH, Rocket Pool's rETH.
• Lending Markets: Aave's aTokens, Compound's cTokens.
• Liquidity Provision: Uniswap V3 LP NFTs are non-fungible representation tokens for concentrated positions.
• Cross-Chain Bridges: Wrapped assets like WETH or WBTC are foundational representation tokens for native assets on non-native chains.

• Synthetic Asset: A token representing an off-chain asset (e.g., gold, stock) without direct custody.
• Wrapped Token: A 1:1 representation of an asset on a different blockchain (e.g., WETH).
• Governance Token: Grants voting rights, not necessarily a claim on underlying assets.
• Non-Fungible Position: An NFT representing a unique claim, like an Uniswap V3 liquidity position.

A type of representation token where the holder's balance automatically adjusts (rebases) to reflect accrued rewards or penalties, while the token's unit price aims to stay stable. This is an alternative to the reward-bearing model.

• Mechanism: Your wallet balance increases periodically to represent earned staking rewards.
• Example: Ampleforth (AMPL) uses rebasing to target price stability, though not as a staking derivative.