Tokenization of assets in blockchain refers to the process of converting physical assets, such as real estate, gold, artwork, etc., into digital tokens on a blockchain. These tokens, also known as security tokens, represent full ownership or partial ownership of an underlying asset and can be bought and sold just like traditional stocks or bonds. These tokens are called “security tokens”. On a higher level, a “token” is a unique identifier used to refer to the sensitive or important data tied to it.
For example, suppose you own 10 acres of land in the US and you need to sell it to a guy in Canada, but the transfer of ownership process through the traditional formalities is extremely time-consuming and expensive. But in a tokenized economy, you can convert the ownership of your land into tokens and sell them to anyone around the globe in an instant with only a fraction of the cost when compared to traditional procedures.
We can now widely see asset tokenization used as a means of business across the market. BitCar is such a company that allows users to buy fractions of luxury cars.
Tokenization on the blockchain
Even though the concept of tokenization was introduced back in the 1960s, long before the introduction of blockchain technology, blockchain proves to be the best medium to be used for the tokenization of assets, especially due to the transparency and security it offers.
Assets that can be tokenized on the blockchain are categorized into two broad categories:
- Tangible: Tangible assets are physical and measurable assets like gold, real estate, valuable commodities, etc.
- Intangible assets: Intangible assets are assets that are not physical in nature like licenses, trademarks, patents, films, copyrights, etc.
The general process of asset tokenization typically involves the following steps:
- Auditing: First and foremost, you must have a physical asset to tokenize. It could be art, a house, gold, or even commercial real estate. Regardless of the asset, it must be audited to ensure that it retains value and to verify its unique characteristics.
- Selecting a token type: Select a token type that is appropriate for your asset and overall business model. Modern blockchains can generate several types of tokens such as utility tokens, security tokens, etc., each with its own set of standards and trading criteria. NFTs are the most popular, effective, and efficient option for tokenizing physical objects.
- Understanding regulations and legal guidelines: Conduct research on any legal requirements pertaining to your token and the asset itself. These standards may dictate which countries you can operate in and how tokens are issued. Consider existing industry standards as well as international and national legislation that defines asset ownership and token distribution.
- Choosing a tokenization platform: If you are not a technical person, you will want to find a tokenization platform that aligns with the various standards assigned above (as the actual process of tokenization involves highly technical steps). These platforms are referred to as “Tokenization-as-a-Service” companies. Eg: Digishares, Tokenex, etc.
- Developing smart contracts: A tokenization provider can handle the majority of these details, but you must decide how many tokens will be issued and how many will be distributed publicly. And if you want to fractionalize the ownership tokens, decide how many smaller units will make up each token.
- Vaulting assets: To ensure their safety and authenticity, the asset holder must surrender the item to their tokenization partner or a verified third party. For optimal conditions, the storage facility should be both secure and environmentally friendly. In situations where storage is impractical, such as real estate, the vault may hold important documents such as property deeds.
- Token distribution: Finally, you can issue and list your tokens which can be used for internal listing or secondary market trading.
Once created, these tokens are sold through a process known as a Security Token Offering (STO), which is almost identical to an ICO. In an ICO, utility tokens are provided in exchange for the investment, but in an STO, asset-backed tokens are sold to investors. Once the tokens have been issued and sold, they can be traded on a secondary market, such as a cryptocurrency exchange, just like any other digital asset.
Advantages of tokenizing assets
- Reduced management costs: As mentioned in the first example, transferring ownership of an asset requires a significant amount of money and time, as well as lawyers acting as intermediaries to handle the paperwork and build trust between you and a buyer. If you choose to tokenize the same asset and use a decentralized platform, many parts of this process will be automated, saving you time and money.
- Fractional ownership: Tokenization allows for fractional ownership of assets, meaning that individuals can purchase a fraction of an asset, such as real estate or artwork, rather than having to buy the entire asset. This opens up the possibility for a wider range of investors to participate in the ownership of high-value assets and can increase liquidity in the market. A company known as BitCars already does this by allowing its customers to buy fractions of luxurious cars. The extent of divisibility can be set by the token creator.
- Increased liquidity: Tokenization can increase liquidity as it provides divisibility, which can attract smaller investors and reachability in the market for assets that were previously difficult to trade or transfer, such as real estate or private equity. This makes it easier for investors to exit their investments, and for new investors to enter the market i.e., more liquidity overall. For instance, in a tokenized economy, someone from Australia can easily buy tokenized real estate from America seamlessly. In other words, anyone can buy anything from anywhere seamlessly as long as it is tokenized.
- Transparency and provenance tracking: Blockchain’s decentralized ledger allows for a clear and tamper-proof record of ownership and transfer history of assets. This can be especially beneficial for assets like real estate, where ownership and transfer records can be convoluted and difficult to access. This can also benefit assets like artwork, as this level of transparency allows potential buyers to verify the authenticity of the artwork.
- Immutability: The data stored on the blockchain cannot be changed, deleted, or corrected. Anyone interested in buying or selling tokens can be confident that the asset information and transaction records are correct because they are verified and cannot be changed once they are recorded on the blockchain.
Disadvantages of tokenizing assets
- Complexity: Asset tokenization can be a difficult process that necessitates a high level of technical expertise. Furthermore, for investors unfamiliar with the technology, the tokenization process can be perplexing.
- Lack of regulation: The tokenization of assets is a relatively new concept and is not yet fully regulated, which can create uncertainty for investors.
- Lack of standards: There is currently a lack of tokenization standards, making it difficult for investors to compare and evaluate different tokenized assets.
- Security risks: At the moment, the tokenization of assets on a blockchain is not foolproof; security risks such as hacking, fraud, or manipulation exist.
Asset tokenization in industries
Asset tokenization can disrupt so many industries, including:
- Real estate: Tokenization enables fractional ownership, allowing a broader range of investors to participate in the ownership of high-value properties. Furthermore, the decentralized ledger of the blockchain allows for a clear and tamper-proof record of ownership and transfer history.
- Art & collectibles: Tokenization of art and collectibles allows for easy ownership transfer and provenance tracking, which can aid in the fight against forgery and fraud. It also allows for fractional ownership and increased market liquidity.
- Private capital & VC: The tokenization of private equity and venture capital allows for increased liquidity, making it easier for investors to exit their investments. Furthermore, it enables more transparent and efficient management of the underlying assets.
- Supply chain management: The tokenization of supply chain assets allows for greater transparency and traceability, making tracking the movement of goods and materials easier. It can also help to improve efficiency and reduce the risk of fraud.
- Virtual assets: The tokenization of gaming and virtual reality assets enables the creation of virtual economies in which players can buy, sell, and trade virtual items and in-game currency. It can also help to increase player engagement and retention.
Final Take
Tokenization of assets is an important step toward adopting blockchain technology and securing business data. From individuals to enterprises, everyone can find benefits in using blockchain-based tokens, be it having a stake in the ownership of assets and ensuring their traceability to raising funds. The key to evaluating tokenization before jumping in is to have a thorough understanding of blockchain technology.