by Maria Wachal
Massive investment opportunities are the benefits typically reserved for the few. Decentralized blockchain network can change that. Just like bitcoin is significantly changing the financial landscape, a blockchain asset tokenization can make investing in real world assets far more convenient and efficient.
With this method, tangible assets can be divided into small units increasing their liquidity and enabling more market participants to join. So, why asset tokenization seems to be one of the most promising blockchain applications? What are the challenges and opportunities of it? Let’s find out.
What is asset tokenization?
Asset tokenization stirred up interest on how to move real world assets into a blockchain. How does it work? Blockchain tokens can represent participation rights in form of decentralized protocols and this way allows investors of all sizes to purchase shares in given resources.
As you see, the idea behind asset tokenization is quite simple: it allows to convert the rights to assets with economic value into a digital token.
Such tokens can be stored and managed on a blockchain network. Tokenization can have tremendous effects on trading and investment, promising greater transparency, liquidity, data integrity and exchange potential.
By tokenizing assets you can start trading them in a cryptocurrency fashion and managing their value exchange under contract written on blockchain.
How exactly does asset tokenization work?
Asset tokenization can be described as a natural progression of investable funds. To picture this, I will use a commercial real estate context as an example.
Let’s assume that you’re a merchant in real estate sector. One of your properties has a value of $250,000. With asset tokenization you can represent its value in terms of tokens. Let’s say that 1 token = $25. That means each token represents 0,01 % shares of your asset.
To tokenize an asset you have to evaluate it and conduct an audit of your property, and this may involve a series of steps. When the asset is evaluated, tokens are available for the investors. If someone wants to diversify their investment portfolio by adding your real estate property, they can easily do it by purchasing your tokens on a blockchain network.
The arrival of new players to the real estate market will increase the supply, and consequently, should cause the prices to go higher, due to the larger amount of market players and capital available. If the property becomes more expensive, the value represented in tokenized assets will certainly increase, and the owners of tokens will be able to sell them higher (or in some cases receive the dividend) — increasing their return on investment.
Benefits of assets tokenization
Blockchain distributed ledger has attributes that could be very appealing to the investors. Assets tokenized on blockchain are:
- Immutable — once an investor buys tokens, nobody can “erase” the ownership.
- Accessible — tokens can be accessed from any place in a world, 24/7, via e.g. a smartphone app.
- Divisible — tokens hold a promise of greater liquidity which increases the expected value from trade and eliminates the need for minimum investments.
- Cost-effective — tokens eliminate the middlemen, which often limit investment accessibility by e.g. restricting investments to accredited investors only, demanding high fees and requiring an access to stock-trading accounts.
- Transparent — tokens eliminate asymmetry of information present during the transfer of ownerships.
How does it look from a software development perspective?
Asset tokenization on blockchain requires distributed ledger infrastructure to be developed. This is not much different than a “classic” blockchain system. You will still need:
- a protocol that consists of a chain of smart contracts for the payment and transfer of legal rights to an asset,
- wallets to store your tokens,
- and a trading platform to trigger the whole mechanism.
However, there are a few differences with types of tokens used in this particular use case. In a classic crypto scenario, a token describes a specific type of cryptocurrency that exists on a blockchain. In real world asset tokenization there is a need for slightly different tokens:
Utility tokens
A Utility token gives a user an access to a product or a service. They are rather used just to operate inside a closed blockchain ecosystem, and are not designed as investments.
Security tokens
A Security token represents actual ownership of an asset. It can be used as an economic unit for operations run on a blockchain and investors can expect to profit from them.
Why is real-world asset tokenization a game-changer?
The ability to represent the ownership of real world assets on a blockchain can disrupt the way we manage assets.
At the moment, big value investments like real estate properties, gold, famous paintings or other fine art pieces are reserved for the few. With new models of rising capital, secured by blockchain technology, there would be:
- no territorial barriers: an investor from any place in the world, let’s say from Stockholm, can invest into a building on the other side of the world, let’s say in China, without leaving their country, with the security, speed and ease of transfer offered by blockchain network.
- no middlemen: trade can be conducted without third-party brokers that often slow down the process, making it inefficient and expensive.
- lower investment risk: the investment portfolio can become more diverse due to the possibility of owning parts of several assets.
- improved liquidity of tangible assets: blockchain tokens enable to introduce fractional ownership.
Globalization of capital coming from asset tokenization can significantly increase the demand and ease down the market entry, leading to diversification and growth in the market.
For now the legal status of this concept is difficult. The technology evolves quickly, but the regulatory frame is far behind. Additionally there are challenges such as:
- improvement of security infrastructure and safety regulations,
- identification of incentives to trigger more market participants and more transactions to increase market depth,
- development of legal enforceability of property rights system,
- development of tax regulations.
However, there are countries that already have prepared legal frameworks fitted into the new blockchain market models. For example, Switzerlandand Malta are on the frontier of blockchain adoption, including tokenization applications. Real world assets are such a large investment area that it is rather a matter of time before asset tokenization on blockchain proves pivotal.
Blockchain platforms that “tokenize” tangible assets are already present on the market and their tokens were issued:
- Bankex — “Bankex provides the universal solution which can transform different asset classes to a digital system/field/economy/area providing it with liquidity, flexibility, and safety for asset owners and investors like never before”
- Maecenas — “Maecenas is a new online marketplace promises to give art lovers the chance to buy shares in famous paintings.[The Telegraph]”
- LaToken — “LATOKEN’s mission is to make capital markets and trading available 24/7 T+0, with a broader range of asset classes. We aim to facilitate capital reallocation into promising businesses, which will foster job creation with higher productivity.”
Tokenize everything!
Blockchain asset tokenization creates a new category of crypto financial products and is changing the traditional concept of ownership.
There are many assets that can be moved to blockchain: stocks, real estate properties, gold, even fine art. The main point is to tokenize very expensive assets that only a few can afford at the moment. You can be a merchant, or you can be a trader who is willing to diversify their assets portfolio and be subjected to little less investment risk.
Want to join the tokenization early-adopters? We can help!
Check out our blockchain portfolio or just write us at hello@softwaremill.com