Blockchain technology made a massive impact on many sectors, especially in finance, revolutionising traditional finance with decentralised finance (DeFi). Financial transactions have now become transformative and seamless with the invention of cryptocurrencies like Bitcoin, but only few are aware that the same technology can redefine ownership and management of other real world assets such as real estate, stock, commodity or even personal data. The real question is: How do we represent these assets in the digital world?
Asset tokenization is the process of converting rights and value of tangible or intangible assets into digital tokens – bridging the gap between traditional finance and digital world using blockchain technology. It offers immense potential and benefits such as global market access, fractional ownership, streamlined asset transfer and increased liquidity.
In this article, we will look deeper into Asset tokenization and its broader applications far beyond traditional cryptocurrencies.
What is Asset Tokenization?
First let us understand how things work in traditional asset management. Traditionally, we greatly depended on centralised institutions such as banks, brokers or governments as an intermediary to record, manage and validate asset ownership.
For instance, buying a piece of land involves extensive paperwork, high fees and lack of transparency. This model brings a lot of inefficiencies such as delayed transactions, high charges for intermediaries, and chances of fraudulent activities are high.
Tokenization of Assets is an emergent and dynamic financial innovation within the realm of the digital asset market, with a potential market size of hundreds of trillion dollars. Tokenization process involves creation of digital representation of assets or utility, called tokens allowing for easily trade and store. Tokens are created on top of blockchain networks such as Ethereum, Solana or others, making the transaction transparent and secure. Tokens can represent many forms of assets including cryptocurrencies, art, real world assets like real-estate.
Learn more about how Artinals and ART-20 are democratizing NFTs and Real-world asset tokenization.
Types of Asset Tokenization
Here are main two classification of asset tokenization:
Fungible Asset Tokenization
In fungible asset tokenization, each unit of token is of the same value and function.
For example, Bitcoin, you can own fractions of it and are interchangeable.
Non-Fungible Asset Tokenization
NFTs represent unique assets that are not interchangeable since the value of tokenized assets can be different. Example, a piece of Art can be tokenized into NFT, owning a specific value.
Tokens are created and managed through self executing codes that define the terms of agreement deployed on blockchain called Smart contracts. They enable the issuance, transfer and management of tokens in decentralized and automated manner without requiring any intermediaries for execution.
Use Case of Asset Tokenization
Cryptocurrencies like Bitcoin and Ethereum are tokens that are inherently digital in origin, while tokenizing assets are blockchain based representations of various instruments including real world physical assets.
Owning real-estate or expensive artworks are not easy as the barrier for entry is sometimes extremely high which makes people reluctant to buy. But owning a piece of such an asset is possible by dividing the asset into fractions. With tokenization of assets, each digital token represents a share or fraction of the underlying asset.
What Are the Other Assets That Can Be Tokenized?
- Debt tokenization involves converting bonds and loans into tokens where investors can buy and receive interests.
- Commodity tokenization is creating tokens for commodities like gold and silver enhancing its utility.
- Equity tokenization uses company shares into token enabling seamless trade.
- Intellectual property tokenization turns music, patent rights or art into token benefiting creators and investors.
What are the Steps Involved in Tokenizing an Asset?
- Identify assets such as real estate or art that are considered to be tokenized.
- A digital token representing the asset is then created on a blockchain incorporating the smart contract logic that automates the execution.
- Smart contracts are used to manage issuance of token, its trading and compliance according to the assets management and exchange logic.
- Tokens are transferred or traded on the blockchain network securely.
Benefits of Tokenized Assets
- Market Efficiency: Tokenizing assets open up global market access, breaking limitations of geographical barriers. Enables various scale of investors to participate in the market.
- Immutability and Traceability: Blockchain manages ownership records in its immutable ledger while streamlining and automating transactions.
- Fractional ownership: Asset tokenization divides assets into fractions, each token representing a share of underlying asset, allowing to trade individually. This is useful for expensive assets such as artworks.
- Seamless Asset transfer: Token transactions occur in blockchain in a instant and transparent manner streamlining the process without third party interference.
- Increased Liquidity: It lowers entry cost barriers and tokenizing assets into smaller fractions helps creators to find buyers easily.
Challenges in Tokenizing Assets
- Regulatory Obstacles: It is challenging to address complicated and varying regulatory requirements, which differs depending on asset, location, jurisdictions and specific blockchain network used for tokenization.
- Market Acceptance: Investors may find it difficult to trust tokens in their investment strategies due to lack of knowledge in asset tokenization benefits.
- Security concerns: Secure and proper implementation of protocol is necessary otherwise malicious hackers can impose threat on the tokenized assets.
Conclusion
Asset tokenization is an exciting development for DeFi, potentially broadening its audience and capabilities. Tokens have found a lot of utility in the DeFi sector beyond cryptocurrencies, including real world asset (RWAs) to tokenize real and tangible assets by linking physical assets to the blockchain paving infinity of possibilities use case in blockchain. Tokenization prospers in a more interconnected financial realm bridging traditional finance and decentralized finance.
