The Benefits of Tokenization cannot be emphasized in the global market of today. According to forecasts, the global tokenization industry will grow from USD 2.03 billion in 2021 at a CAGR of 24.09%. This technology has revolutionized the way the world approaches investment for good. By combining blockchain technology with traditional assets, tokenization has successfully mitigated the volatility associated with digital assets and mediated entry into erstwhile inaccessible investment platforms for the small investor, at the same time.
Now, with asset tokenization, tangible investment vehicles have increased accessibility, security, transparency, and many more benefits. But what is tokenization in itself, how does it work, and what are the benefits of this new phenomenon that is turning investor heads? This article explores the answer to all these questions and more. If you are an investor or looking for investors for your project, you have come to the right place, Read on.
Background On Tokenization
The history of the tokenization of physical assets can be traced back to the early days of blockchain technology and cryptocurrencies. In the early 2010s, the first experiments with tokenizing assets began, with early projects such as Mastercoin and Counterparty. These projects allowed for the potential creation of tokens that represented assets such as gold or real estate, which could be traded on a blockchain.
With the introduction of the Ethereum blockchain and the production of ERC-20 tokens in 2017, the idea of tokenization started to attract widespread interest. As a result, programmable tokens that could stand in for any kind of asset, including actual assets, became possible.
By 2018, the first real estate tokenization took place, when a $20 million luxury apartment building in Manhattan was tokenized. Soon after, further real estate tokenization initiatives emerged, leading to the tokenization of both commercial and residential properties throughout numerous nations.
Although today, tokenization of physical assets is still a relatively new and emerging field, myriads of projects and platforms are inventing new ways to tokenize real-world assets daily with many under development or in the testing phase. Most of these projects are focused on solving technical and regulatory issues, but the potential for tokenization of physical assets to revolutionize how we access and trade assets are indisputable.
What is Tokenization And How Does It Work?
Simply put, tokenization is the process of converting a physical asset, such as real estate, fine art, or collectibles, into a digital token that can be traded on a blockchain. This process involves the creation of a digital twin of the physical asset, which can be bought and sold just like traditional assets, but with increased liquidity and accessibility.
Notable Examples of Asset Tokenization
One example of a real estate tokenization platform is RealT. It is a platform that allows users to tokenize their real estate properties and offer them as investment opportunities to a global audience. RealT uses blockchain technology to create a digital token that represents ownership in a specific property, which can then be traded on the platform.
The platform also provides a marketplace for buying and selling these tokens, allowing for liquidity in the market. Additionally, RealT offers a variety of tools for property owners to manage their properties, such as rent collection and financial reporting. And finally, it takes care of the compliance and legal side of the tokenization process, making it easy for property owners to tokenize their assets and for investors to purchase them.
Tokenization of art is a new way to invest in the art market using blockchain technology. This process enables the creation of digital representations of artworks on a blockchain, which can then be bought, sold, and transferred in a secure and verifiable way. If you are an artist or interested in art, you will appreciate its many benefits including the reduction of fraud, increase in transparency, and enabling of 24/7 trading.
Moreover, tokenization makes it easier for people to purchase and invest in expensive pieces of art. An example of this is Art Blocks, a blockchain-based platform that allows artists to create and sell digital art assets. The platform is designed to allow artists to take control of their own distribution and sales and offers a marketplace for buying and selling art tokens.
Tokenization allows for the digitization of physical commodities such as gold, silver, or oil, enabling investors to trade them as digital assets. Paxos is one instance of a platform for commodities tokenization. Using blockchain technology, the platform enables users to purchase, sell, and trade tokenized representations of gold called PAX Gold (PAXG).
One fine troy ounce (t oz) of a 400 oz London Good Delivery gold bar, kept in Brink’s vaults, serves as the collateral for each token. When you own PAXG, you also own the actual gold that is in Paxos Trust Company’s control.
Luxury Items and Collectibles
Another use of tokenization includes the creation of digital collectibles, such as sports memorabilia or limited edition items, that can be traded on a blockchain. This eases the verification of authenticity and rarity of assets while providing a new way for fans and collectors to own a piece of their favorite team, player, or artist.
Some platforms allow investors to invest in tokens backed by real-life luxury items like wristwatches and even cars. For example, CurioInvest offers a user-friendly platform for investing in expensive collectible cars. The hand-selected automobiles are chosen by the specialists at CurioInvest based on their investment potential.
This platform crowdfunds the cost of cars by offering “Car Tokens” for sale to investors on the platform. By holding these tokens, you acquire the right to a portion of the revenue from the sale of the car. Additionally, you can choose to diversify your portfolio by investing in several cars, and a virtual garage of sorts, backed by real, tangible assets.
What are the Benefits of Tokenization?
Liquidity refers to the ease with which an asset can be bought or sold on the market without significantly impacting the asset’s price. Tokenization allows for the fractional ownership of assets, meaning that an asset can be divided into smaller units, or tokens, that can be bought and sold on the market. This increases the overall liquidity of the assets, as it allows for a wider range of investors to participate in the market by lowering the entry-level.
Think of a $10 million piece of commercial real estate, for instance. It would be challenging for small investors to buy such property. However, if the asset is tokenized, it can be split into one million tokens, each worth $10. This makes the asset more liquid and accessible by enabling anyone to buy as many or as few tokens as they can afford.
Another example would be if you have a private company or startup looking for investors to participate in the ownership of the company. Tokenization allows you to issue shares in the form of tokens, which can be traded on a stock exchange or a secondary market. This opens up your company to a wider market as smaller investors can easily purchase tokens.
Accessibility is similar to liquidity as one of the key benefits of tokenization because it allows for the fractional ownership of assets. This means that instead of having to purchase an entire asset, like a luxury watch or car, you can purchase a token that represents a fraction of assets you might not normally be able to afford. That way, a wider range of people can invest in luxury assets. Tokenization also makes it easier for individuals to invest in assets that were previously difficult to invest in or were only accessible to a small group of people.
Additionally, tokenization can boost the security of assets. This is because tokenization makes it possible to leverage blockchain technology, which is a decentralized and impenetrable method of storing data. The ownership and transfer of the tokenized assets are secure and transparent since each token can be monitored and confirmed using blockchain technology. Tokenization allows physical assets to be stored in safe, off-site places rather than having to be physically stored and secured by individual owners. This boosts the security of the assets themselves by lowering the possibility of loss or damage.
The added transparency that tokenization can offer is another advantage of this technology. Every transaction and transfer of ownership of the tokenized assets are recorded and tracked on a public ledger because, as explained earlier, tokenization makes use of blockchain technology. This can boost trust and confidence in the market by allowing for more transparency on the ownership, movement, and value of the assets. Additionally, the implementation of smart contracts can make transaction execution transparent and automated, hence lowering the risk of fraud or mistakes.
This is also a benefit of tokenization. Because tokenization typically involves the use of smart contracts, which are self-executing contracts with the terms of the agreement directly written into code. This means that once the conditions of the smart contract are met, the contract can automatically execute the agreed-upon actions, without the need for human intervention. As a result, the need for intermediaries, such as lawyers or brokers, will be almost non-existent. Additionally, tokenization can also help to increase the efficiency and speed of transactions, reducing the potential for errors or fraud.
Tokenization can reduce the costs associated with buying and selling assets, as it eliminates the need for intermediaries such as stockbrokers, and can also reduce the costs of maintaining and transferring ownership of the assets.
The Bottom Line
In summary, the benefits of tokenization are numerous and far-reaching. Tokenization allows for the digitization of physical assets, making them easily transferable and tradeable on blockchain platforms. This has the potential to revolutionize industries such as real estate, art, and collectibles, by making it easier for individuals to invest and trade in these assets.
Additionally, tokenization also increases the liquidity of assets, as they can be easily bought and sold on a global scale.
Furthermore, tokenization also provides increased security and transparency, as the ownership of the assets is recorded on a tamper-proof blockchain ledger. Overall, tokenization has the potential to greatly streamline and improve the way we invest and trade in physical assets.
How does tokenization of assets really work?
Physical asset tokenization refers to the process of representing ownership of a physical asset, such as real estate or artwork, using a digital token on a blockchain. The token serves as proof of ownership and can be bought, sold, or traded just like any other digital asset.
Typically, the process involves creating a digital representation of the asset, such as a 3D model or image, and then creating a unique token that is linked to that representation. The token can be stored in a digital wallet and transferred to other users on the blockchain, allowing the asset to be easily traded or sold. The blockchain serves as a secure and transparent record of ownership, making it difficult for ownership of the asset to be disputed. You can find out more about how luxury cars, for example, are tokenized here.
Is it really worth it to tokenize assets?
Tokenizing assets can have several benefits, such as increased liquidity, fractional ownership, and the ability to trade assets on a global scale. However, it is important to do your own research when planning to venture into asset tokenization, be aware of the potential risks and regulations surrounding it, and carefully consider whether it is worth it for your specific asset or use case.
What kind of assets can be tokenized?
Assets that can be tokenized include, but are not limited to, real estate, art, collectibles, precious metals, commodities, and even financial instruments such as stocks and bonds. Since tokenization is the process of creating a digital representation of an asset on a blockchain, which enables the asset to be bought, sold, and transferred in a secure and verifiable way, almost any traditional asset can be tokenized.
Fernando Verboonen is the Co-founder & CEO Curio Invest. He has been in the Web3 space for nearly a decade and has a wealth of knowledge about the ecosystem.