Some instances of technology have been so powerful that they transcend the territory that they were supposed to benefit and start to impact multiple verticals of business positively. One such technology is blockchain technology.
Often, this new revolutionary digital ledger is associated with cryptocurrency. However, it has a lot more than just bitcoin and ethereum. Its immutable and secure nature makes it a perfect platform for tokenizing real-world assets for trading purposes.
What is asset tokenization?
Simply put, the definition is self-explanatory. This is the process of converting actual assets or rights to the specific as it with a tangible economic value into a digital token.
These tokens exist on a blockchain network, making them extremely secure and tradable at the same time. Real estate tokenization and Art tokenization are the two emerging areas of tokenization of assets.
How does tokenization work?
Converting a real-world asset into a digital token seems quite simple on paper. However, there are a lot of parameters that need to be taken into consideration. It needs to be decided first, if the actual asset will be tokenized or if it will be a special purpose vehicle that will be tokenized. In addition to that, it is also vital to define the rights of the token owners, or in this context, the investors. Sometimes, the investors might be entitled to share in the asset. Sometimes, it is just about voting rights. Sometimes, it is the access to the cash flow in the asset. Since there are so many variants, it is important to define the purpose of the token and the rights of the token owner.
The greatest advantage…
There might be real-world assets that are extremely valuable and are bound to fetch great returns if invested on. However, it might be too much to afford for a nominal investor.
Even if there are investors who could afford them, they might not want to put all their eggs in one basket. This presented a challenge to the entire economy because there was an acid bound to grow but with no avenues for growth.
With tokenization, the liquidity of such assets grew by leaps and bounds. If we were to take an example of a real estate as it is worth $250,000, it might be quite a difficult task to get people to invest in such an expensive asset. If the value is broken down into representative tokens - each valued at $25 - every token represents 0.01% share in the asset.
With this, it is possible for common people to access the asset. Investors with larger capital can consider purchasing a chunk of these tokens, let's say, 100 tokens worth $2500. Since the asset is now extremely tradable, it increases the liquidity of the asset. The increased liquidity enhances the value, bringing in better returns for the investors.
It is safe to conclude that the greatest advantage brought about by tokenization is liquidity.
The other advantages
- The tokens are immutable. Once an investor buys the token, it leaves a permanent record making it impossible to erase the ownership. It makes the entire system immune to fraudulent transactions.
- The tokens are universally accessible. Every potential device connected to the Internet can access the token. This means that an investor with a smartphone can access these tokens from any place on this planet 24/7.
- Tokenization eliminates the need for middlemen. This reduces the cost associated with the trading of tokens, making the entire process extremely cost-effective.
- Since the tokens are built on the blockchain, there are no possibilities for asymmetry of information. This gives a proper confluence of transparency and security.
Conclusion
At a time when technology has crept into almost every sphere of our lives, finance and transactions cannot be an exception. With technology like Blockchain presenting a lot of advantages, tokenization is the way forward, when it comes to investments and digitization of assets.