An Easy Pill to Swallow
I came here for the technology, I stayed for the community and ideology. Thus, it’s been difficult to pinpoint how I really feel about the current direction of the blockchain space.
I think the future of blockchain will wear a suit and tie.
It’s clear at this point that ICO’s are not the future of blockchain. Not to say there won’t be any successful ICO’s in the future, but they aren’t the killer use cases blockchain needs to legitimize itself in the eyes of those who doubt it.
Tokenized Assets and Security Token Offerings will spark adoption and legitimize the space.
This was initially a tough pill for me to swallow. The fact that crypto can create financial freedom for anyone with an internet connection and enough time/will-power is what fascinated me at first, it seemed like a spark that could start a global redistribution of wealth. So, Security Tokens, which many people would be restricted from buying, weren’t very exciting to me.
Beyond their limited scope of reach, I didn’t believe that tokenized assets were a truly revolutionary use of distributed ledger technology.
I was wrong.
I brushed off Tokenized Assets similarly to how I brushed off Bitcoin Futures. They seemed like a way for those afraid to get into the space to benefit from the audacity of blockchain trail-blazers.
Ignorantly, I came to my own conclusion about Tokenized Assets before truly understanding what they were, and the problem they solved. To be frank, I didn’t realize the problem existed.
I didn’t understand the current process well enough to understand how tokenizing assets would change the game.
You might think the way you spend, store, and transfer money now is pretty digital. I personally use cash very rarely, and most of my transactions occur via credit/debit card or online — the trick is, that’s not digital.
When you transfer money to someone else’s bank account, money isn’t actually moving from one bank to another — there isn’t a real transfer of ownership, you’re essentially taking the banks word for it. You might see numbers change on your online banking portal — but that doesn’t mean money is moving in and out of it. Those are just numbers.
Think about it like this: when you withdraw cash from an ATM, you’re not directly withdrawing that cash, i.e. the asset, out of your account. Someone at my bank doesn’t get a message when I try to take out money and say, “Oh Reza is trying to withdraw $20, send the man some cash!”
It’s the same when you swipe your card, or initiate a wire transfer. More or fewer funds may be available to you than before initiating a transaction, but there is no real transfer of ownership. A part of this is due to the Byzantine General’s Problem, which Bitcoin famously solved with its technology. Basically, it’s hard to trust people, and most people shouldn’t be trusting the organizations they do now.
Bitcoin represents the first method to actually transfer value and proof of ownership from one person to another, without creating opportunities for double spending.
Why does that matter?
The process of buying and selling assets, often in the form of securities, sucks.
In many real asset markets, the difference between the price at which one can buy the asset and the price at which one can sell, at the same point in time, is a reflection of both the bid-ask spread and the expected price impact of the trade on the asset. The difference can be very large in markets where trading is infrequent. In the collectibles market, this cost can amount to more than 20% of the asset value.” — Robert Breedlove, Parallax Digital
It’s terrible, ripe with middlemen, expensive, and dreadfully slow. When selling assets it’s hard to find buyers, there are usually several intermediaries, who take a fee and slow and down the process.
“If you are selling an illiquid security just because you are in need for short term funding, consider raising a loan. The price cut you have to take for selling such a security in the market sometimes exceed the interest you pay on a loan,” Joydeep Sen, Founder and CEO of Wise Investor
You’re required to work with several third parties to transfer ownership of a security, if you boil down the problem to the fundamental issues at hand — one of the largest factors contributing to the high fees and slow processing time is the fact that up until recently, it was extremely difficult to prove the transfer of ownership of an asset.
Enter Tokenized Assets
Tokenized assets bring a unique set of benefits to the world of buying and selling securities. Right off the bat, we know that by the merits of the blockchain, tokenized assets allow us to actually transfer real-world assets from one place to another, and re-assign ownership — completely digitally, without the aid of a third party. Therefore removing the need for many of the third parties involved. This alone can drastically reduce the time and cost of issuing, selling or buying securities.
Tokenized Assets make securities simple, cheap, and fast.
Most importantly, they’re an easy pill to swallow for institutional investors.
by JOSHUA COLEMAN on Unsplash
The security token market is projected to be around 4 trillion by 2025, according to a study by nex.io. It’s a lot easier for an institutional investor to wrap their head around the concept of a digital token representing ownership of an asset, than, for example, a digital token that’s’ value is a reflection of the fact that the technology includes its own custody, governance, issuance, and audit functionalities.
Tokenized assets, and the Security Token Offerings that occur to distribute them, are at the very least the _near-_future of blockchain technology. We wouldn’t have projects like BAKKT in development if smart money didn’t already know that digital assets are going to be a huge market. Companies like Microsoft, Starbucks, and other giants have already begun investing in the infrastructure needed to buy and sell security tokens.
Although they aren’t what drew me to crypto, Tokenized Assets and Security Token Offerings are going to allow institutional investors to partake in the crypto market like never before. Once the infrastructure has been built, and enough assets are available for offering, Tokenized Assets have the potential to cause the market to skyrocket.