It may be hard to believe, but soon you could earn a fraction of Christiano Ronaldo’s earnings. You could own a few square metres of an apartment in Hong Kong or perhaps a stake in a collectible Formula 1 race car. Thanks to tokenization, the world is becoming increasingly fractionalized everyday, providing us with the ability to shape our own financial destiny.
What would you buy first in a fractionalized world? Well, I am a huge fan of Manchester United and I would love to buy some MUFC tokens on blockchain.
Whether you are deeply invested in cryptocurrencies or reading your first articles about blockchain, there’s no hiding that tokenization is one of the greatest visions of the 21st century. So, why don’t we clear our heads for a few minutes and imagine the possibilities that a tokenized future brings?
What is Asset Tokenization?
In today’s world, every asset is identity-centric. That means your house, your car, your salary and your stocks are all tied to your name.
When all these assets get tokenized, they can be broken into smaller ownership stakes. In other words, they can be fractionally owned by multiple parties. The asset is tokenized using security tokens. A security tokenis any cryptocurrency that pays dividends, profit shares or invests in a project with the expectation of profit. It derives its value from an underlying real world assets. For instance, a million dollar property could be divided into 100 security tokens, whereby each security token represents a 1% stake in the property and its future cash-flows such as rental.
Since security tokens are classified as investment contracts, they are subject to government regulations.
How does tokenization work?
First, real-world assets are moved onto a blockchain. Then, tokens on the blockchain can be used to represent ownership or participation stake in these assets in the form of decentralized protocols. This allows tokens to be bought and sold on different exchanges. Ultimately, investors can invest in various illiquid assets such as real-estate and sports teams due to lower minimum-investment requirements.
When an asset gets tokenized, one security token can represent a fraction of its value. Since security tokens are similar to tradable securities, this is similar to buying shares of a public company, except that it is on a blockchain.
What are the benefits of Asset Tokenization?
From an asset owner’s perspective:
Increased liquidity: Imagine Alice urgently needs $10000 and her apartment is valued at $100000. Alice’s apartment is tokenized into 20 security tokens, each worth $5000 or 5% of the apartment. Now, she can easily sell 2 security tokens and get $10000 instead of tediously trying to sell the entire apartment, thereby making the apartment a more liquid asset.
Fair prices: Illiquid assets do not have an established market. Thus, owners of exotic assets such as eSports teams need to provide investors with incentives such as illiquidity discounts, thereby lowering the price of the asset. The increased liquidity due to fractional ownership will eliminate illiquidity discounts. Additionally, selling in fractions will allow investors to charge fair prices and sell strategically over a longer period of time.
Lower cost of paper-ownership: Presently, transferring the ownership of an asset involves lawyers and company secretaries to handle the paperwork of the transaction. Other than that, it requires a lot of time. Tokenizing assets would automate a part of this process, saving both money and time.
From an investor’s perspective:
Increased liquidity - Imagine Bob wants to invest in real-estate but he only has $15000. Since Alice just tokenized her apartment into 20 security tokens, Bob can now invest in real-estate. In fact, Bob could diversify his portfolio by investing $10000 in Alice’s property, $2000 in an artwork, and $3000 in a race horse. Thus, investors benefit from increased liquidity of illiquid and exotic assets.
Shorter lock-up period - Lock-up periods are often part of illiquid and large investments and they restrict investors from selling the asset. This introduces a large opportunity cost of investing in other assets. Asset tokenization will increase liquidity in the markets, thereby allowing investors greater flexibility with their investments.
Increased transparency - Investors are often oblivious to the risk exposure when investing in assets because asset owners only present the good side in order to show the highest asset value possible. A distributed ledger with immutable records will help investors make more educated investment decisions and easily monitor their investments.
Furthermore, since the asset ownership details are stored on the blockchain, the investor’s public-private key pair forms a digital signature on the blockchain, separating his blockchain identity from his real identity. Hence, although transactions are visible on the distributed ledger, they cannot be traced back to the investor by an unauthorized party. This is a huge step towards data security.
In addition to all this, asset tokenization has other benefits since they involve security tokens.
What can be Tokenized?
From traditional assets such as bonds, commodities, venture capital funds and real-estate to exotic assets such as artwork, race horses, sports teams and celebrities, companies across the world are using blockchain technology to achieve the vision of a tokenized world.
Globally, several companies have been working on tokenizing commercial and residential real estate. In October 2018, the first real-estate property in New York was tokenized on the Ethereum blockchain. Another blockchain startup is working to allow diamonds to be traded like other commodities. Sellers can simply list their diamonds on the platform and deliver them to a custodian, who would release to the buyer upon completion of the transaction. We have also achieved fractionalization of exotic cars. Exotic cars are one of the best performing asset classes in the last decade and now they will be tradable on live auction platforms.
Liquefy, the leading security token issuance platform in Asia, is focusing on tokenizing sports teams, allowing investors and fans to easily invest in their favorite clubs and players. There are various applications in the sports industry from purchasing a stake in a sports team to investing in the upbringing of your favorite young players.
Clearly, the wave to tokenize everything is coming. Now, the question is: “What will you buy first?”