Apr 12, 2022
With Blockchain technology gaining international acceptance and media attention, corporates and governments alike are diving deeper into the functionality of the technology to understand how it can improve native operations. A topic that comes up often, especially in the real estate and financial markets, is 'tokenization' and this article will be breaking down what this means and how it is being used around the world.
Tokenization, simply put, is translating economic items into token form, thus creating a new token economy. The concept can be used for virtually anything with value and is simply moving the recognition of ownership onto a blockchain network. The token holder can be specified to have certain rights to the underlying asset including, but not limited to, complete ownership, ownership of generated profits, fractional rights or even governance rights. A new asset class can thus be created using tokenization.
So, what are the benefits of this technology?
1) Increased global liquidity - Since tokens stored on any decentralized chain can be freely moved between network participants, it allows for access to investment opportunities around the world and makes the underlying assets stored on the chain to be a lot more liquid and accessible across borders. Low liquidity assets such as precious metal goods, real estate, collector items, etc. can now have stronger liquidity for investors who want to add such exposure to their portfolios but are currently unable to due to the stagnant active market for the assets in many geographies.
2) New asset class with reduced capital barriers - Since tokenized assets are stored in token format, it also reduces the capital barrier of entry for high-cost investments allowing for fractional ownership of the asset. For example, investing in real estate in London would require significant capital but with tokenized assets, individuals from other countries with weaker currencies can still gain exposure towards the asset by buying a fractional share of the tokenized property.
There are even companies that create wallets to store fiat currencies in token form to secure transactions without parsing sensitive user information with every transaction!
3) Transparent, provable transaction history - with tokenization, ownership rights on assets will be less debated upon as every transaction will be recorded on the chain in an immutable and verifiable manner. This helps reduce malpractice in sensitive transactions in numerous industries. Imagine the fine arts industry - if a curator were to tokenize the asset on a blockchain and publish the public address of the token, future sales of the piece would be less prone to fraud risks as the seller would be required to identify ownership with the private key of the token itself.
The main barrier with tokenizing assets such as real estate and commodities is the regulatory barriers towards recognizing the transfers of ownership but given the number of corporations trying to integrate the technology, the topic will be of key interest in the coming years!