Can All Assets be Fractionalised on the Blockchain And Do They Need To Be?
When asset tokenization was introduced with the possibility of blockchain technology, many financial experts were pleasantly surprised by the upturn of events with some even heralding a tokenized economy as the future. That being said, can all assets be fractionalized? What are the assets that have benefited from its tokenization?
Here is a quick article on six assets that have been optimised thanks to asset tokenization.
1. Arts and Collectables
Traditionally, artworks and collectables can only be seen in museums and galleries and purchased through bids during auctions. The limited access, however, presents a high barrier of entry to common investors who require a substantial amount of capital before they can start investing.
With blockchain technology, however, arts and collectables can be tokenized, allowing investors to own a fraction of the artwork at a lower cost. This gives rise to further advantages such as a diversified portfolio with stakes on multiple artworks simultaneously, quicker processing as intermediaries like art-dealers are bypassed, and wider access to more artworks especially those exotic and rare collections, thus greatly increasing its appeal as an investment tool.
2. Real Estate
Similar to the traditional investment market of artworks and collectables, the real estate market is one that prerequisites a high capital with limited access granted through multiple intermediaries such as real-estate agents among others.
Tokenization of real estate, however, not only democratises access to real estate properties but increases the liquidity of a previously illiquid asset. Investors can own properties in upscale towns and cities by investing in development projects through real estate investment tokens, lowering the barrier of entry for most investors. Like the tokenization of artworks, the tokenization of real estate enables fractionalised ownership that greatly reduces the risk of loss, with an added advantage of a diversified portfolio.
3. Venture Capital (VC) Funds
High capital cost with low investment returns. Sounds like a horror story written for investors, isn’t it? Yet, those words are the most fitting in describing the traditional VC market. VC funds have been notorious for their low profitability, taking up to 5–7 years before any sign of profit is seen. To protect unseasoned investors from damaging losses, most national regulations require investors to have a net worth of more than a million to qualify for investments in traditional VC funds.
Tokenization of these VC funds, however, can bring about a huge change. Discounting the lowered barrier to entry, the higher liquidity and the greater diversity in investors and portfolios, the immutable and transparent nature of blockchain technology also allows for greater security. This, in turn, could drastically reduce the potential for scams and frauds which may be the very thing needed to loosen a regulator’s grip on the minimum capital needed for investment.
4. Renewable Energy
The law of conservation of energy states that the total energy of an isolated system remains constant and cannot be created nor destroyed. The idea of fractionalizing energy thus sounds both absurd and meaningless to a common person.
However, unlike the other examples listed above, tokenization of renewable energy not only presents a lucrative opportunity for investors but is one that directly impacts the environment. According to the Renewables 2017 Global Status report, as much as 78.4% of the world’s energy comes from the burning of fossil fuels despite the negative impact it has had on the environmental climate.
Attempting to transform the energy market from one that is environmentally harmful to environmentally friendly is a jarring move that requires vast amounts of capital, capital that not many investors possess. With the tokenization of energy, however, the barrier of entry is lowered, allowing everybody a chance to save our environment.
5. Intellectual Property
Every creative idea is registered in the industry as an intellectual property (IP). With the burst of entrepreneurship and creative data, the IP industry has blossomed and is expected to be a staggering worth of US $16.51 billion by 2025. Yet, these figures have been inaccessible to the common investor due to the hefty costs needed and the low transparency found in its cumbersome processes.
With tokenization, however, access is made possible to every investor. Not only does it lower the capital cost to get started, blockchain technology and smart contracts has made trade of IPs more convenient through peer-to-peer transactions on a transparent platform. Seeing as blockchain technology is immutable, tokenization also presents a proof of ownership like no other, making any infringements of copyrights obvious and easily detectable.
6. Precious Metals
Precious metals can be really expensive and may present a high barrier of entry for investors looking to get their first gig started. Not to mention the illiquid nature these assets possess and the need for constant valuation that can be taxing on its investor and may affect its long term investment value.
With blockchain technology, however, fractional ownership becomes a possibility for consideration. It allows investors to invest at a lower cost, and even gain voting rights within the circumstances of equity in a business. The act of tokenization also allows for higher liquidity as the precious metals are now made more accessible to everyday investors with reduced trading frictions, allowing investors to sell or buy a fraction of an asset while locking its capital up for its wider circulation.
Conclusion?
Technically speaking, all assets can be tokenized and fractionalised. However, not all assets need to be and the deciding factor is largely dependant on the enumeration of benefits it can offer through its tokenization.
That being said, some assets like precious metals and renewable energy perform better when placed on the blockchain, especially since it draws in a larger pool of investors and a higher liquidity rate.
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