Translating the Physical Into the Digital…
The previous article outlined an overview of Konrad’s asset mapping mechanism but made no mention of asset tokenization. This begs the question, when does tokenization step into the picture? Why is a trust fund present in Konrad’s asset mapping mechanism? How do smart contracts help in asset tokenization? It’s time to find out.
First Things First, What Are Smart Contracts?
Smart contracts are protocols coded on computers that are designed to facilitate, verify or execute the performance and negotiation of a contract. Every transaction made by a smart contract is entirely traceable and irreversible, making them credible witnesses to any digital transaction on the blockchain.
How Do Smart Contracts Help in Asset Tokenization?
Following the mapping of assets on the blockchain, a trust fund will seize control of these assets and become its main legal entity. With control of these assets, the fund can then proceed to classify these assets into their various categories and fractionalise them proportionately according to their innate values. This process is performed with the aid of fiduciary institutions and financial and regulatory institutions.
In addition, having an asset-specific means of fractionalisation, or smart fractionalization, presents itself as an apt advantage as it allows for a more accurate valuation of assets to be conducted. Smart fractionalization is also highly suitable for raw material assets as those assets often experience uneven value distributions due to their physical nature.
With values being assigned to each fractionalised share, keen investors will now be able to own shares of raw material assets by purchasing the tokens pegged to these assets. This process is also known as fractionalised ownership.
The process of smart fractionalisation as summarised above is achieved by docking the smart contract API with the template library as illustrated in the figure below.
That being said, asset tokenization is not without its problems. For instance, when a real asset is fractionalised, and its ownership is shared among a large group of individuals, these investors may not develop a strong sense of ownership to the tokenized asset as a result. Asset maintenance and revenue collection may thus become a source of dispute among investors, especially if there is a lack of accountability for everyone involved.
To combat this issue, Konrad has developed a smart contract for deposit and insurance through the trust legal entity to reduce the risk of damages made to initial assets. In addition, Konrad will develop more financial derivatives to thoroughly reduce similar associated risks.
Conclusion?
While more investors mean more capital flow, having a large number of people that are staking on a single asset may give rise to more conflicts, especially during times when consensus decisions surrounding the management of the asset have to be made. Still, the positives outweigh the negatives when it comes to asset tokenization and it is certainly worth a try for budding investors looking to dip their toes into the market.
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