WHY IS THE REAL WORLD ASSETS TOKENIZATIONNECESSARY

WHY IS THE REAL WORLD ASSETS TOKENIZATION IS NECESSARY

In this day and age there are many physical assets that are difficult to transport, which is why people prefer to trade documents representing these assets, be it oil, real estate etc. However, this system has a number of flaws and problems that in this here information age we live in demand a well-designed and innovative solution.

Estimated by the Credit Suisse Research Institute, the total price of the real world assets in 2017 has exceeded $280 trillion, more than $200 trillion of which are real estate. This account does not include the financial tools of the huge derivatives market (real goods like gold, oil, wheat etc.; securities, currency, indices etc.), the size of which surpasses $1000 trillion. The main problem of the real markets is the information asymmetry, which leads to the lack of trust between the market participants. The low level of trust creates barriers, limitations and leads to the decline of market activity and volume. The lack of efficient solutions and trustworthy asset management tools, as well as the rapidly developing market digitalization create demand for powerful solution making tools, namely physical asset tokenization.

Right now the global business is constantly working on making the transition to the digital system, similar to Bitcoin, yet tethered to an asset — a system of tokenized assets. Why exactly do we need real world asset tokenization and what needs to be done to create a digital token? For example, a distributor that owns precious stones don’t want to waste time on searching for a customer to sell all their stock to, they want to find an easy way to split his gemstone supply and sell the parts. The buyer in turn wants to own only a small share of the stones and have a way to sell his ownership. Asset tokenization and ownership democratization are precisely the answer to these demands.

Physical assets have various tokenization options, yet the main principles remain the same — speed, security and physical asset token transaction simplicity.

INTANGIBLE ASSETS

These types of assets are legally embedded, while the physical asset itself is absent (patents, carbon credits, trademarks, copyright etc.). Their main advantage is that they are easier to transform into tokens, than the physical objects, due to fewer difficulties with their storage and transportation.

INTERCHANGEABLE ASSETS

In jurisprudence these are assets that are equivalent, analogous or interchangeable objects. They are also simpler to tokenize thanks to the ability to split them into lesser parts (similar to Bitcoin) and the fact that the overall amount of tokens is connected to the overall set of interchangeable asset components. When converting these asset into tokens you don’t need an abstract layer as opposed to the non-interchangeable assets. An example would be a corporation that aggregates assets and offers them as a package. This method is used in securitization (the way of financing through issuing securities backed by assets that generate a stable cash flow) of mortgage loans — when a number of loans with similar features are combined into a single package.

In blockchain we can separate the projects into those that involve tokenization of partial rights (e.g. music licenses) and those involving ownership tokenization (real estate sale etc.).

LICENSING

Intellectual property licensing (let’s take the music industry as an example, tokenization should affect it first) depends directly on the documentation and trust. Artist trust the information about sales of their intellectual property that they are given. However, the ability to watch and download media online drastically lowers the sales of physical copies. If the rights to music were represented in blockchain, the majority of those taking part in creating music would have their own digital shares. Imagine if any instance of listening to composition would require a paid “unlocking”, proceeds from witch would be distributed among rights holders.

SMART CONTRACTS

However, tokenization is not only and not quite digitization — digitization simply creates a description of an asset, its consumer characteristics, photos etc. Tokenization, besides all of the above, adds a financial element — automatic smart contracts for deal execution, automatic transaction commands, formulas for asset price calculation, automatic source data validation etc. By the way, the first country to officially legitimize smart contracts was the Republic of Belarus by passing the Decree on Development of Digital Economy on December 21 2017.

TOKENIZATION PROCESS AND THE GLOBAL LEGISLATION

In some states the sale of shared ownership of assets without government permission is considered illegal. Due to the fact that digital blockchain systems are global by their nature this can cause problems for tokenized companies or the owners of platforms where tokens are being sold. The situation is especially complex due to conflicting legislations, that further complicate ways of avoiding regulation.

CENTRALIZATION — THE OBSTACLE FOR TOKENIZATION

To ensure the maximum extent of system decentralization, for example a platform like Product Protocol, blockchain implementation is necessary (this being one of the main advantages over non-blockchain systems). By storing the hashed data in blockchain individuals, companies and government entities can store a decentralized record of their asset ownership, while retaining data confidentiality. At the same time all the asset data, Virtual Token asset token issuers and their owners can be easily authenticated.

However, there is a problem among all tokenization models — the connection of the single asset owner to the numerous token owners. There is a risk of centralization. It can be diminished through various combinations of tokens, contracts, insurance, audit and third party guarantees.

THE REQUIREMENT FOR LEGAL REFORM

However, not all physical assets can be transferred to blockchain without making certain legislative reforms. Several countries have laws in place that require asset deals to conducted in a certain way or with certain registrations, which is unsuitable for tokenized systems. Real asset tokenization is a big and difficult challenge, it requires innovative solutions that are beyond the boundaries of technology. In some cases it requires legal reform, in other — a mix of active laws, new business structures and new digital token systems.

BLOCKCHAIN TRADING SYSTEMS

Usually companies that wish to trade, let’s say oil, with each other need to exchange paperwork and maintain their own sales record. By using a blockchain-based system like Product Protocol, with its own decentralized marketplace, these companies could solve

relevant problems, reap the benefits of the blockchain technology, reduce paperwork and provide precise and reliable records.

Real sector asset tokenization provides an opportunity to enter new markets and grow exponentially, but the current market situation does not allow to make the leap quickly and painlessly. As the 2017 experience has shown, a company with an annual turnover of $500,000–5,000,000 are unable tokenize their assets on their own due to the lack of understanding of the crypto market and its players. New token support and liquidity grown remains an unsolved problem.