Asset Tokenization — what is it? The next powerful level of Digitization
The term „asset tokenization“ is popping up more and more often, especially when it comes to the topic of digitalization. Larry Fink, the head of the world’s largest asset manager BlackRock, sees enormous potential and a trillion-dollar market in asset tokenization. And indeed, tokenization is a very important technology that will change our financial industry, but also many other business models, enormously.
Therefore, it is worth taking a closer look and understanding the topic of asset tokenization.
What is asset tokenization?
Chainlink defines asset tokenization: „Asset tokenization involves representing the ownership rights of real-world assets as digital tokens on a blockchain.“
Let’s take a closer look. We are talking about assets that are digitally mapped. The term „assets“ is very broad; these can be physical assets like real estate, shares, funds, machines, classic cars, wine, artworks, securities, diamonds and so on. In general, one could say all real world assets can be tokenized.
Anything that has value can be created as a digital representation on a blockchain. All rights and obligations associated with a value are digitally „deposited“ in the form of smart contracts. The product of asset tokenization is a token or many tokens that are digitally mapped to a specific asset. Tokens are securities, making the underlying assets tradable on the financial market. A security token is a digital asset that represents ownership or other rights and transfers value from a real world asset or bundle of assets to a token. In plain language, security tokens are the digital form of traditional investments like stocks, bonds, or other securitized assets
Today, assets are usually still securitized by written documents and certificates. In the future, this will be done digitally through tokenization.
What are the advantages of asset tokenization?
The asset tokenization offers numerous advantages. These are:
Fractional ownership
Digital Token can be broken down into much smaller pieces than classic financial instruments. Let’s take an artwork from van Gogh as an example. This cannot be divided into small parts as an asset. The painting can only be sold as a whole. Through tokenization, for example, 1,000 tokens can be issued, which all represent an equal share of the artwork. This allows multiple collectors or investors to own shares of the artwork in the future.
The fractional ownership can also be applied to all other assets. In this way, real estate, machines, diamonds, shares and much more, which has been difficult to subdivide up to now, can be divided into small units as desired in the future.
Transferability
A token can be transferred from one owner to another on a blockchain within a short period of time, as they are digitized, clearly defined and registered shares of assets. This eliminates all the time-consuming processes involved in transferring real estate, for example.
Tradability
Asset tokenization makes it much easier to trade assets. For common securities, such as shares in large companies, trading via stock exchanges and brokers is nowadays easy and quick. For many other assets, such as classic cars, works of art, real estate or watches, it is much more difficult.
There are also ways and trading possibilities here, but the traditional approach of securitizing the assets requires notaries, lawyers and experts to handle the trade. This is a time-consuming and costly process. These are often historically illiquid assets.
Asset tokenization makes it much easier and faster to do in the future, as a token as a digital security, is much easier to trade. Trading 24 hours a day, 7 days a week is now possible.
Transparency
All digital token transactions are stored immutably and transparently on the blockchain. These can therefore be traced at any time. Transparency strengthens the trust of market participants. It is possible to trace how and by whom a token has been transferred at any time.
Fast Transfer
The transfer of assets can be handled quickly using tokens, as it only requires one transaction on the blockchain. The programmed smart contract is executed automatically. Within a few minutes, values can be transferred worldwide. Similar to how an email transmits information in the shortest possible time, values can be transmitted worldwide through the transfer of tokens.
Cost savings
The representation of assets as tokens eliminates the need for many expensive intermediaries and trusted third parties (e.g., lawyers and notaries), because the digital securitization of the token takes care of everything necessary to transfer the token without experts. Only minor costs are incurred when using the blockchain technology. The asset tokenization process is much faster and less expensive than the previous securitization of assets.
How does asset management benefit from tokenization?
Now that some of the advantages of tokenization have been presented, the question arises: Who benefits from it? Who really has a benefit?
The question is best answered by looking at who is involved in the asset issue.
Asset issuers
The term issuer sounds a bit abstract at first and it is not immediately clear who is an issuer. The answer is that almost any person or company can be an issuer of assets. Whether someone „issues“ their real estate as an asset, a collector tokenizes their classic car collection, or a company digitizes their shares or machinery as tokenized assets, they are all issuers of assets and want to make them tradable, shareable, and/or transferable. Intangible assets such as licenses can also be tokenized. All tangible or intangible things for which there is demand can be tokenized assets.
Asset issuers can now take advantage of the benefits outlined above such as small denomination, transferability, tradability, etc. through tokenization. Tokens make it easy to capitalize many things that were previously difficult to capitalize. Tokenization offers completely new financing options. By issuing tokens, issuers can access capital much more easily than was previously possible.
For example, a real estate manager could tokenize its properties and make them available to many potential investors. Or a start-up tokenizes its company shares. Until now, this has often been difficult and only possible to obtain investment capital via banks, investment companies or other specialized players.
Tokenization offers a completely new financial instrument with many possibilities. A much broader layer of investors, from large investors to small investors, can be addressed.
Crowdfunding was an experiment that in parts opened up new ways to fund things. Tokenization includes all this and much more. Because digitized assets as tokens with appropriate regulation guarantee clear rights and their enforceability.
Other major benefits for issuers include reduced issuance and administration costs, a shortened time-to-market phase and access to new and larger distribution channels and buyer groups.
Investors
For investors, tokenization offers a host of new opportunities. Tokens give retail investors easy access to high-value digital assets that were previously available only to very few, wealthy investors or financial institutions. Anyone can now invest in digitalized assets via tokens. Investments in alternative assets, regardless of budget and expertise, are thus possible.
For example, it was previously only possible for a few investors to invest in high-priced real estate in prime locations, in valuable classic cars, rare works of art or high-quality watches. In the field of financial investment, completely new opportunities arise for small investors, but also for institutional investors such as pension funds.
Investors can be involved and participate in tokenization projects from the very beginning. Likewise, it is possible to buy the desired tokens on the secondary market at a later date and participate in the performance of the deposited asset.
Summary
Asset tokenization is the regulated digitization of real world assets. So far, there are still a lot of restrictions, elaborate processes, and limited market participants in the asset space. This is going to change tremendously. Because tokenization will result in enormous advantages for all participants, investors and issuers, which will completely change the market.
Blockchain provides an opportunity with asset tokenization that is similar in scale to what the Internet was in the early 2000s. It solves an existing problem. The Internet has fundamentally changed the distribution of information and the way we communicate. Blockchain and tokenized assets will do this for all assets and assets in all sectors. It is fair to call this a „gamechanger“ or a disruptive new technology that will completely change what happens in the marketplace.
It therefore makes a lot of sense to get to grips with this technology at an early stage and familiarize yourself with the great opportunities it offers. It is up to each individual and each company to decide when to get involved. Many things are still in their infancy, but it is well known that those who get involved and position themselves at an early stage will benefit the most. The necessary legal framework has been created in the last 2 years, so that there are now clear legal regulations that provide security for all involved.
FAQ — Frequently asked questions
What is a token?
A token is a digitized form of asset. It is assigned a specific function or value. Wide-ranging applications and manifestations are conceivable.
What is a blockchain?
A blockchain is an immutable digital database. Through transactions, tokens and coins can be transferred from one participant to another within a short period of time. Blockchain technology is the foundation of a blockchain.
What are tokenized assets?
Tokenized assets are digitized assets of all kinds. Digitization can be ensured by various technologies. Blockchain technology offers many new possibilities for Asset Management.
What are Smart Contracts?
A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. The contract automatically executes and enforces itself, without the need for intermediaries.
How are physical assets impacted by tokenized assets?
Tokenization of physical assets can provide fractional ownership opportunities, allowing a broader range of investors to participate in exclusive markets without large capital investments. It also increases the transparency and efficiency of transactions by providing a secure, immutable record of ownership and transaction history. Lastly, tokenization can increase the liquidity of physical assets, making it easier to buy and sell them on secondary markets.
