Benefits of Tokenization — Emergence of a new financial world
In recent years, tokenization has emerged as a transformative technology that is revolutionizing the way capital and investments have been made to date. Larry Fink, the CEO of Blackrock, the world’s largest asset manager, recently said “Next Generation for Markets’ Is Tokenization“. If the CEO of Blackrock attaches this importance to tokenization, then it is not just a brief technical fad.
By leveraging blockchain technology, tokenization enables the digitization of almost any asset imaginable, be it financial assets like shares, physical assets like real estate or intellectual property like software licenses . These can be tangible assets or non-tangible assets. In understandable and simple terms, tokenization is the digitization of assets. Tokenization is the digitization of assets. It is the creation of digital assets.
In this article, we will outline the main benefits of tokenization. By understanding the key benefits of tokenization, the importance of this technology can be better understood.
Increased Liquidity
One of the main advantages of tokenization is the potential for increased liquidity. Traditionally, certain assets such as real estate or art are illiquid, making it difficult for investors to buy or sell fractional shares. Tokenization solves this problem by dividing assets into digital tokens that allow seamless buying, selling and trading on blockchain-based platforms.
Small and medium-sized companies in particular therefore often have difficulties in obtaining liquidity because they have not conducted an IPO with their shares. Shares in such companies have been traditionally illiquid assets. However, if the company shares can now be tokenized and thus transferred to interested investors, completely new opportunities arise for companies.
For companies, this results in a broader and more diverse pool of potential investors, which ultimately increases market liquidity. One example of tokenization of shares is the Aktionariat company in Switzerland. It provides a platform for companies to tokenize their own shares.
Another use case would be the tokenization of assets of a company. For example, XYZ Real Estate, a leading real estate developer, tokenized a luxury apartment complex, allowing investors to purchase tokens representing ownership of the property. This tokenization attracted hundreds of investors worldwide, promoted liquidity, and enabled individuals with smaller budgets to participate in high-value real estate investments.
Tokenization allows companies of all sizes to digitize their assets and make them accessible to investors. This gives them a whole new way to increase their liquidity. Additional capital markets are being tapped and new asset classes are emerging.
Only asset tokenization in the real estate market is a trillion dollar market that will emerge in the next few years.
Enhanced Accessibility
Tokenization democratizes access to traditionally exclusive or high-value assets. By dividing assets into smaller, more affordable tokens, tokenization opens up investment opportunities to a broader range of people, including retail investors. Retail investors typically do not have the opportunity to invest in, for example, prime real estate, exclusive watches, or high-priced artwork. Tokenization is changing that. Because now even small investors can acquire fractions of a high-value property in the form of a token.
Both companies seeking capital and investors who want to diversify their portfolios benefit from this greater accessibility.
For example, ABC Fine Art Gallery has tokenized a collection of rare artworks, allowing art lovers to purchase tokens representing ownership of individual pieces. This allowed art lovers who could not afford to buy entire works of art to invest in the art market and benefit from potential increases in value. Increased accessibility also opened up a new fundraising opportunity for the gallery to acquire additional artworks and expand its operations.
An extreme example to illustrate this is the burning of a bansky of the original artwork and the creation of digital parts to this artwork. Normally, however, the object is not destroyed during tokenization.
Fractional Ownership
Tokenization enables fractional ownership, allowing investors to own smaller shares in high-value assets. Until now, it has often only been possible to acquire large shares in investment properties. Through fractional ownership in the form of tokens, this can be changed. Each token represents a small share in an asset. The distribution of the tokens can be chosen arbitrarily by the emmitent. An asset can be divided into 1,000, 100,000 or even 1,000,000 shares through the tokenization process.
Depending on what makes the most sense for the issuer and the investors. This concept is particularly valuable for assets with high barriers to entry, such as commercial real estate or large-scale infrastructure projects. Fractional ownership allows companies to raise funds more easily and efficiently, while investors can diversify their portfolios across different assets.
Example: LMN Energy Corporation, a renewable energy company, tokenized a solar farm project. By splitting the project into tokens, the company offered partial ownership to investors interested in clean energy. This approach attracted a diverse group of investors and allowed LMN Energy Corporation to raise the necessary capital for project development while giving investors the opportunity to participate in the growing renewable energy sector.
Improved Transparency and Security
Blockchain technology, which forms the basis for tokenization, provides transparency and security for asset transactions. Each token represents a unique digital record that is stored in the blockchain ledger and provides an immutable and transparent transaction history. Trusted intermediaries, such as banks or notaries, is no longer necessary as this is ensured through the technology. Transactions on the blockchain are non-revisable and transparent. In addition, certain “if-then” rules can be stored via a smart contract, which is automatically executed as soon as the criteria are met.
This transparency strengthens trust between the parties involved and reduces the likelihood of fraud or manipulation. In addition, the decentralized nature of blockchain technology provides protection against centralized data breaches.
For example, PQR Supply Chain Inc. tokenized its supply chain management system, allowing stakeholders to track the movement of goods from source to destination in real time. By assigning tokens to each step of the supply chain process, the company ensured transparency and minimized the risk of counterfeit or compromised products. This increased security and confidence appealed to enterprise customers who wanted better visibility into their supply chains.
Increased Efficiency and Automation
The use of smart contracts, a key feature of tokenization, automates and streamlines various processes related to asset ownership. Smart contracts are self-executing agreements encoded in the blockchain that execute predefined terms automatically and without an intermediary. This automation reduces administrative overhead, streamlines transactions, and minimizes the potential for human error or delay. It eliminates high costs that were previously required to involve lawyers and notaries to create and execute contracts. Significant time and cost savings are thus possible.
For example, EFG Investment Fund has tokenized its venture capital fund, enabling automatic distribution of profits and dividends to token holders through smart contracts. Instead of lengthy manual processes and paperwork, tokenization streamlined profit sharing, reducing administrative costs and delays. This efficiency attracted both investors and corporate clients seeking straightforward investment opportunities.
Conclusion — Benefits of Tokenization
Tokenization offers a variety of benefits to businesses and individuals, transforming the way assets are owned, bought, and sold. Increased liquidity, improved accessibility, fractional ownership, improved transparency and security, and increased efficiency through automation are just a few of the benefits tokenization brings to the business landscape.
Real-world examples show how various industries are using tokenization to unlock new investment opportunities, attract capital, and improve operational processes. As tokenization continues to mature and regulatory frameworks become clearer, more companies will leverage this innovative technology to unlock the potential of their assets.
Tokenization will significantly change the existing financial industry. In addition to traditional assets, a variety of new asset classes will emerge. The tokenization market will become a trillion dollar market with numerous new market participants emerging.
Whether it’s real estate, artwork, renewable energy projects, or supply chain management systems, tokenization offers a transformative solution that is enriching for both businesses and investors. By recognizing the benefits of tokenization and its applications, companies can position themselves at the forefront of this digital revolution, driving innovation and creating new opportunities in their respective industries.
It is important for businesses to understand the implications and intricacies of tokenization before embarking on the journey. With expert advice and regulatory compliance, companies can realize the full potential of this disruptive technology. The benefits of tokenization are so significant that this technology will be one of the game-changers for the global world economy in the next 10 years. Understanding the benefits is the first step to understanding the scale.
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