Aug 29, 2022
Asset tokenization: an overview
As the decentralized world of blockchain technology continues to grow, tokenized assets have caught the eye of investors and regulators alike. HSBC has predicted that the tokenized markets could reach US$ 24 trillion in value by 2027.
What role do tokenized assets play in the AmFi platform?
AmFi provides the infrastructure for businesses to optimize a financial service they already provide.
At the time of writing, AmFi provides support for credit notes, invoices and credit card receivables. There’s an application both legal and in code to tokenize these assets to serve as collateral for a liquidity pool .
Besides tokenizing these assets, we use blockchain as a tool to streamline the traditional services, offering a more transparent, quicker and more efficient environment for borrowers to take loans and for investors to diversify their portfolios.
But what is tokenization and what types of tokens are there?
Asset tokenization is the conversion of real assets into digital assets.
We can divide these digital tokens into two categories: those which came from fungible assets and the ones originated from non-fungible assets.
Most cryptocurrencies we know are “fungible” because each unit of a given cryptocurrency has the same value and validity as the others, and they are interchangeable, meaning that each unit of $BTC, for example, is exactly the same as another unit of $BTC.
Company shares are the best example of fungible assets and are often used to raise funds. Some protocols, such as Synthetix, are tokenizing shares to make it easier for investors to buy them in different countries around the world.
In the AmFi platform, there will be a fungible token behind every lending pool representing how many quotas an investor has bought from a pool.
NFT: the real game changer
NFTs were first introduced to the world in the Ethereum network with the ERC-721 token standard. A “non-fungible token” is a token that represents a unique value, it is not interchangeable.
Think of the Mona Lisa as an example: there is only one of it and, even though there may be copies, the real one is in the Louvre Museum. The Mona Lisa is a non-fungible asset.
What can be tokenized?
In the 2021’s crypto bull market, the notion that investors were trading silly images for hundreds or thousands of dollars was prevalent, but the use cases of NFTs are not limited to that; the possibilities for tokenization are endless.
Tokenization doesn’t change the original asset, but how its ownership is managed.
Ownership is the key word here, as tokenization allows for both proof-of-ownership and fractional ownership .
Some examples of what can be tokenized: precious metals, art (physical and digital), funds (providing liquidity and participation), corporate debt and equity, loans, credit notes and invoices, collectibles (physical and digital), real estate (commercial, residential), intellectual property (patents, licenses), commodities and energy and certificates.
What are the benefits?
· Broader geographic reach: public blockchains are inherently global, as they present no external barrier to the global population and investors.
- Increased liquidity: real estate is a very illiquid kind of asset, but tokenization fractionates it and unlocks liquidity potential, making the asset tradeable on secondary markets and allowing a broader base of investors to participate in the ecosystem.
- Shorter settlement times: tokenization can reduce transaction times, allowing for 24x7 trading, as smart contracts triggered by predefined parameters can complete transactions instantly. On the AmFi platform, the settlement of a lending pool can be 3.5 times faster and 10 times cheaper than that of a similar kind of mechanism used in today’s standards.
- Infrastructure upgrade: for many asset classes, fundraising and trading remain slow, difficult and require an exchange of paper-based documents. Digitizing these assets on a Distributed Ledger Technology (DLT) infrastructure can vastly improve the efficiency in these markets, with an increased impact in areas that currently have non-existent traditional infrastructure.
- Improved asset-liability management: tokenization will improve the ability to manage asset-liability risk through accelerated transactions and improved transparency.
- Regulatory development: regulators increasingly show signs of wanting to create regulatory frameworks for the generation and exchange of digital asset tokens.
Brazil is one of the most advanced countries when it comes to regulation for this new technology. Last week (Aug. 17), AmFi was selected in an acceleration program for fintechs, promoted by the Brazilian Central Bank, which shows that regulators are leaning more and more towards innovation in this sector.
We are just at the beginning of our journey! Learn more about what we are building: https://linktr.ee/amfi.finance
