Tokenization of Real-World Assets
Tokenization is the process of converting real-world assets into digital tokens or currencies. Tokenization can apply to numerous different assets, like property, bonds, art, etc. NFTs are a prominent form of tokenized assets, where art is tokenized and traded across the market.
The process of tokenizing a real-world asset involves converting the ownership of an asset into a token on a blockchain. To do this, smart contracts are incorporated. More specifically, the digital tokens that are created are backed by the asset, and the details of ownership are written within the contract. Whenever, the token changes ownership, the smart contract is automatically rewritten, making this process a self-executing process. But how does an asset get converted into a token? For this, asset representation models are necessary.
Asset Representation Models
Asset representation models are simply token standards that describe the different types of assets being tokenized. For Ethereum, there are three very common token standards: ERC-20, ERC-721, and ERC-1400. Let’s dive into these three token standards.
- ERC-20: First integrated into the Ethereum blockchain in 2017, ERC-20 is a token standard meant for fungible assets, assets that aren’t unique or non-replaceable. Since this token standard can be used for identical assets, it is popularly used for stablecoins like Maker, Augur, and OMG. This token standard is also used for numerous other purposes, but it doesn’t cover all potential needs.
- ERC-721: Implemented in 2018, ERC-721 is a token standard meant for non-fungible assets, assets that are unique and cannot be replaced. For example, collectibles, art, or property are made through ERC-721. Moreover, the most popular use of ERC-721 is NFTs, whose popularity is directly due to the creation of ERC-721.
- ERC-1400: Integrated into Ethereum in 2018, ERC-1400 was created for security tokens. This token standard is meant for more secure transactions, while also being compliant with numerous rules and regulations.
Benefits of Asset Tokenization
There are numerous benefits to asset tokenization. The tokenization of real-world assets as a whole increases the liquidity of assets, offering new items for sale on the market. Furthermore, the transparency and efficiency of the system help to reduce transaction costs by directly connecting the buyer with the seller. This removes any third parties and also eliminates the cost associated with the use of third parties. As a result of the use of smart contracts, transactions are executed within a matter of seconds rather than over a long period of time. The use of smart contracts also reduces the chance of fraud. Lastly, the fact that these tokens are available online opens up the prospect for more buyers to buy them than if they were physical.
Risks associated with Asset Tokenization
Although there are many pros associated with asset tokenization, there are a few risks. One of the biggest risks is the risk of cyber-attacks and hacks on the tokens. Many tokens are also subject to price changes, where token values can vary as a result of global market conditions. This can result in a token selling for less than it is worth. There are also many hidden risks in tokenizing an asset.
If you want to learn more, check out the links below:
Asset tokenization: A beginner’s guide to converting real assets into digital assets
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