ETFs and Blockchain: Pioneers in Asset Tokenisation
This is number 3 of a multi-part article series. In our last article we looked at the similarities of how both ETFs and blockchain democratise finance (read here) and in our first one we looked at the efficiency parallels (see here).
When discussing asset tokenisation, a concept that often springs to mind is blockchain, thanks to its integral role in creating digital tokens representing real-world assets. However, a pioneering model of tokenisation had already been at play in traditional financial markets even before blockchain made its appearance. This pioneer is the Exchange-Traded Fund (ETF).
ETFs: Pioneers in Asset Tokenisation
In essence, ETFs were the financial world’s first attempt at asset tokenisation, enabling a pool of assets to be represented by a single, tradable entity. ETFs encapsulate a diverse portfolio of assets, such as stocks, commodities, or bonds, and allow investors to buy or sell these bundled assets on a stock exchange, similar to trading individual stocks.
In a sense, each ETF unit is a “token” representing a proportional interest in the underlying asset pool. The tokenisation model provided by ETFs has opened up opportunities for individual investors to gain exposure to a diversified portfolio with a single transaction, democratising access to a wide range of asset classes that would have otherwise required significant capital to individually own.
Blockchain: The New Frontier in Asset Tokenisation
Blockchain technology has taken the concept of asset tokenisation to a whole new level. With blockchain, practically any asset — real estate, artwork, precious metals — can be digitally represented or “tokenised” on a blockchain network. Each token can represent a unique piece of value that is interchangeable and can be traded on a global platform without intermediaries.
For instance, through tokenisation, a high-value asset like a building can be divided into multiple tokens, each representing a fraction of the building’s ownership. This means individuals can buy a “piece” of the building by purchasing tokens, much like buying a piece of a company by purchasing stocks.
Just as ETFs democratised access to diversified investment portfolios, tokenisation is democratising access to a broader range of asset classes by lowering the barriers to entry and making these assets more accessible and liquid.
A Confluence of Benefits
When comparing the tokenisation offered by ETFs and blockchain, it’s essential to appreciate how they both democratise finance, increase efficiency, and introduce a greater degree of liquidity to markets.
Both ETFs and blockchain-driven tokenisation allow for fractional ownership, making expensive assets more accessible to average investors. This kind of fractionalisation can enhance market liquidity, as smaller, more affordable units of expensive assets are likely to have more potential buyers.
Moreover, both bring increased transparency and efficiency to transactions. With ETFs, investors can see the portfolio of assets they own, and with blockchain, every token transaction is recorded on a transparent, immutable ledger (and for those who worry about this transparency for business transactions, then check out our ZK proof tech helping bring confidentiality where needed).
Looking Forward
The journey of financial markets has been one of constant evolution and innovation, and both ETFs and blockchain technology play key roles in this narrative. While ETFs brought the initial wave of asset tokenisation, blockchain has the potential to bring a tidal wave of change, further opening up the world of investing to everyday individuals.
As we look to the future, we should not only anticipate how blockchain could reshape our financial systems but also appreciate the innovations, such as ETFs, that have led us here. The evolution from ETFs to blockchain demonstrates the power of technology in creating a more democratic, transparent, and efficient financial landscape.
