What is Asset Tokenization?
When the Bitcoin ushered the world of cryptocurrency, little did it realize that it was opening up a new world of unlimited opportunities that might revolutionize the way in which assets and investments are looked at. The decentralized network called the blockchain has been holding the floodgates to a method of investment that will attend the financial landscape.
Blockchain enables an otherwise illiquid asset to be broken down into smaller units representing ownership that will increase the chances of smaller market participants investing in larger assets.
So, what’s the funda behind asset tokenization?
As it might have already been known, blockchain is a transparent and immutable distributed ledger that keeps a secure and accessible record of transactions. If the assets of the real world are moved into the blockchain in the form of decentralized protocols, this paves way for many investors of different sizes to purchase shares in the asset.
If everything has to be compressed in a single line, Asset Tokenization facilitates the conversion of the rights to the asset with economic value into a digital token.
These tokens can be stored and managed on a blockchain network, and it has a tremendously positive impact on trading and investment by bringing in greater transparency, liquidity, and data integrity.
Cool! How does it work?
Asset tokenization, at least on paper, looks simple! If you were to have a real estate asset valued at $250,000, you can represent its value in the form of tokens where a single token can be priced at $25. This would mean that a single token represents a hundredth of a share in your asset.
To tokenize your asset, it has to be evaluated and audited which may involve a few steps. Once the asset valuation is complete, the tokens can be made available for investors. The investors can also consider diversifying their investment portfolio by choosing not to invest all of there money in a single asset but rather distribute them across different assets.
The increase in the number of investors will increase the supply, and it should cause the prices to go higher. because of the larger amount of market players and the increase the capital, the property and consequently, the token becomes more expensive. The owners of these tokens can sell them at a higher price or receive the dividend, which results in an increased return on investment.
The different benefits of tokenization
The reasons why tokenization is attractive can only be attributed to blockchain which presents a series of advantages:
- Immutability — a transaction record and the record of ownership is permanent and cannot be erased.
- Universal accessibility — a smartphone with a connection and the credentials to access the data is all you need to affect a transaction from any part of the world at any time of the day.
- Cost effective — the smart contracts that control the blockchain eliminate the need for any medication that might translate into costs.
Transparency — the immortality of the blockchain eliminates any possibility of asymmetry of information that might arise during the transfer of ownership.
Asset tokenization requires augmentation to the classic blockchain. You will need a protocol that consists of the chain of smart contracts for the payment and transfer of legal rights, the wallets that will facilitate the storage of your tokens and above everything, but sharing platform that will trigger the entire mechanism.
It might be structurally similar to cryptocurrency, but unlike the cryptocurrencies, the tokens of the real world can be either utility or security tokens. The utility tokens give access to a product or service, or maybe a certain privilege. The security tokens, on the other hand, represent the actual ownership of an asset which can translate into an economic unit for investment purposes.
Why is tokenization the revolution in investments?
The world of investments has always been facing the threat of dichotomy where investments with a huge potential of earning might not always be liquid, and on the parallel side, assets that are highly liquid might not always give better returns.
The world of the tokenization is all set to change the game. With no territorial barriers and the involvement of almost-zero intermediaries, the trading is bound to be cost-effective and secure. Tokenization helps small investors venture into the world of the until-now-expensive side of investments like Commercial Real Estate, and also helps large-scale investors to diversify their portfolio of investment. All these factors culminate at highly profitable liquidity which governs the lucrativeness of any investment!