Tokenization
The process by which real-world assets are turned into something of digital value called a token, often subsequently able to offer ownership of parts of this asset to different owners.
What Is Tokenization?
Tokenization is a buzzword that is commonly thrown around the blockchain and cryptocurrency world. However, despite the fact that this word is commonly used, many people do not know what it actually means. In this article, we will break down everything that you need to know about tokenization so that you can be fully informed about the topic.
Tokenization is the process of turning various items into digital assets called tokens. Tokens typically operate on blockchains and are controlled through smart contracts and algorithms. Many different types of assets can be tokenized. For example, real estate, works of art, percentages of ownership in a company, etc. can all be tokenized.
Tokenization is becoming more and more popular because it reduces friction for companies wanting to obtain funding by selling assets on an open market. For example, companies that do not want to deal with the
IPO process can issue a token instead of a stock offering. Blockchain tokens are traded on cryptocurrency exchanges and are subject to price swings based on supply and demand.
Why Tokenize Assets?
Why Tokenize Real Estate?
Real estate is one of the most promising applications for crypto tokenization. Creating digital tokens to represent assets provides several key benefits. Firstly, it unlocks new
liquidity, as real estate tokens can be traded 24/7 on global crypto marketplaces. Tokenization also enables fractional ownership, allowing individuals to own a portion of a property at a lower cost. It has the potential to significantly reduce transaction fees and settlement times compared to traditional property sales.
Why Tokenize Securities?
Securities like stocks and bonds can also benefit greatly from tokenization. Digitizing securities as blockchain tokens makes them easier to fractionally trade, allowing investors to purchase small amounts instead of whole shares. This improves accessibility and opens up opportunities like 24/7 trading. Settlement times for security transactions could potentially be reduced from days to minutes by using blockchain tokenization.
Why Tokenize Bonds?
Bond tokenization provides similar advantages to stock tokenization, including easier fractional trading and faster settlement times. It also gives issuers access to a wider pool of global investors compared to traditionally issuing paper bonds. Overall, it improves liquidity and accessibility for bonds as an asset class.
How Does Tokenization Work?
At its core, tokenization refers to representing real-world assets as digital tokens on a blockchain. It involves creating a virtual representation of an asset that is digitally transferrable using blockchain technology. These asset-backed tokens can then be easily traded, tracked or managed.
The tokenization process involves three main steps. First, the real-world asset is digitized into a virtual representation. Next, unique crypto tokens are generated on a blockchain to represent ownership rights. Finally,
smart contracts are used to enforce the rules around the issuance and trading of the tokens.
Where Are Tokens Stored?
One advantage of blockchain tokens is that they can be stored in a decentralized manner. Tokens themselves reside on their blockchain network and ownership is managed via wallets. However, some asset tokenization platforms may also use centralized storage for the digitized assets paired with tokens.
What Is the Role of Smart Contracts?
Smart contracts are programs that set the rules for token transactions and enforce ownership rights. For example, they prevent
double-spending of tokens and automatically execute transfers based on
digital signatures. Smart contracts enable key functions like issuing new tokens or collecting dividends.
Real-World Applications
Tokenize Real Estate
Some platforms allow
accredited investors to purchase tokens backed by shares of commercial properties like office buildings or hotels. These systems turn legal ownership into blockchain tokens to give room to fractional, 24/7 liquidity.
Are Tokenized Stocks Legal?
The legality of equity tokenization is still evolving, but tokenized stocks have started emerging in certain jurisdictions. In places like Liechtenstein, tokenized stocks that meet regulatory requirements can be issued and traded. Overall, properly regulated security tokens can offer improved accessibility and liquidity for private stock investment under the right conditions.
Equity Tokenization Use Cases
Equity tokenization could benefit private company shares by making them tradeable on crypto platforms for wider access to investors. Other use cases include improving liquidity for thinly traded public stocks or reducing settlement times for stock trading.
Tokenized shares may also enable comprehensive ownership tracking and integrated compliance features.
Tokenization in DeFi
Using NFTs to Tokenize Assets
Beyond fungible tokens, crypto also enables non-fungible tokenization.
NFTs are used to digitally represent unique assets like collectibles, artwork and even real estate. Just as anyone can
mint NFTs, real assets can be "wrapped" into NFTs to prove authenticity and enable new markets.
Stablecoins Bringing Stability to Crypto
Stablecoins have gained popularity in
decentralized finance. Cryptos like
USDT and
USDC are
pegged 1:1 to USD, allowing them to reduce volatility. Stablecoins provide a stable means of payment and trading within the crypto ecosystem. They represent perhaps the most successful form of tokenizing real-world assets, i.e. fiat money.
Governance Tokens Enabling DAOs
Governance tokens power
decentralized autonomous organizations (DAOs) on blockchains. Holders of tokens can vote on proposals for protocols like MakerDAO or Uniswap that are solely governed by smart contracts. This demonstrates how crypto-economic token models can sustain complex virtual organizations.
Challenges Faced by Tokenization
Regulations Remain Unclear in Many Regions
One key challenge hampering adoption is the lack of clear regulations for asset tokenization in most countries. While some jurisdictions are pioneering frameworks, regulatory uncertainty persists across major markets like the EU, US and China. Developing compliant tokenization platforms requires navigating complex legal frameworks.
Tokenization Improving Accessibility and Liquidity
Looking ahead, crypto-backed tokenization may fundamentally transform finance by making all assets easily tradable and accessible worldwide. Tokenization unlocks 24/7 liquidity, fractional ownership, lower costs and streamlined operations. If adoption continues, it could create exponentially larger and more efficient markets for investments, securities and collectibles.
Potential To Tokenize a Wide Range of New Assets
Virtually any asset can be represented as a digital token, from fine art and vintage cars to
carbon credits and stadium tickets. Asset tokenization is still in its infancy but holds tremendous potential to financialize and exchange anything of value on blockchains. As the technology matures, tokenization could enable new markets we cannot yet envision.