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Tech Deep Dives

What Are Real World Asset-Backed Tokens?

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Published on:
April 1, 2021

Contributor: CoreLedger goes into the intricacies of tokens in agribusiness and real estate.

Table of Contents

Introduction 

Tokenization has enabled the opportunity for literally any asset to become tradeable on the blockchain. Tokens are typically digital “claims” on real values — they also have the ability to break up whole values into fractions, which is only really possible through digital technology, and requires a slight recalibration in how we think of assets, and of ownership. 


Fractionalization allows investors, for example, to engage in revenue participation, meaning that they can buy a token that entitles them to a share of the revenue earned by a company or project, opening up a whole new market for investors internationally. 


Any item can be tokenized in its entirety too, giving the token holder full ownership of the asset. Items like agricultural assets can be tokenized for trading and assets like artworks, luxury goods and legal documentation can be tokenized for security and traceability. Once the value is tokenized, it is then stored in a secure digital “safe,” able to be traded or sold at any time to anyone around the world.


As mainstream attention turns towards the blockchain sector, users will be looking for examples of how this technology is actually used everyday. This piece will dive into some of the real use-case examples of tokenization that impact a diverse range of industries, taking this nascent technology beyond the crypto space. 


Agri-Backed Tokens as Stablecoins

Today, farmers can tokenize assets like soybeans, cattle or corn, making them accessible to both national and international investors to then be traded for currencies and stablecoins. This tokenization use case is especially revolutionary for countries with unstable currencies or untrustworthy economies. 


This use case is already taking place in Argentina, where the value of the peso has plummeted. Farmers are able to tokenize their soybeans to redeem and trade with any other tokenized asset on the blockchain via a unique atomic swap, where any asset becomes tradable with another. This means that soybeans can essentially work like an asset-backed currency in a digital barter system, and be traded for cattle, corn or even the peso. More than 40% of the world’s soybean oil and soy-meal production comes from Argentina, meaning it is of great national interest that smallholder farmers can liquify these assets. 


Agri-backed tokens also have upside for investors, as well as the farmers seeking relief from inflation. In these economies, many are forced to buy physical assets because the national currency is constantly losing value. Using tokens instead to own stable values might be the best possible alternative, and the ability to simply convert the token back into fiat money means you can liquidate at any point. The fundamental issues of stability and liquidity lacking in cash and stocks are solved for those looking into long term-saving options. 


Investors in agribusiness can also be reassured that returns are based on the value of its products, which are universally in demand. The value of food can never go to zero because it is needed constantly. There are still risks like drought, hurricanes or pests, but they will not occur at the same time everywhere on earth, so your risks are relatively contained with simple diversification.


The only regulatory issue to beware of in this instance is tokenizing a currency itself. As long as a user is trading tokenized assets for other tokenized assets or currency proper there are no legal hurdles, meaning that users can sell soybean tokens for fiat or other tokens, but not fiat tokens.


Real Estate and Revenue Share Tokenization

Tokenizing real estate is considered one of the most exciting use cases for blockchain technology as it enables a real estate token to act as a digital security, and greatly lowers the financial barriers to accessing real estate by lowering the price of admission. 


However, there is currently much more conversation around its use than there are real use cases — this is because there is currently a misconception that you can tokenize real estate or an asset to distribute ownership. 


In reality, this process lacks the proper legal framework necessary in most jurisdictions and owning a fraction of an asset comes with obstacles to the token holder — for example, repair costs, or disputes over whether the collective owners should sell the property. 


Revenue participation models are the next iteration of real-world asset tokenization, as they offer investment into the revenue of an asset via participation tokens. This solution can be applied to any business case where revenue is created over time. Companies issue a “Participation Token” which grants the holder the right to a percentage of future profit. That profit is then paid out to the investor via a “Payout Token.” Both of these tokens can be sold on exchanges.


In addition to quickly raising capital, companies using the revenue participation model benefit in several ways. They can attract investors internationally, fractionalize revenue without any ownership transfer of the asset and can easily administrate multiple small investments with cost effective payouts. 


The revenue participation model has multiple use cases, including real estate, agribusiness and industrial projects. Bitcoin mining is another example where investors can choose to access part of the reward revenue via a revenue-participation model.


Land Registration and Documentation Tokenization

In principle, land registries simply need to maintain records of land and real estate ownership, recording changes of possession as they happen over the years. It sounds like a simple enough task, but it comes with a myriad of challenges.


Many industries and governments across the world still use paper trails for documentation. In 2010, an earthquake in Haiti left 1.5 million people homeless. The disaster also destroyed 60 years’ worth of government archives, including land registrations. Many Haitans still remain without any legal means of claiming land as their own, given the government has no record of prior ownership. In some countries, land isn’t registered at all. As recently as 2004, only one percent of land in sub-Saharan Africa was under formal government registration.


The simple implementation of a blockchain-based land registry could enable the ownership documents to be recorded and assigned to the owner’s user account. If there are structural changes to the building, these can be added to the blockchain, and if the property is sold, all the relevant documentation can be transferred to the new owner. Every transaction is traceable, timestamped and indisputable.


Used in this way, blockchain could provide a highly secure and mobile record of ownership that cannot be manipulated. In contrast to storage on a central server or a central archive, which — if lost — means the end to all claims, blockchain allows information to survive any disaster. The entire archive doesn’t have to be stored on the blockchain for this to be effective. It is enough for one document to go on the blockchain and act as a document “fingerprint” to be replicated all over the world. 


With this fingerprint, any copy of the data can be validated and unambiguously found to be “real” or “fake.” A single surviving genuine document allows for the verification of all claims. 


Additionally, the end-to-end encryption of sensitive records and ability to tokenize these records enables the tokenization of accessing rights via access token. This token can be attached to the land registry, and the owner is in control to grant access to authorized parties. 


For example, if an owner wants to take out a mortgage on the property, they can grant access rights to non-public data on the mortgage company, which would be possible whenever necessary, unconstrained by office working hours. No paper-based system can provide such flexibility, resilience and durability. 


One could argue that a centralized server-based system like Amazon Web Services could provide the same service. However these servers, despite their size, are still vulnerable to failure and hacking, as has been proven before. The consequences of the network failing are serious, as is the case with a paper system. Data on the blockchain is far more secure and short of a global failure of the system, there isn't really a way to lose it. It's also very simple to “notarize” deeds on the blockchain, since there is an inherent level of security in the data itself that a server system does not have.

Conclusion

The sky is truly the limit when it comes to the possible use cases for real asset-backed tokenization. At the moment, we are witnessing a greater awareness of this technology in the form of NFTs or the issuance of digital security tokens, signified by the historic $69.3 million NFT artwork sale by Beeple. This execution of blockchain technology is already opening doors to new opportunities for wealth creation and generation, while offering millions around the world a chance to invest — a luxury that has been limited to a small wealthier portion of the global population. The future of tokenization is bright. 


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Author(s)

Johannes Schweifer

I'm the CEO of CoreLedger.

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