The world of investments has always been looking out for processes to break down an asset into small constitutes but at the same time, not to compromise on the value of the assets itself. They knew that splitting an asset into smaller parts would greatly enhance the liquidity and investor participation. However, to do so without compromising on the price of the asset and using extremely dependable paperwork was a challenge that has for long plaguing the investment industry.
Traditional paper ledgers were difficult to maintain, and they did not present an easy option to trade when trading and investments were globalized. A simple excel sheet could probably solve the problem. Still, the challenges in the arena of manipulation as making a change was as simple as deleting the contents of a cell and replacing it with something else! This increased the possibilities of fraud.
Arriving at a solution that converges the advantages of both the old and the new, send you the pic. Until the digital and immutable ledger technology called blockchain made its entry. The confluence of security and immutability along with its global reach and accessibility made it the panacea that the world of investments was looking for.
Now that the recordkeeping has been taken care of, it is time to address the “breaking down of the asset.” The process of breaking down a large asset into smaller representatives is called tokenization. Tokenization can have different definitions based on context. However, in the context of asset tokenization, it can either represent shares in the asset or profit shares or equity or debt.
Demystifying Asset Tokenization
Tokenization of assets can be illustrated with a simple example. The example holds true even if we don’t bring together aspects like the blockchain and smart contracts. If you are an asset owner and you have an apartment that is priced at $100,000. Suddenly, you are in dire need of $30,000, and the only option you have is to sell that prized apartment for $100,000 even though you know that the apartment’s price might increase in the long run.
- Selling an asset worth $100,000 is surely not easy. It is not possible to find investors who will be ready to invest that tune of money on a single asset even if they know that the price is going to appreciate in the long run. Therefore, it becomes difficult for the asset owner to raise the money that they want in a short time frame.
- If you were an investor who had $100,000, you could buy the apartment right away! However, that would make sure that you do not have money for any other investment. If you were an investor with just about $5000 at your disposal, you could not even think about buying that amazing apartment.
- However, with the tokenization, the apartment can be broken down into 100 units valued at $1000. These ‘units’ are referred to as tokens. With this method, the apartment owner can sell about 30 of them to ensure that they get the $30,000 that they need right at that point in time. An investor with a huge capital can buy all the 30 tokens and still have $70,000 left for other investments. Last but not least, the retail investor who had just $5000 to invest can actually invest in that apartment which was, until now, considered inaccessible to them!
- Therefore, it is quite evident that tokenization presents a bouquet of advantages to the asset owner, and both retail and institutional investors.
Bringing in the Blockchain
The blockchain is an immutable public ledger that is used to record information and effect transactions. Once the purchase is made, the record of ownership cannot be erased or altered by fraudulent practises. Therefore, bringing in the blockchain and asset tokenization has the credentials it takes to work out wonders in the field of investments.
What All Can Be Tokenized?
Well, everything! Some of the most illiquid assets like artwork, sports teams, and many traditional assets like bones, venture capital funds, commodities, and real estate can all be tokenized equity. Given below are a few examples:
Real estate tokenization is considered to be one of the biggest use cases to tokenize your assets. From the example that we have seen above, it is quite evident that to tokenize your property means to open up new avenues for higher capital and market participation. It also gives room for real estate to expand into untapped markets.
As of now, shareholder information for small and medium businesses is recorded on papers or spreadsheets. Since each party manages its own data repository, there is a possibility for a discrepancy in data and is extremely prone to errors. Tokenizing your equity shares allows companies to interact with shareholders and provide them information on a single shared and immutable ledger. It achieves the perfect confluence between transparency and authenticity to run trades on the secondary market.
A lot of illiquid assets, including but not limited to private company ownership, partnership shares, exotic wine, and food, and collectible artwork can all be tokenized on the blockchain. It leads to better price discovery, provenance, and transparency on the blockchain.
Advantages of Asset Tokenization
Going by the words of Dr. Ian Malcolm in Jurassic Park, just because something could be done doesn’t mean that something should be done! Here are the reasons why asset tokenization presents a plethora of real-world benefits.
- When you tokenize your assets, it means that any investor in any part of the world can invest in any asset that is located in any part of the world! It renders the concept of geographic barriers obsolete.
- Asset tokenization platforms eliminate the need for intermediaries and the costs involved. The smart contracts – an inherent property of the blockchain – ensure that all the processes involved are automated, and trust is maintained in all stages.
- In the world of investments, one of the most significant advantages brought about when you tokenize your property is the enhancement of liquidity. Since asset ownership is made more affordable, it improves liquidity and broadens investor’s base, increasing their access.
- When you tokenize your assets, you pay me for fractional ownership. It means that a property owner can sell a part of their property, and an investor can purchase a fraction of a particular property. It diversifies the investor’s portfolio, which is one of the greatest advantages as all investors look forward to when investing.
- An asset tokenization platform that uses blockchain technology brings about the most important confluence of immutability and transparency. It means that everyone can see the transaction records but at the same time, no one can tamper with it. This is one of the most amazing and much-needed technological breakthroughs that the world of investments has been expecting for long.
There is no question that tokenization will be the order of the future, and it might not be a surprise that it is projected that more than 10% of the global assets will exist on the blockchain by 2024. If you would like to stay in tune with this new technology and embark on this exciting voyage of property tokenization, you can get in touch with blockchain development companies. They will take care to understand your requirements and also present you the perfect tokenization solution.
Vanessa Jane is a Blockchain Consultant, been in the Software Development Industry for the last 4+ years. She has a great knowledge of Technology, Blockchain, real estate tokenization, Tour and Travels, Fashion, Education, etc also she likes to write about the tips, procedures and everything related to the growth of Business.