Blockchain has been one of the most revolutionary and disruptive technologies, creating a paradigm shift by allowing people to become part of a global financial system. Countless currencies have been designed with different features and aims. Ethereum, for instance, securely executes and verifies application code, that is, smart contracts. Blockchain and cryptocurrency go hand in hand, yet the purpose of blockchain goes far beyond Ethereum. Blockchain technology offers new investment opportunities by enabling asset tokenization. Digital assets can be purchased, sold, and exchanged on the distributed ledger.
What Is Asset Tokenization on The Blockchain?
At present, financial institutions are compelled to reduce costs and optimize business, so they attempt to explore various solutions to create new revenue streams and optimize legacy systems with the support of innovative technologies. Tokenization, powered by blockchain technology, has the potential to reduce global wealth disparities by enabling access to a wider range of investable assets. It refers to the process of converting something into a token (precisely, a security token) that represents a tradable asset. For example, real estate can be transformed into an illiquid asset, allowing buyers to transact immutably.
Opportunities Arising from The Tokenization of Assets
In the financial sector, there’s much talk about tokenized assets, but very few understand what asset tokenization means or how it’s different from other crypto investments. Tokenized assets are created via an initial coin offering, and the security token can represent a share in a company, ownership of real estate, or participation in an investment fund. The financial sector has become aware of the many benefits of tokenization, but ignoring the challenges can lead to consequences. The adoption of asset tokenization enables benefits such as:
Splitting up ownership means that there’s no barrier to entry in investing in real-world assets, so there are more assets available for investing in underserved segments of society. An asset can be easily converted into cash without much difficulty. Sellers, as far as they’re concerned, can easily find a counterpart to perform a transaction. The tokenization of assets supports inclusive finance. As no intermediaries are necessary, investors have access to new economic opportunities, and participation isn’t dependent on location. Individuals with little money can start investing. Regrettably, it’s easy to think that you can get started with a small amount.
Blockchain technology introduces transparency by default, facilitating transactions that are traceable and unalterable. As a ledger, the blockchain keeps a record of every transaction ever made on the network. It’s fully open and accessible to anyone. The records are unalterable, yet blockchain forks are possible. For physical assets, transparency permits improved traceability, as anyone can review the history of the activities performed. In some situations, privacy-enhancing technologies can be deployed to avoid leaking sensitive information to other participants in the network. Anonymous credentials, for instance, can be integrated into the distributed ledger.
Single Source of Truth
It’s difficult to map and interlink data points such as licenses, intellectual property, rights, and ownership of individual assets, to name a few. As a consequence, only fragmented data points are available, making it challenging to make data-driven decisions. Via a single source of truth (SSOT), data is aggregated from many places, so actors of the ecosystem can interact with the same digital representation of an asset. Blockchain technology reduces information mismatch; identical information is found on each node. Access is granted by digital tokens that are revoked as soon as the transaction is completed.
Tokenization Provides a Convenient Way of Investing in Assets
Almost any physical or digital asset can be tokenized from a technical standpoint. Financial institutions act as advisors by offering consultation or taking advantage of their expertise as custodians. Tokenization can be applied across a wide range of asset classes, including fungible assets (equity, debt, derivatives), non-fungible assets (collectibles), and partially fungible assets (game currencies). You can acquire tokens that represent small percentages of underlying assets and exchange them on secondary markets, which are open 24/7. Businesses offer these tokens on an exchange platform, and ownership is recorded on the blockchain.
Steps To Investing in Tokenized Assets
- Find a reputable and trustworthy centralized/decentralized exchange. Tokenization transforms assets into commodities, so you can monitor your investment without intermediaries, not to mention that you have sufficient liquidity. Examine the price of the asset and identify relevant jurisdictions and regulations.
- Fund your account with fiat money or cryptocurrency. After you’ve completed the onboarding process, fund your account. Millions worth of real estate have been tokenized on the Ethereum blockchain, so if you want to invest in real estate assets, you’ll need some ETH. In case you’re wondering how to buy Ethereum, it’s not complicated at all. Smart contracts automate regulatory compliance.
Tokenized assets are backed by a contractual obligation to the token holder, so their value doesn’t depend on how many buyers and sellers are in the market. They can generate income streams, of which mention can be made of dividends and interest payments. The traditional market infrastructure is slowly but surely adapting to the token economy. Some obstacles must be overcome, nonetheless, if tokenization and the broader economy are going to take off. For example, in some market circumstances, it might be impractical to liquidate a position.
Asset tokenization finds wide-ranging applications owing to the development in technology that allows capitalizing on its resources. It provides exposure to a multitude of projects to a large number of investors. Smart contracts ensure compliance with securities regulations and provide a strong audit trail. Blockchain technology guarantees that when a user purchases a token representing an asset, nobody can change or erase ownership of that asset. The rise of tokenization is most commonly associated with non-fungible tokens (NFTs), which are popular in applications like avatars and collectibles.
Many argue that tokenization is the future of financial markets, and almost every asset in the world will be tokenized and represented on the distributed ledger. What is certain is that blockchain technology is revolutionizing the financial services industry, bringing about transparency, cost efficiency, and accessibility.