Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
Mahi Sall is the CEO & Founder of FinXpair, a Berlin-based strategic advisory boutique firm focu[...]
Tokenizing Assets and Unlocking Value on the Blockchain
Appinventiv | Chirag Bhardwaj | Aug 19, 2020
Blockchain has poised to bring a transformative difference in the finance world. The technology, with its characteristics like decentralization, immutability, transparency, and distributed structure, has added new forms of benefits and applications into the ecosystem. One of which is asset tokenization on the blockchain surface. This concept has emerged to be one the top Blockchain technology trends by opening new doors for tokenization of anything and everything in the marketplace – be it diamond, paintings, or property.
But, how far will it take the market? Will it become a key addition to every business?
Tokenization of Assets
The simplest answer to what is asset tokenization on blockchain is that it is a process through which a blockchain token is issued to digitally represent any real tradable asset in a way that you can trade with a single fraction of the asset as well. When talking about how tokenization is different from securitization, the former turns all the real world assets into high-liquidity digital token, whereas the latter converts low-liquidity assets into higher-liquidity security instruments that could be traded in markets and over-the counter.
See: Will the Law Keep Up with Smart Contracts in 2021?
Types of Tokens Circulated and Used in Blockchain World
To ensure that you get the best perks of investing your efforts into the development of tokenized asset, tokens are broadly divided into two basis:
1. On the Basis of Nature
- Tangible Assets – The term represents a set of assets that holds some monetary value and is available usually in a physical form.
- Fungible Assets – These digital assets are created such that every token is equivalent to the next. Meaning, one bitcoin is equal to one bitcoin and is interchangeable with one bitcoin only.
- Non-Fungible Assets – They are designed as unique and can’t be interchangeable.
2. On the Basis of Speculation
- Currency Tokens – These tokens represent currencies in digital form.
- Utility Tokens – The term refers to a digital token that is issued to support funding for the development of cryptocurrency and can be later employed for purchasing a particular product or service offered by the issuer of the cryptocurrency.
- Security Tokens –Security tokens, one of the cryptocurrency trends, is basically the digital representation of traditional securities.
See: For Digital Assets, Private Markets Offer the Greatest Opportunities
Potential Benefits of Tokenization
1. Greater Liquidity
One of the prime benefits of Asset Tokenization is enhanced liquidity. Presently, the market for privately held firms is illiquid. Because of this, it takes more time for buyers and sellers to know about each other and the services they offer.
But, with the adoption of asset tokenization, this process becomes smoother and streamlined. It introduces a blockchain platform where tokens represent private company securities and are sold to participants who would have pre-vetted in such areas as authorized investors with adequate capital to take the risk. These investors can exit the platform anytime by selling their tokens on a secondary market easily and efficiently. They won’t have to suffer from the hassle of early redemption which is an expensive affair. This, as a whole, will encourage high net worth individuals and agencies to make an investment in private company securities. And ultimately, build a global market for these private securities.
2. Higher Accessibility
Accessibility is also one of the prime benefits of asset tokenization on the blockchain surface. The concept to tokenize an asset on blockchain allows fragmentation of assets to the minimum possible amounts in the form of tokens and encourages investors to get a small fraction of shares. This opens doors for different investors and cuts down the minimum investment period and amount.
See: KABN North America Partners with UK and Barbados Based Tokenise International to Develop Verifiable Identity Credentials for Regulated Stock Exchange
3. More Transparency
Transparency is yet another advantage of tokenization. In tokenization of assets, the token-holder’s rights and responsibilities are embedded in the contracts that define token attributes, along with a complete record of ownership. This gives you an idea of whom you are dealing with, what power they have, and whom they have purchased this token from. Something that adds transparency to the whole process.
4. No Intermediaries
With the introduction of Smart contracts and characteristics like immutability, tokenization has also reduced the number of intermediaries required in a transaction.
5. Cheaper and Faster Transactions
Since transactions of tokens will be done using Smart contracts, a major portion of the process will be automated. This will cut down the number of intermediaries and the efforts required in administering the whole process. This will eventually result in faster and cost-effective transactions, which will be yet another advantage of tokenization of assets.
Some industries embracing the tokenization of assets today include finance, sports, healthcare, real estate and enterprise.
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