Tokenization: Everything You Need to Know

Tokenization is one of the many new concepts that have been introduced by blockchain technology.

New payment methods are being introduced into today's financial industry thanks to tokenization's ability to secure, digitize, and simplify transactions. Because of the benefits, it provides to both sellers and buyers such as fractionalizing asset ownership, this idea has gained traction all around the world.

A new concept can be tough to grasp and businesses may not realize how much value it can bring, this article will then uncover what you need to know about tokenized assets, why is it essential and what are the current use cases of assets tokenization in today’s world.

What is Tokenization? 

Essentially, tokenization is the process of transforming an item into a digital token that can be used on a blockchain platform. Asset tokenization is one of the most common use cases in today’s world. 

Asset tokenization on the blockchain is a procedure in which a blockchain token is produced to digitally represent any actual marketable asset in such a manner that a single fraction of the asset may also be traded. Essentially, a token in such a use case is a digital representation of an asset that is accessible to everyone on the blockchain. The value of each digital token is derived from its underlying real-world assets, such as real estate, gold or even artwork. As you can see, tokenization is possible for any asset that has value to a third party, regardless of its physical or digital form. 

We can now see tokenization started to venture into different industries. Starting with the financial systems and moving on to other areas like real estate in providing innovative solutions such as fractionalized property ownership. As such, many other industries and investors are exploring the option of fractionalizing their assets and converting them into tokenized assets because of the endless potential of this ever-growing technology.

Why Tokenization is Essential in Today’s World?

The ownership of digitally native assets is a novel concept. Paper-based symbols of ownership such as property rights or stock certificates are currently backed up by our legal system. These paper-based symbols can be converted to digital assets and placed on a blockchain to take use of four essential features provided by this technology. 

Liquidity is the most obvious advantage, but there are many others. If an issuer wishes, tokenized assets can often be exchanged on secondary markets. The token's "liquidity premium" allows investors to have more margin, while sellers benefit from the token's "liquidity premium" by capturing more of the underlying asset's worth by eliminating the needs of middlemen in between the transactions. 

Accessibility is an apparent advantage for both assets owner and potential investors. A key advantage of fractionalized assets is the ease with which the ownership of a particular asset can be further fractionalized into multiple digital tokens. Investing in these possibilities is open to everyone since the barrier to invest has notably reduced. As such, tokenized assets such as tokens which represent fractionalized property ownership are transforming the way investors look at traditional real estate market opportunities and have opened doors for a new pool of investors who are inaccessible previously.

The third advantage is that transactions are faster and cheaper. Automated elements of the exchange process can be achieved by using smart-contract technology. Automation reduces the need for intermediaries, resulting in speedier deal completion and cheaper transaction costs. 

As a last advantage, it's important to note that transparency of ownership and transactions have greatly improved in respect of asset tokenization on blockchain. Token owners or investors can have their information, ownership records, and legal agreements included directly into the digital asset they own via security tokens. The blockchain's immutability also renders the ownership record unquestionable. This new level of openness ensures that all parties involved in a transaction know exactly who they're doing business with and prevent illicit activities from budding.

How does Tokenization work in Real Life? 

Here are some of the use cases of tokenization in today’s life. 

1. Real Estate Assets Tokenization

Tokenization in real estate is in its practice of using blockchain-based tokens to create fractional property ownership of a particular property. It helps to create more liquidity when it comes to transacting these real estate assets.

The first tokenization real estate deal was completed in 2018 by Elevated Returns, a New York-based asset management firm. On the Ethereum blockchain, an $18 million offer was made on the St. Regis Resort in Aspen, Colorado.

Elevated Returns intended to sell half of the St. Regis Resort as a standalone asset at first. After that, the corporation decided to sell tokens to provide 18.9% ownership. 

2. Physical Commodities Tokenization

Despite the fact that the market for commodity exchange has mostly transitioned to paperless transactions, the overhead for these transactions is enormous.

The American bank and financial services behemoth JP Morgan has announced that gold bars will be available as a tokenized asset on Quorum, their blockchain network.

3. Artwork Tokenization

The proprietors of original artworks by well-known painters frequently sell prints of their works. Assume there are 1,000 prints of a particular painting.

These prints could be tokenized by transferring ownership of the prints to a certain company. The corporation can then sell the tokens to the general public for a single copy.

Physical delivery to the specified address can be done once the voucher has been redeemed.

If the value of the redeemed tokens does not meet a particular level, then the token holder can possess a fraction of the art print based on its assessed worth.

For example, TheArtToken (TAT) sells tokens that reflect a portion of ownership in contemporary and postwar art. The original physical artworks are kept at a Swiss government-run facility.

Buyers and third-party markets can now transact in fractions of artworks thanks to the tokenization of art.

4. Cargo Tokenization

The Bill of Lading (B/L) is the means of issuing proof of ownership in the logistics business. This approach has a number of drawbacks, including delays in delivery and the inability to retrieve items if the bill of lading is lost or misplaced, among others.

To circumvent the problems that the traditional way of using the B/L causes, CargoX has devised a tokenization approach. Smart B/L is an open system based on Ethereum that they are developing.

Their Smart B/L system is anticipated to function in the same way as the token system. The carrier will use their app to construct a Smart B/L at the origin and send it to the exporter.

When the importer sends money to the exporter, the exporter also gives the importer ownership of the Smart B/L token. By providing the Smart B/L token to the transporter at the receiving end, the importer can claim ownership of the goods.

Conclusion

Asset tokenization is reshaping the way we deal with real-world assets, from financial instruments to real estate. Any item or service may be represented by a digital token and stored on a blockchain, making it accessible to all while enabling unprecedented transparency and security, thanks to blockchain technology. 

As long as different countries have their own rules for governing the tokenized asset and the maintenance of fractionalized ownership of tokenized assets, there will surely be more seamless borderless transactions. The tokenized future is rapidly becoming a reality as more and more individuals and governments around the world come to terms with blockchain's extraordinary power and utility.

Visuals courtesy of PIXABAY and UNSPLASH