With the rise of blockchain technologies, the world of finance is undergoing fundamental transformations. The financial ecosystems are the recipients of a number of benefits due to the introduction of decentralization, immutability, and distributed blockchain systems. Blockchain is encouraging the further democratization of the investment market in illiquid assets by bringing about fairer, more transparent markets.
Blockchain allows for breaking down an asset into smaller units for additional investments. It can be anything from exotic assets like paintings, racehorses, and sports teams to traditional assets like real estate property, company shares, collectibles, commodities, debts, and bonds. Almost anything can be turned into a token on a distributed ledger. But this leads to two questions: What is asset tokenization? and How to tokenize an asset?
What is asset tokenization?
Asset tokenization is turning any real tradable asset into digital tokens on a distributed ledger or blockchain. Tokenization can help divide and establish ownership rights into different shares. Thanks to blockchain, the ownership of assets is secured so no one can erase or change them. The possibilities of asset tokenization are limitless. The entire world can be tokenized and broken down into smaller pieces.
What assets can be tokenized?
There are four key types of assets that can be turned into digital tokens – intangible, fungible, non-fungible, and financial tokens.
Intangible assets. They don’t have a physical presence such as copyrights, patents, trademarks, etc.
Fungible assets. These assets are easily replaced by identical items. Fungible assets include commodities, common shares, options, and dollar bills.
Non-fungible assets. They cannot be divided into smaller parts in the real world. Non-fungible assets include cars, art, real estate, etc.
Financial tokens. These tokens include monetary vessels, precious metals, stones, gems, and gold.
Benefits of asset tokenization
In 2022, only a small percentage of the population is able to accurately assess high-value investments. This fact acts as a deterrent to the development of the investment market. However, the tokenization of assets delivers new opportunities for further growth and diversification of assets in the market. Additional benefits of asset tokenization include:
- Greater liquidity of assets
Private equity value is estimated at $4 trillion, and real estate also has trillions locked. Hence, tokenization can open the following assets to a global investor pool and a new market for trading previously non-fractionable or illiquid assets.
- Higher accessibility
Accessibility is one of the greatest benefits offered by asset tokenization. Tokenized assets can be accessed 24/7 from any part of the world.
- Full transparency
Since each record is kept on a shared and decentralized ledger, no one can claim to own assets fraudulently. This gives you a full view of the token ownership, including who and when a token was purchased. Nothing can be covered up.
There is no way that the data stored on a blockchain can be corrected, changed, or deleted. Thanks to improved traceability, anyone can view every transaction performed with a particular asset at any point in time.
Asset tokenization completely removes the need for intermediaries. Thanks to smart contracts, a major portion of transactions are automated. This results in faster and more cost-effective transactions.
- Fractional ownership
Tokenized assets become divisible units that allow for small-percentage investments. Fractional ownership makes it easier for billions of new investors to enter the market.
Challenges that slow down the adoption of asset tokenization
Asset tokenization is a complex process that has the potential to transform the market and innovate the global economy. Here’s what you need to know before going all-in on asset tokenization:
- Lack of regulations. Most of the challenges of asset tokenization are linked with regulatory issues and its borderless nature. There are no universal regulations that would apply in different countries and different jurisdictions. Regulators, developers, and state politicians need to work together to define the legal framework regarding tokenized assets.
- Cyber attacks. Blockchain is a target for criminals. In 2020, hackers successfully launched over 122 cyber attacks and stole $3.8 billion. Though it seems like a huge problem, this number has been declining year over year. In 2019, there were 133 attacks.
- No standards. There is no formal framework for developing and managing tokenized assets. The development of common standards can help standardize the market and ensure trust among every participant in the market.
What are asset-based tokens?
Asset-based tokens are digital representations of physical assets that are secured by those assets. Any physical asset like gold, real estate, soybeans, crude oil, or equity can become an asset-backed token.
Benefits of owning asset-based tokens
- Lower trading costs
- Increased liquidity and market depth
Asset-based tokens are projected to increase the liquidity of the underlying physical asset. The market of tokenized assets is projected to reach $24 trillion by 2027. This means that 10% of the world’s GDP will be tokenized. The process of asset tokenization can help unlock enormous amounts of capital kept in traditional illiquid systems.
Industries that can benefit from the adoption of asset tokenization
Asset tokenization has huge potential to change many business spheres, including:
Asset tokenization can disrupt traditional financial products via decentralized finance or DeFi. It could have various effects on the financial landscape of sectors like investment, payment, margin lending, and product structuring.
- Real estate
Real estate is another business domain that could benefit from the adoption of asset tokenization. Thanks to tokenized assets, the investing process can be simplified and streamlined. There is no need for intermediaries that make it easier for buyers to interact with sellers and vice versa. Moreover, tokenized real-estate assets allow for investing even a small amount of money in highly-priced real estate items.
Healthcare institutions deal with tons of sensitive information on a daily basis. Tokens can replace the most sensitive patient data like PPI, ePHI, and PANs with unique values and greatly reduce the chances of data breaches.
WIth asset tokenizations, it will be easier for fans and investors to invest in their favorite players and clubs. Not only will investors benefit from asset tokenization. More investments mean more support and opportunities for athletic clubs.
Blockchain allows artists to monetize their art and art lovers to invest in their favorite pieces without spending millions of dollars.
How to tokenize an asset?
The concept of tokenized assets can revolutionize a greater number of business verticals. The world’s tokenization market value is projected to reach $5.6 billion by 2026. It can make you think that the introduction of asset tokenization into your business isn’t a bad idea. Here’s how you can tokenize an asset:
- Choose an asset. Don’t forget to conduct extensive research to study the market to identify what niche you are able to occupy.
- Develop your business model. Before developing your own solution, you need to determine the right business model that depends on the following factors:
- Your role. You can be either a token keeper or an advice issuer on how to build a token.
- Your monetization strategy. You can take advantage of smart contracts or develop life cycle events using distributed ledgers for higher benefits.
- Your platform functionality. You can become a central distributor and provide access to various tokenization platforms or maintain user accounts on cryptocurrencies.
- Build your platform. With Unicsoft, you don’t have to worry about the technical part of the development process. Our field-tested blockchain developers can turn any business idea into a fully-fledged software solution.
- Integrate your platform. The process of platform integration depends on your business model. Now you need to take care of product/service types, your target audience, the infrastructure involved, and any legal aspects.
- Study the legal issues. Before entering the market, you need to ensure that your platform complies with all the regulatory requirements.
- Publish a whitepaper. Tell the world about the importance of asset tokenization, its adoption, and its impact on the business world.
- Win over investors. This is probably the hardest part of your journey. You need to start your marketing campaign long before you launch your platform.
Asset tokenization can revolutionize a number of different business spheres and deliver new services and new roles to the market. It will offer new opportunities for traditional market players to meet the demand of the next-generation economy. Contact us to find out how to harness the power of asset tokenization for your business niche.