Asset Tokenization on Blockchain - Part 2

The Tokenization of Assets

“Tokenization is the process of converting a real-world asset into a digital asset, token or coin that can be tracked, traded, transferred, moved, recorded or stored on a transparent, time-stamped and irreversible Blockchain system“

Unthinkable a couple of decades back, but these days anyone can participate in the financial markets and global trade by simply having a laptop computer, tablet or smartphone and being connected to the internet.

What used to be the exclusive domain of brokers and intermediaries is now available on platforms and apps. Anyone, with a basic knowledge of computing, can transfer money, buy & sell commodities, execute financial transactions and trade the financial markets across the globe with the ease of a couple of clicks.

This all has become possible due to the ever increasing computer power that is continuously being compacted in portable devices such as laptops, tablets and smartphones.

Not only has this ?miniaturization“ of computing power revolutionized technology, the user-experience has improved along with it, by leaps and bounds.

At the onset of the computing era, knowing and mastering computer language was necessary to be able to use computers, but today, a child can learn how to use a tablet or smartphone within one day, and usually within only a few hours.

In parallel, the superfast proliferation of mobile devices as well as mobile networks has created a global interconnected world that exchanges information at hyper speed and as a result, the world has become ?smaller“ but at the same time faster, to the point of information overload.

The advent of blockchain has added an entire new dimension to the transfer of information via the world-wide-web, it has created the ?internet of value“, and along with this, enabled the tokenization of just about everything.

Tokenization of assets enables fractional ownership and allows for secure and borderless transaction of digital assets. This means that anyone can trade anything and anywhere in the world without the need for third-party intermediation.

As a consequence, traditional ?real-world assets“ that have been converted to ?digital assets“ can be traded on global markets and crypto exchanges much easier, faster and at a fraction of the traditional costs associated with global financial transactions and more importantly, without the never-ending paper trail.

According to Anthony Pompliano, founder and partner at Morgan Creek Digital Assets, tokens really represent the “intersection of digital assets and traditional financial offerings and are just a new technology improving old concepts”.

More importantly, as described in an interesting article by Michael Ippolito on LinkedIn, the four key advantages of tokenization are:

Liquidity - The creation of tokens significantly reduces the friction to trade ownership stakes in illiquid assets.

Accessibility - As a result of the way our current financial system is set up, many investment opportunities are not accessible to all participants in the global market. Tokenization and blockchain changes all of that.

Visibility - Tokens are an interesting answer to one of the most persistent problems with secondary markets, namely how difficult it is to track assets that move through them.

Efficiency - The real selling point for tokens is their ability to drastically reduce the involvement of middlemen in financial transactions. Smart contract code allows for the programming of highly specific ownership clauses in the tokens themselves.

On the other side of the proverbial coin, there are 4 major barriers to the tokenization of everything, namely regulatory framework, blockchain protocol maturity and scalability, as well as the need for more mature marketplaces supported by stable-coins that allow for prices to be consistent. If continued instability and high volatility plague crypto markets around the world, it will not be feasible or even impossible to tokenize a fixed asset and encourage mainstream buy-in.

Tokenization is one of the most significant aspects in the development of blockchain technology and many say it could affect the economy as much as the development of the internet and smartphone combined. Traditional financial metrics that represent the health of the economy generally ignore a transfer of value to the consumer.

Previously, seemingly unquantifiable abstract assets such as intellectual property, brands and goodwill as well as documented assets such as copyrights and patents can now be represented in the form of token – that is, as a ?digital legal right“ – on blockchain with a unique identifier number and even further parceled out and sub-divided into fractional tokens or units.

This paradigm shift in the digital value and transferability of assets makes it possible to sell legitimate fractions of almost anything such as art, music, artist, or even performers’ future revenues and everything else under the sun that involves money and value.

And as more assets become tokenized, the more liquid the global financial markets will become, the more market participants that enter the global economy fostering a new level of crowd inclusion never seen before.

The only challenges that need to be overcome in blockchain are speed, scalability and stability and this will be of crucial importance in order to achieve mainstream adoption of crypto world-wide.

From the above three, crypto currency stability is by far the biggest challenge and trying to contain crypto volatility will have to include many market participants.

Asset-backed stable coins – commonly pegged to the mighty US dollar or the ?safe-haven“ of gold - are currently the most promising solution to crypto volatility, however many stable coins such Tether, Gemini, Paxos, Circle, Coinbase and Tiberius are still struggling to do what they claim, that is provide stability to cryptos pegged to either USD or Gold. There are many reasons, one of which is market immaturity, but also the slow rate of adoption.

In simple terms, the more market participants, the greater the adoption, the more stable coins in circulation, the better the stability and overall functionality of stable-coins.

Today, there’s an estimated but mind-boggling $256 trillion dollars’ worth of real-world assets that are “documented” on a paper trail but highly illiquid. These assets will in due time be tokenized but the time frame is not yet known as many factors come in to play such as regulatory and legal status which keep these assets “frozen” in time and value

Blockchain technology will provide the regulatory and legal framework to transform these real-world assets into new forms of fractional ownership represented by digital tokens on blockchain that can be traded, transacted and stored without borders or boundaries across the world.

This fundamental transformation of assets from analog to digital will result in unprecedented liquidity in the global market of traditionally illiquid assets.

Unleashing AEAs that are autonomous as well as independent legal entities, empowered to trade and transact with limited or no liability (depending on regulation and jurisdiction), is a game changer of mind-bending magnitude.

AEAs will be roaming blockchain to discover information asymmetries, detect oversupplies, dispose of surplus, seek or create demand and aggressively exploit market inefficiencies on a global scale. In short, AEAs will engage in instant and global “commercial arbitrage” without the cost of expensive labor or third-party intermediation through legacy networks and systems.

One cannot even fathom the depth and disruptive impact this will have on global trade and the labor market in general. It’s “the good, the bad and the ugly” of “merciless technology” in full effect. And in the process, it will make the few early adopters and their owners incredibly wealthy beyond belief.

It will be comparable to Jeff Bezos’ Amazon retail empire of today, but instead, a decentralized global industry of commerce and trade, times a million or more.

Global trade, transport and commerce will never be the same again.