Understanding Asset Tokenization

Massive investment opportunities are the benefits typically reserved for the few. A decentralized blockchain network can change that. Just like bitcoin is significantly changing the financial landscape, a blockchain asset tokenization can make investing in real-world assets far more convenient and efficient.

With this method, tangible assets can be divided into small units increasing their liquidity and enabling more market participants to join. That's why asset tokenization seems to be one of the most promising blockchain applications.

The idea behind asset tokenization is quite simple - "It allows to convert the rights to assets with economic value into a digital token".

Such tokens can be stored and managed on a blockchain network. Tokenization can have tremendous effects on trading and investment, promising greater transparency, liquidity, data integrity and exchange potential.

Let's Understanding - Asset Tokenization In Simple English

Let us forget about Blockchain and smart contracts for a moment. Imagine you want to invest in real estate but your initial investment is modest - say $5,000. Perhaps you want to start small and increase your investment gradually. For instance, you decide to invest a couple of thousand every three or four months. Obviously, with the traditional real estate market, this is quite awkward to do. How are you supposed to buy two or three square meters in an apartment?

Let us reverse the situation. Imagine that you have some property — say an apartment. You need cash quickly. The apartment is valued at $150,000 but you just need $10,000. Can you do this quickly without much friction? To my best knowledge, this is next to impossible.

Enter tokenization. Tokenization is a method that converts rights to an asset into a digital token. Suppose there is a $200,000 apartment. Tokenization can transform this apartment into 200,000 tokens (the number is totally arbitrary, we could have issued 2 million tokens). Thus, each token represents a 0.0005% share of the underlying asset. Finally, we issue the token on some sort of a platform supporting smart contracts, for example on Ethereum, so that the tokens can be freely bought and sold on different exchanges. When you buy one token, you actually buy 0.0005% of the ownership in the asset. Buy 100,000 tokens and you own 50% of the assets. Buy all 200,000 tokens and you are 100% owner of the asset. Obviously, you are not becoming a legal owner of the property. However, because Blockchain is a public ledger that is immutable, it ensures that once you buy tokens, nobody can "erase" your ownership even if it is not registered in a government-run registry. It should be clear now why Blockchain enables this type of service.

Thus, we took an asset, tokenized it and created its digital representation that lives on Blockchain. Blockchain guarantees that the ownership information is immutable.

Benefits of Asset Tokenization

Blockchain distributed ledger has attributes that could be very appealing to investors. Assets tokenized on the blockchain are:

1. Immutable?- Once an investor buys tokens, nobody can "erase" the ownership.

2. Accessible?- Tokens can be accessed from any place in the world, 24/7, via e.g. a smartphone app.

3. Divisible?- Tokens hold a promise of greater liquidity which increases the expected value from trade and eliminates the need for minimum investments.

4. Cost-effective?- Tokens eliminate the middlemen, which often limit investment accessibility by e.g. restricting investments to accredited investors only, demanding high fees and requiring access to stock-trading accounts.

5. Transparent?- Tokens eliminate asymmetry of information present during the transfer of ownership.