Over the recent years, financial institutions have embraced blockchain technology for the tokenization of real-world assets. This is a move that has sparked excitement in the finance arena. Banks can use tokenization to profit from decentralized finance (DeFi), safeguard assets on the blockchain, and use smart contracts to improve transaction efficiency.
In this article, we discuss what asset tokenization is and explain the whole process step by step. We also look at some of its benefits.
What Is Asset Tokenization?
This is the process of encoding a given asset’s right into a digital token that you can hold, sell, and trade on a blockchain. The tokens produced represent an ownership interest in the underlying asset. You can tokenize any asset, whether intangible or tangible. Turning these assets into digital tokens makes them more easily divisible.
This then makes fractional ownership possible, allowing more and more people to invest. As a result, the markets for these assets become more liquid. Additionally, asset tokenization can enable direct peer-to-peer trading of traditional assets that at the moment need middlemen. The process also brings transparency and tighter security to the market.
The Process of Asset Tokenization
Here’s how the tokenization process works.
Identify the Asset
The first and most crucial step is picking the asset to be tokenized. This could be physical like artwork or a building structure or financial like company shares. Once selected, the asset should be subjected to valuation which will impact the type and number of tokens issued. It’s advisable to go for tokens with a significant market as you’ll be aware of the price range and be able to appropriately price the tokens.
Come Up with Legal Frameworks
Next, ensure that the tokenization complies with the relevant regulations and laws. These may be different for different locations and asset types.
Create Smart Contracts
Come up with a smart contract that dictates the terms and conditions of the tokenized asset. It should also clearly define transfer rules and ownership rights. Smart contracts are blockchain-based, decentralized programs with clear, auditable code that perform predetermined tasks. In the case of a tokenized real estate property, for instance, smart contracts could be in charge of crucial functions such as rental income distribution and payment of real estate maintenance expenses.
Distribute and Sell Tokens
With the digital tokens and smart contracts in place, it is time to sell the tokens to investors. You can accomplish this through open sales to the general public, private sales, or a combination of the two. Tokenization’s effective fractionalization of the asset has the potential to establish a larger and more liquid market for the asset.
Manage Assets
The asset continues to be managed by its owners or custodians. Rights and ownership however will be tracked via the blockchain. Blockchain ensures a transparent record of ownership and transactions, lessening the risk of errors or fraud.
Trade On Secondary Markets
Tokens can also be traded on secondary markets after their launch. List them on a digital exchange or marketplace to allow trading and investment.
Benefits of Asset Tokenization
Here are some of the benefits of asset tokenization:
Access Democratization
Asset tokenization can help democratize access to investment possibilities while upholding necessary safeguards. Asset classes such as fine art have historically been the domain of the wealthy, thus the high entry barriers. Asset tokenization can help break down these barriers by making fractional asset ownership possible. This means investors can hold tokens that represent tiny shares of the asset.
Market Fluidity and Efficiency
There are various ways asset tokenization can improve market fluidity and efficiency. First, fractional ownership can enhance the liquidity of assets that are typically considered illiquid, such as real estate. Secondly, smart contracts and blockchain technology can simplify transactions by eliminating the need for middlemen. This lowers transaction costs and times and opens up a round-the-clock global market for tokenized assets.
Other benefits of asset tokenization are ensuring security and transparency and enabling simplified asset management.
