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In October 2018, a Manhattan-based, $30-million, 1,700-sq-ft luxury condo was tokenized on the Ethereum blockchain. In February 2019, the real estate industry saw plans to tokenize a $66-million building in Miami, Florida. But that’s not it. When it comes to tokenizing real-world assets, anything from bonds, commodities and funds to arts and sports teams can be tokenized.
Experts say that the tokenization of real-world assets can fundamentally change how we invest in them. It is, however, important to first understand the basic concept of tokenization and why we should consider it an option.
Asset Tokenization in Three Sentences
Asset tokenization is the process by which we can denote a real-world asset or a portion of it by a digital token equivalent that can be traced back to the original asset. These digital tokens contain details such as the portion of the real asset they represent, the details of ownership, history of ownership, and so on. People can then own the rights of a real-world asset by simply owning the rights to a digital token stored on a blockchain.
Benefits of Asset Tokenization
Instantaneous Transactions, Reduced Cost
When transferred manually through the conventional process, the transactions of real-world assets can be a lengthy affair. It may take days, if not weeks or months, to close one deal.
If we assign digital tokens to represent these same real-world assets, we automatically integrate the properties of crypto tokens. We can then make the transactions of these assets almost instantaneous like it is for cryptocurrencies or tokens.
Making the transaction process thoroughly digital can also reduce the cost of each transaction and minimize errors.
Wider Reach, Greater Liquidity
Many individual investors fail to invest in high-end assets such as real estate and arts because they cannot afford the required capital. By tokenizing these assets, we can fractionalize each of these high-valued items into smaller portions, resulting in a relatively smaller cost. Many individual investors can then find investing in these assets more achievable.
Another issue with these assets is the lack of liquidity. But when we divide one large asset into several chunks, we automatically add to the liquidity of that asset. With more people owning one type of asset, there can be a consistent flow of supply and demand.
Secured Data, Increased Transparency
The tokens that represent real-world assets are stored on blockchains, meaning that they are cryptographically secured. It would be next to impossible for anyone to tamper with the data tagged to a token.
Dealing with tokens on a blockchain also adds transparency to the process. Both transacting parties can easily keep tabs on the other party and verify each other’s authenticity. They can also access the blockchain to track the history of ownership of the same tokens.
Tokenization of real-world assets can bring a new dawn in the world of investing for various types of assets. It could drastically impact the world of traditional finance to make it more transparent and democratic. Fraudulent activities would also take a big hit with added security and transparency. However, it is important to note that for the mass adoption of tokenization, we will need regulatory reforms to support the process.