Imagine owning a piece of the ‘Buckingham Palace’ or the ‘Mona Lisa Painting’. Well, of course, you can’t really buy a piece of either of these valuable pieces, but modern concepts have now made it possible to literally ‘own a share’ in an asset.
In today’s modern world, almost every asset has a singularly defined ownership. In other words, each asset such as real estate property, art pieces, or even your favorite sports team has singularly defined ownership.
However, blockchain technology has the potential to entirely change the landscape of this ‘defined asset’. Blockchain allows an asset to be tokenized such that each asset can be divided into multiple fractions. Each fraction can be owned by different entities. In other words, asset tokenization allows any asset to have clearly defined multiple ownership.
The asset, fractionally owned by multiple parties, can be tokenized using security tokens. These tokens are raised on a blockchain platform and they are backed by an actual underlying asset. The significance of a security token is that it facilitates defined shares, pays dividends, and receive profits. Each security token represents equivalent shares of the underlying asset. For example- a $100,000 worth real estate land can be divided into 1000 security tokens, wherein each token is worth $100.
Exciting, isn’t it?
What Can Be Tokenized?
Tokenization has opened up potentially new areas that have further expanded the possibilities. This includes the tokenizing of intangible assets such as copyrights, patents, shares, and bonds as well as tangle assets such as land, precious metals or even exclusive art pieces.
Security tokens further allow trading, buying, or selling of these tokens. Utility tokens or cryptocurrency tend to lose value as they do not have any real backing. But as security tokens represent an underlying tangible or intangible asset, their behavioral characteristics are unlike those of the utility tokens.
Let’s say that you want to invest $1000 for buying public shares of a few companies. However, the investment amount eliminates prominent organizations like Google as the price of their one share ranges above $1000. Moreover, if you even invest one share with Google, this automatically eliminates the possibility of diversifying your portfolio by investments in multiple shares.
Tokenization allows you to buy shares of such prominent companies by enabling you to buy fractions of one share. Hence, instead of buying one share, you can choose to buy 1/4th of the share and receive subsequent returns or profits. Moreover, this would also allow you to diversify your portfolio from the same investment amount.
Tokenizing financial instruments like company shares would further enable higher liquidity in the market. It also promotes inclusiveness by catering to a wider audience irrespective of the value or price.
One of the arenas where tokenizing can impart the maximum value is the real estate sector. This is due to multiple reasons. Our conventional real estate sector has multiple shortcomings. This includes exclusive with high barriers to entry, various bottlenecks, reduced liquidity, and largely opaque.
Tokenized real estate enables dividing a real estate property or land into multiple fractions on the blockchain. Each fraction represents a share in the real estate property. Essentially, tokenization facilitates fractional ownership of a real estate asset. This can further provide a number of benefits.
First and foremost, it eliminates the barriers of real estate in terms of the investment amount needed. Anyone can buy shares of a property and further enjoy either rental benefits or the returns of a real estate investment. Next, it increases the liquidity that flows in the market by permitting inclusiveness in the market. Thirdly, it also allows investments in spaces that provide higher yield but were difficult to access. Case in point: Tokenized parking spaces. Other than this, it also promotes transparency with blockchain in any real estate process.
Stablecoins are probably the most simplified application of tokenization. Stablecoins are cryptocurrencies that are pegged to a fiat currency like U.S dollars or Euro.
Blockchain has multiple advantages due to its core protocol. For financial transactions, it can provide various benefits including instant transfers, cross border transactions, negligible fees, and much higher security than our traditional instruments. Moreover, a practical application with all the benefits mentioned above already exists, namely bitcoin.
Stablecoins that are backed by the underlying fiat currencies can be used for industries like cross border remittance. This would entail a financial process that is easy, instant, and low-cost approach.
Blockchain provides fundamental advantages as far as funding is concerned. The first, however not in retrospective to tokenization, is that blockchain has provided a platform to raise funds. A variety of ICO’s and blockchain startups have raised funds for their projects through tokens. Startups can reach a wider number of investors even without any platform and subsequently, investors can find a number of projects to pool in their money.
Through tokenization, shares of the funds can be further distributed on a blockchain ledger. This further ensures effective trading of shares on the blockchain itself. Hence, ownership of the fund shares is clearly defined. Similar to company shares, tokenization provides fractional ownership in the funding and hence permits higher liquidity.
Additionally, legal obligations differing in accordance with parameters can also be programmed in the blockchain. This allows only the eligible parties to participate in the funding process. Blockchain tokenization also removes the need for middle-men to monitor the process. Much of the tasks can be automated using smart contracts and thereby reduce the additional fees.
From sugar to coffee, varied factors affect the market including location, supply-demand, currency rates, and more. With a number of factors defining the real-time pricing of individual commodities, it has given rise to fraud.
Buying and trading commodities have always been in the hands of large institutional investors. While the millions worth of commodities trade every day, much of it is done by big players. Tokenization would allow retail investors to be a part of this market by enabling investments worth only tens of dollars.
Real-time pricing is now largely manipulated with fraud and corruption in the commodity market. Blockchain facilitates a distributed ledger that is transparent and accessible to each member in equal capacities. With higher transparency and auditable actions, it would become easy to monitor the real-time pricing of commodities.
Further, tokenization can also assist in the operational activities of the billion-dollar commodities market. It can help in reducing administrative fees and additional costs. Tokenizing can aid in generating higher liquidity and efficiency in the market.