What is Tokenization of Assets
The asset tokenization on the blockchain is quickly becoming the hottest trend in the financial markets, as the previously unavailable investment sectors open up to smaller investors. How is that possible, and what is the tokenization of assets? Read on to find out!
Imagine that you have an expensive and unique item that’s difficult to sell, for example, an inherited piece of art. Such assets are considered illiquid because they require time and resources to sell to the right buyer for the right price. To release your liquidy, aka sell the artwork, you’d have to find an interested art collector who has enough funds to purchase it in full.
Obviously, there won’t be that many people fulfilling that criteria and so you won’t be able to sell illiquid assets quickly; not without a significant loss. But what if you could digitize and divide your real estate or artwork, and sell parts of it to people all over the world, like selling shares of a company? Perhaps, you could only sell some of it, enough to obtain the fund you require right now?
Take another example. The real-estate sector remains one of the most stable and highest returns investments despite the 2009 crisis. And yet, anyone willing to reap the benefits has to invest substantial amounts to purchase the entire house with plus the transaction costs and notary fees. You can’t invest a few thousand euros in just a meter square or two, and neither can the owner sell you only a small portion of their home. Or can they?
Tokenization of an asset is the issuance of digital tokens that represent the ownership of an asset, such as a piece of art or a house. Instead of looking for a local buyer interested in a rare or expensive item, asset owners can sell their tokenized assets – IEOs or STOs to many smaller investors worldwide, in full or in part, under various customizable contract conditions.
At the same time, retail investors can enter markets previously reserved for bigger players, and partake in lucrative opportunities at low minimum investment threshold and negligible transaction fees.
How does Asset Tokenization Work?
Blockchain technology is mainly known for bitcoin and cryptocurrency trading. However, it has many real-world applications from delivery system management, to tokenization of assets.
Blockchain is a timestamped and immutable digital ledger, which means it is tamper-proof and can be a forever proof of a transaction. For the purpose of this article, we focus only on the decentralized public blockchains as they are at the core of the blockchain movement and Cocoricos philosophy.
Using pre-designed smart contracts, we can incorporate information onto the blockchain, in this case, the details of the asset ownership. Although it may sound daunting, the process can be as simple as a few clicks when using intermediaries. Most tokenization portals include not only digitization and token issuance services with thoroughly audited and standardized smart contracts but also access to asset exchanges and a global network of investors, allowing instantaneous 24/7 asset trading.
What can you Tokenize?
In essence, you could tokenize almost anything from a real-world object to your virtual items, and perhaps even your own labor or future ideas, provided you can craft a legal representation of the ownership of such assets.
In practice, tokenization is most useful for traditionally illiquid assets such as high-ticket price real-estate, artwork, and collectibles, or materials sold on traditional markets in extremely large batches, for example, base metals.
Tokenization allows the divisibility of substantial assets that can then be sold in part or in full to various smaller investors.
Is Tokenization Safe?
Almost anyone can tokenize assets or buy token online, but the question is, how to guarantee that the digital tokens represent actual real-world assets. At this stage, we still require trusted third parties like the Cocoricos legal team, to audit the asset ownership and make sure the tokens are backed.
As with everything, it’s prudent always to perform your due diligence and make sure the platform you use offers existing assets and compliant transactions, for example, via KYC/AML vetting of the investors.
Purchasing and trading tokens on external exchanges or 2ndary markets come with its set of risks, and you have to keep your passwords and secret keys safe to maintain access to your assets. In the blockchain, your asset is not attached to your identity per se but to your account guarded by a private key, so losing keys can mean loss of assets.
Contracts Legality and Paperwork
Most tokenization portals, including Cocoricos, offer custom made smart contracts audited by an expert legal team. Our team also audits the legal paperwork related to ownership of the asset, to make sure owners have the right to tokenize and sell their items.
In your digital wallet, the token is a representation of your asset ownership, with contract conditions encoded.
Additionally, at the time of purchase, the transaction between you and the seller is timestamped and incorporated into the public blockchain and serves as an additional proof of your asset ownership until you sell or trade.
Tokenized assets have to comply with local regulations in many geographical jurisdictions, as tokens are sold to investors all around the world. The sale conditions are often included in smart contracts and tokens, as some investors may be excluded from the purchase due to their local laws, i.e., the US-citizens.
Benefits of tokenization / Pros
For asset owners:
- Unlock illiquid and difficult to sell assets.
- Gain instant access 24/7 exchanges and a global network of investors.
- Divide assets and sell a fraction of the ownership.
- Get access to high-return industries at a low entry barrier.
- Trade assets quickly and with low transaction fees.
- Purchase a fraction of the high-ticket price items.
Negatives of tokenization / Cons
- Tokenization requires third-party asset paperwork audits.
- Ownership is tied to your online identifiers (i.e., private keys) rather than your personal identity.
- Assets lost to phishing or loss of private keys are often unrecoverable.