TOKENIZATION: A REVOLUTIONARY METHOD OF ASSET SECURITIZATION

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Author: Mohamed Hamza Ghaouri

In the previous blog, we discussed the emergence and evolution of DeFi as a major revolution in blockchain technology. We have highlighted its importance in providing funding and financial inclusion. In this current blog, we’ll highlight one of DeFi’s innovative components, namely asset tokenization.

Although blockchain was created to enable the existing cryptocurrency, the potential of this technology has gone much further. Nowadays, blockchain is disrupting many industries and it is showing no signs of stopping. Blockchain technology now allows the tokenization of any real physical asset and allows its owners to present it in digital form. But what’s behind asset tokenization and is it possible to tokenize literally anything? In this blog, we provide answers to the most frequently asked questions so that you can understand the basics of this phenomenon and discover the opportunities associated with issuing blockchain tokens backed by real assets.

Asset tokenization is a way to digitize tangible and intangible assets and convert them into tokens, which are then stored on the blockchain. An asset is usually not equal to a token: Assets are usually broken down into smaller parts, which form many tokens. Once the issuer has tokenized his assets and entered the digital world, it becomes possible to store and exchange them in a fractional or complete manner, as well as transfer them to other owners.

Recently, more and more asset owners, startups and investors are discovering tokenization opportunities and as the popularity of asset tokenization increases, so does the market size. Equity tokens can be viewed as financial instruments and treated as securities. They function like traditional stocks, i.e. the owners literally own a certain percentage of the total business and can receive a portion of its profits and participate in making decisions about the future of the business. Tokenization has already entered many industries such as:

  • Tokenization financial sector
  • Tokenization in real estate
  • Tokenization of Timber, precious metals, and natural resource assets
  • Tokenization of artworks
  • Tokenization in sport and entertainment
  • Tokenization for better ecology
Figure1: Illustration of a tokenization of an Artwork

Figure2: The NFT sold at $69 Million*

*Everydays — The First 5000 Days” is a collage of all the images that the artist known as Beeple has been posting online each day since 2007

Tokenization is driven and it is deriving its main benefits from the blockchain technology. Let’s take a closer look at some of the benefits it offers:

  • Greater accessibility & liquidity of assets: It provides a decentralized system and allows anyone from any part of the world to tokenize their assets and sell them at any time. 
  • Transparency: All transactions are taking place on the blockchain are available to all participants. This allows users to trace the entire history of all actions with a particular asset, verify its origin, and see how its ownership has been transferred across the supply chain.
  • Immutability: Anyone interested in creating, selling, or buying tokens can be assured that the asset information and transaction records are accurate, as they are verified and cannot be changed once recorded onto the blockchain.
  • Fractional ownership: Assets’ owners can divide them into as many parts as they want, giving them the option of partially owning them.
  • Cost & time savings: The absence of intermediaries reduces time and the cost that would normally be spent on third-party services.

It all starts with the blockchain – the technology makes it possible to create and store tokens. Asset owners needs to choose a special Security Token Offering (STO) platform that allows them to digitize their assets and turn them into the number of tokens they need. After that, they can start their own STO campaign, and anyone in the world can buy these tokens, thereby investing in the business of the asset holder.

Now that you know the fundamentals of asset tokenization, let’s learn more about the types of tokens. Here are the types of tokens in the blockchain world for different assets:

  • Tangible Tokens (TT): represent a collection of assets with specific monetary value as well as general availability in physical form.
  • Fungible Tokens (FT): Refers to digital assets created in such a way that all tokens have the same value. This means that one Bitcoin is equal to one Bitcoin, and users can trade it with a single Bitcoin.
  • Non-fungible Tokens (NFT): Are another major concern in asset tokenization. Non-fungible actives generally have unique characteristics and are not interchangeable. This scarcity-based token gives the buyer a sense of possession of a rare asset (mostly an art work).

The rapid scale of digitization is calling for companies in different industries to consider tokenization of assets. In addition, tokenization can also bring benefits at the individual level, thus enhancing their relevance in the existing market. With many security and transparency issues plaguing the existing asset management industry, it makes sense to go for assets tokenized with blockchain technology. Over time, tokenized assets would become one of the dominant instruments in a digital economy.

Accordingly, aware of the importance of tokenisation, Finterra’s Gallactic Blockchain is designed to allow for the Tokenization of different assets such as real estate, lands, gold, etc. As a non-fungible token, FinToken offered by Finterra represent parts of assets in real life. The architecture of this internally developed broken allows it to be issued and exchanged on a primary and secondary market.

Tokenization of previously impossible assets opens the possibility of programming money tied to real-world value. Not so far in the future, we will own physical assets with people we have never met before. We can divide the risks by investing in tranches of more than one sector. And most importantly, redefine and reinvent the way value is created.

In summary, tokenization plays a transformative role in asset management, slowly but surely entering many markets, democratizing them and making them safer and more equitable. Asset tokenization is no longer seen as a temporary phenomenon as businesses, startups and individuals continue to find new assets to tokenized.

Reference:

https://pixelplex.io/blog/what-is-asset-tokenization/

https://www.brickken.com/asset-tokenization/

https://www.riddleandcode.com/tokenization-101

https://www.leewayhertz.com/what-is-asset-tokenization/

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