Unlocking New Assets - The Power Of Tokenization On Blockchain
Blockchain unlocks a new era of fractional ownership. Learn how Tokenization on Blockchain increases liquidity and democratizes investment.
Author:James PierceReviewer:Gordon DickersonAug 04, 20241.2K Shares86.9K Views
"Asset tokenization" means using special computer programs and a secure online system to turn ownership or rights of something valuable into a digital token that can be traded online. This idea is often used for things like company shares or gold, but in theory, it could be used for any valuable item. It's a very exciting use for this online system because it could affect almost every kind of buying, selling, and trading people do, involving huge amounts of money—way over a hundred trillion dollars every year. This blog explores Tokenization on Blockchain.
Asset Tokenization - Tokenization On Blockchain
Asset tokenization is turning the rights to own something into digital tokens that are saved on a blockchain. These tokens are like electronic ownership certificates for almost any valuable item, whether it's something you can touch, something digital, something replaceable, or something unique.
Since these tokens are kept on a blockchain, the person who owns them can really control their assets, especially if they keep them in a safe digital wallet.
The future potential of this technology is huge, and we're already seeing big steps towards using it today. Big companies like Boston Consulting Group, ADDX, BlackRock, Deloitte, BNY Mellon, and EY have looked into asset tokenization and believe it could really change many industries, including the global securities market.
Microsoft and Vanguard are also getting involved, with projects that tokenize industrial assets and securities. So, asset tokenization is becoming a popular way to use blockchain technology in the real business world.
To get why asset tokenization is important, we need to go back to the basics of Web3 technology. Smart contracts are secure digital contracts written in code and stored on a blockchain, which is a very secure type of database.
To create tokens, a developer writes a smart contract on a blockchain that assigns positive balances to different wallet or contract addresses. These smart contracts also include functions that let users manage those balances.
Examples Of Asset Tokenization
Tokenizing Real-world Assets
Things like money, stocks, government bonds, loans, goods, carbon credits, intellectual property, and artwork can be turned into tokens and saved on a blockchain. This is similar to how gold certificates or property deeds work, as they let the holder claim a real-world asset.
The big change with tokenizing physical assets is that it lets these assets be stored, traded, and used as security on blockchain networks.
Tokenizing Digital Assets
Turning digital assets that exist only on a blockchain into tokens is crucial for Web3. This includes things like managing rights in a decentralized organization or assets that can work across different blockchain networks. Because these assets are fully digital, the owner truly owns the asset, not just a claim on it.
Tokenizing In-game Assets
This is a special case of digital asset tokenization, where items used in online games or virtual worlds, like outfits, weapons, or game currency, are turned into tokenized assets.
Understanding The Process Of Asset Tokenization
Asset tokenization makes the financial system more straightforward and efficient by combining several steps like creating, distributing, trading, clearing, settling, and safely keeping assets into one process, all supported by blockchain technology.
To create tokenized assets, you need to follow a few steps: decide if the token will be fungible (all the same) or non-fungible (unique), choose which blockchain will host the tokens, pick a third-party auditor to check the real-world assets, and then actually create the assets.
Blockchain's decentralized setup means that keeping track of who owns what is transparent and secure because the records can't be changed or tampered with. This gives people more trust in how the system works.
If you're interested in learning more about how to create tokenized assets, you might want to read more about the process of tokenizing an asset.
Advantages Of Turning Real-World Assets Into Digital Tokens
Turning real-world products, investment vehicles, or services into digital tokens through blockchain technology offers a decentralized and less trust-dependent option, along with many other advantages.
Specifically, making real-world assets digital through blockchain offers a clear way to increase their value, make them easier to get and use, and lets off-chain data improve how they're used in the digital finance (DeFi) world.
Here's why asset tokenization is not just useful but can significantly increase the value, availability, and usefulness of many assets:
Liquidity
In traditional markets, financial activities are often recorded in separate records, leading to inefficiencies like higher costs and longer times to settle transactions. This difficulty in working together between different systems is a big chance for digital tokens to help by making assets that can work together and solve the issue of divided liquidity.
Digital tokens can also make it easier to sell assets that are usually not easy to sell. By representing an asset with millions or even billions of tokens, you can own a small part of an asset, which can then be sold on different exchanges that are easy for anyone to access.
This gets rid of the need for expensive middlemen and opens up the market to more buyers, all while keeping the tokens linked to a unique asset.
Accessibility
Many assets with the potential for high returns are too expensive or regulated for average investors. For example, funding a big-budget movie is usually only possible for very wealthy investors because of the high upfront costs and the risk of going over budget.
However, a successful movie can multiply the return on investment in a short period. Other examples of high-return but hard-to-access investments include collecting sports cars, investing in troubled foreign assets, or buying and renting out apartment buildings.
In these cases, making assets digital is similar to crowdfunding, but in a model where the group of investors not only funds but also benefits financially from the asset. This allows smaller investors to put money into higher-risk, higher-return assets with less capital.
Transparency
Many valuable assets lack reliable and easily accessible information on returns, history of ownership, sales history, and other important data needed to make informed financial decisions.
This problem is especially big when looking at foreign assets or when a buyer can't personally check an asset before buying it. A big advantage of digital tokens is that they allow for the open tracking and checking of all these records because many blockchains are fundamentally public.
With digital tokens, users can see who owns an asset and its history of returns or dividends, based on the asset's digital contract logic. Tracking where something comes from on the blockchain allows for unchangeable records, greatly reducing the risk of investment fraud by reducing the need to trust in record-keeping.
These features could significantly lower the risk of fraud in many industries where fakes and imitations are common, such as in luxury goods like wine and caviar, as well as in fashion and art.
Composability
One of the most exciting advantages of making assets digital is also one of the least explored: linking the value of real-world assets with the combination possibilities of the digital finance ecosystem.
Decentralized money markets around digital real-world assets allow users to own a part of the interest generated from off-chain collateral. This improves the liquidity of the broader digital finance space while also giving regular investors access to a class of investments that was previously hard to enter.
Looking ahead, making assets digital will open up many opportunities for developers of digital contracts who want to tap into real-world value.
New types of synthetic assets, indexes, and token baskets can be easily created by combining tokens linked to various assets, and the ability to turn real-world revenue streams into collateral adds another wave of innovation to an already quickly growing digital finance field.
The Importance Of Oracles In Making Asset Tokenization Work
Oracles are crucial for tokenizing real-world assets, ensuring they're accurately valued and traded on the blockchain. This is especially important when creating tokens, using them as collateral, checking their value, and selling them.
Chainlink Proof of Reserve (PoR) is a key tool that verifies off-chain asset information on the blockchain, boosting the security and trust in tokenized assets. It's used by various projects for different assets like government securities, company shares, fiat currencies, credit, and gold, ensuring tokens are backed by real assets.
Chainlink oracles can connect to any data source, providing trusted asset valuations. They use a decentralized network to maintain data integrity and quality, with incentives to ensure accuracy and penalize dishonesty.
This helps even unique assets get tokenized with reliable valuation data.
Frequently Asked Questions - Tokenization On Blockchain
How Do Tokenized Blockchains Differ From Tokenless Ones?
In the realm of blockchains, tokenized versions rely on cryptocurrencies for their functioning, offering incentives in the form of coins to network participants. Conversely, tokenless blockchains operate without these cryptocurrency-based reward systems.
Is It Possible For Blockchain To Function Without Cryptocurrency?
Indeed, blockchain technology can operate independently of cryptocurrencies. At its core, blockchain serves as a decentralized ledger system capable of documenting and authenticating transactions without a centralized overseer.
Which Blockchain Platform Hosts The Greatest Number Of Tokens?
Ethereum is the leading platform in terms of token variety, hosting a diverse array of tokens including stablecoins, DeFi projects, and decentralized exchange tokens. As of now, the aggregate value of stablecoins stands at $232.37 billion, with DeFi projects contributing another $17.47 billion to the total.
Conclusion
Asset tokenization on blockchain is a new and exciting use for blockchain technology with a lot of potential. But, it needs strong and safe oracles, like Chainlink, to really work well. Without these oracles, tokenization won't be as valuable as it could be and could face issues with being too centralized, which goes against its main goal. Using Chainlink's decentralized oracles to bring in information from the real world is key for this technology to truly make any asset more valuable globally.
James Pierce
Author
James Pierce, a Finance and Crypto expert, brings over 15 years of experience to his writing. With a Master's degree in Finance from Harvard University, James's insightful articles and research papers have earned him recognition in the industry.
His expertise spans financial markets and digital currencies, making him a trusted source for analysis and commentary. James seamlessly integrates his passion for travel into his work, providing readers with a unique perspective on global finance and the digital economy.
Outside of writing, James enjoys photography, hiking, and exploring local cuisines during his travels.
Gordon Dickerson
Reviewer
Gordon Dickerson, a visionary in Crypto, NFT, and Web3, brings over 10 years of expertise in blockchain technology.
With a Bachelor's in Computer Science from MIT and a Master's from Stanford, Gordon's strategic leadership has been instrumental in shaping global blockchain adoption. His commitment to inclusivity fosters a diverse ecosystem.
In his spare time, Gordon enjoys gourmet cooking, cycling, stargazing as an amateur astronomer, and exploring non-fiction literature.
His blend of expertise, credibility, and genuine passion for innovation makes him a trusted authority in decentralized technologies, driving impactful change with a personal touch.
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