Contrary to the traditional methods that deal with data, tokenization on blockchain focuses on assets. But, what is tokenization? Tokenization is simply a digital representation of physical goods or assets. Think of tokens as a digital form of land, artwork, identity, etc.
Tokenization is much similar to securitization and fractional ownership. Securitization converts low-liquidity assets into higher-liquidity security instruments that can be traded in the secondary markets and over-the-counter. At the same time, fractional ownership connects unrelated owners to a digital pool. In contrast, asset tokenization turns real-world worlds into a high-liquidity digital token. Consequently, this brings us to what can be tokenized.
What Can be Tokenized?
You can paraphrase this to – what asset can you tokenize? There are ranges of goods and assets that can be tokenized, however, to make it clear, here are the broad categories of tokenizable assets:
Real estate. Tokenization on blockchain allows you to own or represent your physical real estate properties in a digital form and helps you raise money easier. There are several projects currently tokenizing real estate. For example, HouseAfrica, a blockchain-based real estate tokenization platform, leverages blockchain to sell fractions of real estate assets.
Physical goods and commodities. You may be interested in owning physical goods like plants, machines, farms, etc., but you could be restricted by distance and other factors. However, if the asset is tokenized, you can own a fraction of it.
Private equity shares. You may have considered owning security or a share of a particular company, but you have to complete multiple filings, calculations, and may possibly need brokers. Contrary to the traditional share investment options, if the company tokenizes the share, you can own as many units or fractions of the shares as possible.
Types of Tokenization You Should Know.
Although there may be other types of tokenization, this article focuses solely on the tokenization on blockchain. Tokenization is classified based on the nature of assets and the speculation model. While the primary focus is on the type of asset, unique or not, the latter focuses on how the market accepts the asset, either as a currency, utility, etc.
Types of Tokenization Based on Assets.
Tokenization on blockchain is either, fungible, non-fungible, or tangible assets. Hence, you may find the fungible and non-fungible tokens more useful in this article.
Fungible assets. These is a class of assets that are equivalent to another in the market. The token represents a value of the assets and can be interchanged in fractions of each other. Examples of this are saying a unit of Ethereum and Bitcoin is equal to another Ethereum and Bitcoin, respectively, in the market. Since fungible assets are more interested in the value of Ethereum in the market, you can own or exchange a divisible portion of it.
Non-fungible assets. This refers to those assets that represent information of the asset itself more than the value. These assets are very unique and when they are tokenized, they are called Nifty or Non-fungible Tokens. These assets paved the way to tokenize arts, certificates, etc. Examples of non-fungible assets are CryptoPunks, Komodo, etc.
Tangible assets. These are also called fixed assets and represent physical properties that cannot be concerted into the case, but hold monetary values. Some examples include land, plants, etc.
No matter the kind of assets, blockchain helps to own it in a digital form. The tokenized forms of the assets are called tokens. Therefore, you have tangible, fungible, and non-fungible tokens.
Tokenization Based on the Speculative Model.
Utility tokens. These are gateway tokens that help fund or contribute in a project. These tokens became popular through Ethereum, when founders used it to raise funds for blockchain innovations during the ICO era.
Security tokens. Security tokens can be seen as a digital representation of securities. If you hold a security token, you own a digital position in a publicly-traded corporation, a creditor relationship with a governmental body, corporation, etc.
Currency tokens. These are a store of value that asset users can utilize for buying, selling, and exchanging. Simply put, they are the digital form of currency.
Why Tokenize Assets?
Now that you know what tokenization is, you know that it makes physical assets easy to own. However, while there are several reasons to tokenize assets, think of the advantages of the technology-blockchain in other applications. Consequently, we tokenize assets for transparency, security, immutability, among other properties of blockchain. Asset tokenization on blockchain employs smart contracts, distributed ledger technology, consensus algorithms, etc., to achieve the properties mentioned earlier.
Here is a recap of why you should tokenize your assets:
Immutability. Although you may not have any legal documentation of tokenized assets, there isn’t a disadvantage because all of your asset contributions and transactions are immutably secured on blockchain. For instance, assume that land is tokenized and had 500,000 tokens at a rate of $1 per token, tokenization allows you to own a fraction of the land, say 2% of it. Again, although there are no legal documents at the time of purchase, your transactions are secured on blockchain for reference.
High liquidity. Since the market liquidates when transactions are smoother and faster, asset tokenization is a catalyst to liquidity. When you tokenize an asset, you remove the hurdles of hiring lawyers, filing, and several protocols in the traditional assets market. Hence, investors become more confident to shorten or elongate the market as needed.
Eliminates intermediaries. The smart contract enables the automatic execution of pre-defined roles and transactions. Consequently, when you tokenize assets, you did not need third parties for negotiation, pricing, or purchasing. This way, transactions become faster, cheaper, and more accessible.
Asset tokenization on blockchain simplifies asset management. It helps investors and owners to interact and transact seamlessly in a digital marketplace. Several asset types, including fungible, non-funguble, and tangible, can be tokenized. However, the speculative model is utility, security, and currency. Meanwhile, as tokenization leverages blockchain’s properties, it has the inherent challenges of blockchain transactions that are not discussed herein.
Okereke has a passion for researching blockchain and cryptocurrency. He enjoys creating long form educational content to inform others on the opportunities in this space.