TRANSFORMING THE FUTURE: THE REVOLUTION OF REAL-WORLD ASSET TOKENIZATION
Tokenization is one of the latest trends of the web3 to emerge, and it has captured the world with its relatively simple yet practical use cases across a wide range of sectors. In this article, we will explain what real-world asset tokenization means, the key aspects of this process, the procedure for tokenizing a real-world asset, and the associated benefits and disadvantages of this practice.
WHAT IS REAL-WORLD ASSET TOKENIZATION?
Real-world asset tokenization refers to the process of creating a digital (fractional) replica of a physical asset that can be traded on a blockchain network. This process brings a series of benefits, such as the ability to exchange and own the asset more securely and transparently. Additionally, it enables asset traceability.
Tokenization also allows assets to be divided into smaller parts, making them available to a broader range of investors. Moreover, these tokenized assets can be easily traded on global markets, further increasing their availability to investors around the world.
DIVERSITY OF TOKENIZABLE ASSETS
Real-world asset tokenization is not limited to certain types of asset classes. On the contrary, it has the potential to benefit various asset classes, such as tangible assets like real estate, art, precious metals, and luxury goods, as well as intangible assets like financial instruments, invoices, and carbon credits.
For example, the tokenization of properties allows fractional ownership of real estate, enabling investors to buy and sell small percentages of high-value properties. Similarly, the tokenization of art can make investments in artworks more accessible to a wider audience, allowing them to buy and sell fractions of high-value art pieces.
Furthermore, tokenization has the potential to address some of the challenges associated with traditional ownership structures. Tokenization enables more transparent and efficient ownership structures, which can reduce expenses, fraud, and disputes. Smart contracts can also automate many of the processes associated with asset ownership, including transfers, payments, and maintenance.
SIMPLIFYING THE TOKENIZATION PROCESS
Now that we understand what real-world asset tokenization is and its benefits, let’s explain how the tokenization process actually works.
In summary, the process of real-world asset tokenization can be divided into three main stages: pre-tokenization, tokenization, and post-tokenization.
This stage refers to all the real-world steps that occur before the asset is tokenized and placed on a blockchain. It includes formalizing the value of the asset, verifying the ownership of the asset, and ensuring that the correct processes are in place to take care of the maintenance and management of the physical asset, as well as legal processes in case of settlements, dispute resolution, and enforcement.
After the pre-tokenization stage is completed, it is time to create a digital representation of the asset in the form of tokens. The main part of this stage is to ensure that all relevant information about the asset is entered into a blockchain or referenced from it, and then to create tokens for the real-world asset.
The connection between relevant data in traditional databases and the data on the blockchain is facilitated by the use of (decentralized) oracles to ensure that all relevant information is accurately represented on the blockchain. These oracles collect data from traditional databases and transmit it to the blockchain. Decentralized oracles do the same but do it collectively to reach a consensus on the accuracy and validity of the data transmitted to the blockchain.
After the completion of the previous stages and the creation of the tokenized asset, it is time to start distributing/selling the tokenized assets. This is usually done through markets or offerings specialized in tokenized assets. Part of this stage also involves ongoing management of both the physical asset and the tokens, based on previously established rules. In the case of an artwork, this may include storing, maintaining, and insuring the piece, as well as managing token-related information.
KEY ASPECTS OF REAL-WORLD ASSET TOKENIZATION
There are five key aspects of real-world asset tokenization that should be considered throughout the tokenization process and play a crucial role in the success of the entire procedure.
Technological decisions are crucial in the tokenization process. Issues such as which blockchain will be used, which data standards will be adopted, and the fungible or non-fungible nature of the tokens are determining factors for the success of the tokenized asset.
- SECONDARY MARKETS AND LIQUIDITY
The availability of reliable and liquid secondary markets is directly related to the choice of blockchain used. The existence of active communities on the blockchain also influences the success of tokenized assets.
- LEGAL AND COMPLIANCE ASPECTS
Regulatory compliance is fundamental at all stages of the tokenization process. Issues such as securities laws, AML and KYC regulations, as well as tax implications, must be carefully considered.
- CUSTODY AND SETTLEMENTS
Ensuring that ownership of the physical asset is linked to token holders is essential. Additionally, measures for the protection and maintenance of the physical asset, as well as transfers and management of the tokens, need to be defined.
- DISPUTE RESOLUTION
The dispute resolution process varies depending on the protocol or platform used for tokenization. Smart contracts typically outline the rules and resolution processes, but established legal systems can also be employed.
BENEFITS OF REAL-WORLD ASSET TOKENIZATION
Tokenization offers numerous advantages:
- Fractional Ownership
Fractional ownership of assets expands investment opportunities and allows for more flexible ownership structures suitable for investors.
- Increased Liquidity
Greater accessibility and the possibility of instant trading make tokenized assets more liquid.
- Enhanced Transparency
Transactions recorded on a blockchain increase transparency, facilitating traceability and regulatory compliance.
- Lower Transaction Costs
Elimination of intermediaries reduces transaction costs and simplifies asset management.
DISADVANTAGES OF REAL-WORLD ASSET TOKENIZATION
Although it brings advantages, tokenization also presents challenges:
Fragmentation of ownership can make decision-making regarding the asset more challenging, leading to conflicts among token holders.
- Regulatory Uncertainties
There are still regulatory uncertainties surrounding tokenization, requiring careful attention to comply with laws and regulations.
- Technical Complexity
Implementing tokenization requires technical expertise, which may be a barrier for some investors.
- Counterparty Risk
Despite reducing the need for intermediaries, tokenization can create new risks related to third parties and platforms.
THE PROMISING FUTURE OF TOKENIZATION
Real-world asset tokenization offers substantial benefits and opens doors to new investment opportunities. However, significant challenges must be overcome for tokenization to become a widely adopted practice. With ongoing advancements in technology, regulation, and the market, the future of tokenization is promising, and the potential of this revolutionary technology is constantly evolving.