Blockchain-powered innovations such as tokenization have opened up multiple horizons for businesses and individuals. The existing tokenized asset market now is valued at over $500 billion. The concept, though innovative, is not exactly new. In the 60s, tokenization was used to secure credit card usage, transaction receipts, patient information, etc. Thanks to blockchain, the advantages of this process have multiplied, and experts believe that every commodity with quantifiable parameters will get tokenized within the next decade.
An Introduction To Tokenization
When sending an email, you are not physically transporting the document or text to the other person. The mechanism copies the email and sends it to the other person, who can forward it to tens of people. Every time, each person receives a copy of the information. However, sending money without reducing its value with every exchange is impossible. Here is where tokenization comes into play.
Tokenization is the mechanism of digital transformation of ownership of assets. You can essentially turn an asset into a token. Say you are selling a Picasso painting worth millions of dollars. In the traditional method, you sell the artwork to someone who pays you in fiat or other currencies. When you use tokenization, you can create tokens, and multiple people can own the painting.
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Fractional Ownership
When you tokenize an asset, you are fractionalizing its ownership. A person can own 1/25th of an asset too. Such a scenario increases the number of potential buyers too. For instance, there wouldn’t be many people ready to shell out millions for one painting. However, people will be much more open to contributing a lesser amount and being a partial stakeholder in a valuable asset which may include paintings, collectibles, real estate, or even priceless artifacts.
Advantages Of Blockchain Tokenization
Prior to crypto tokenization, the traditional tokens saved alphanumeric tokens and transmitted them through a cryptographic function. The resulting token remained unique. However, these conventional methods lack blockchain’s additional advantages in tokenization such as:
- Opening up the assets to a broader buyer audience, divisibility of the asset, and elimination of liquid premium.
- It also eliminates the geographical restraint in ownership.
- 24/7 trading is possible and eliminates the need for an escrow amount, lawyers, brokerage commission, and others.
- Anyone can learn about the asset’s history as each transaction is secured in the blockchain. This attribute increases transparency.
Beyond these, it also reduces transaction time, increases shareholding, and reduces intermediaries’ dependencies.
Types Of Tokens
- Security Token – validates the ownership of an asset, and its value is dependent on the underlying asset’s value.
- Platform Token – used for delivery of decentralized apps and is common in the Ethereum network.
- Utility Token – for accessing services, payment, and more. They are the governance tokens too.
- Fungible Token – an un-unique token that can be replaced/replicated. These tokens are used for assets that can be divided.
- Non-fungible Token – an un-unique token that cannot be replaced/replicated. These are used for assets that cannot be divided.
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Tokenization Of Everything
Given the advantages of tokenization, it is natural for people to prefer converting every real-world asset into nonfungible tokens. This step changes premium assets into more tradable and liquid options, improving transaction volumes. Although changing off-chain assets into tokens have not yet sparked in reality, it will soon become the norm.
According to a BCG report, the tokenization of illiquid assets would touch 16.1 trillion USD by 2030. Most initial tokenization will start with IPO stocks, private debts, real estate, and others. The most significant hurdle to this process would be people’s resistance to change from the legacy system.
Need For Blockchain Infrastructure
Our legacy financial system does not have the structure for trading nonfungible assets. Thus, blockchain can come as a solution here. A blockchain infrastructure offers better liquidity, cost efficiencies, intermediaries reduction, and more.
The Problems In The Idea of Tokenizing Everything
The first step is to create micro-transactions and a decentralized wallet system. Microtransactions can reduce merchant fees, are faster, and are linked to a stablecoin. Moreover, you can preserve its uniqueness throughout the process. The most important advantage is that the user need not learn about the technical aspects of blockchain to use this.
The main problem that experts pose here is the proof-of-age for these transactions. According to a study, a gaming platform that sold billions of digital currency through their game showcased that children below 13 made more than 50% of the transactions. Does tokenization make it easy for people to pay for anything without understanding money’s value? Also, several countries have restricted anyone less than 21 years old from owning an asset.
The next question concerns the inter-generational transfer of tokens in terms of a will. Today, you can spend thousands of dollars in owning 1/35 part of a holiday home in France, but how will your kids inherit it?
Wrapping Up
The tokenization will soon take over real estate, art, entertainment, and several other sectors. Experts urge entities to use this change to offer services related to tokenization to climb the market competition. Moreover, entities should work on improving trust and educating commoners so that when tokenization becomes a norm, resistance from people will be manageable.
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