What is Tokenization? Tokenization is the process of transforming ownerships and rights of particular assets into a digital form. By tokenization, you can transform indivisible assets into digital token forms.
For example, if you want to sell the famous painting Mona Lisa. You would need to find a seller who wants to shell out millions of dollars for it. Clearly, this reduces the number of people who have enough liquid cash worthy of buying it. But if we tokenize the painting. Then we can have multiple people with whom the ownership of that painting be shared.
Tokenization is therefore a solution that converts ownership of an asset into a digital token. For example, the Mona Lisa worth about $900 million can be converted into 100 million tokens worth $9 each (the number is totally arbitrary, we could have issued 2 million tokens or 900 million tokens). Thus, each token represents a % share of the underlying asset.
How does Tokenization work on the Blockchain?
Generally speaking, a token is a representation of a particular asset or utility. Within the context of blockchain technology, tokenization is the process of converting something of value into a digital token that’s usable on a blockchain application. Assets tokenized on the blockchain come in two forms. They can represent tangible assets like gold, real estate, and art, or intangible assets like voting rights, ownership rights, or content licensing. Practically anything can be tokenized if it is considered an asset that can be owned and has value to someone, and can be incorporated into a larger asset market.
The concept of tokenization precedes blockchain technology. The financial services industry has implemented some form of tokenization to protect clients’ confidential information since the 1970s. This process has typically involved the conversion of sensitive information such as credit card numbers, social security numbers, and other personally identifiable information into a string of alphanumeric characters, which are then processed through a cryptographic function to create a unique token.
To some extent, this method bears some resemblance to the tokenization process enabled by blockchain technology. However, while past tokenization mechanisms were primarily designed to protect sensitive data, blockchain-enabled tokenization allows for more secure yet flexible tokenization of assets that have significantly broadened the potential applications of digital tokens across a wide array of industries.
There are four main categories of tokens on the Blockchain, although the delineations can blur depending on the specificities of a particular token or the platform with which it is tokenized.
- Security tokens: Security tokens embody a particular investment, such as a share in a company, voting right in a company or other centralized organization, or some tangible or digital thing of value. In addition to serving as a digital representation of an underlying asset or utility, security tokens can be programmed with an inexhaustible array of unique characteristics and ownership rights. As such, these tokens constitute an entirely new type of digital asset.
- Tokenized securities: It’s important to note that security tokens are not the same as “tokenized securities.” While the two terms are often conflated, a tokenized security serves as a straightforward digital stand-in for its underlying security and is typically designed to be easily exchanged, aggregated, or used. In other words, tokenized securities mainly exist to broaden the market accessibility or liquidity of the security being tokenized, without the addition of unique programmed or cryptographic characteristics such as those found in security tokens.
- Utility tokens: Utility tokens represent access to a given product or service, usually on a specific blockchain network. Utility tokens may be used to power a blockchain network’s consensus mechanism, furnish the operations of a decentralized market, pay transaction fees, or grant holders the right to submit and vote on new developments within a decentralized autonomous organization (DAO) or other decentralized networks. While security tokens are primarily used to establish ownership rights, utility tokens are more focused on practical use.
- Currency tokens: Currency tokens are designed to be traded and spent. Some are based on underlying assets. Many others are not based on any underlying assets. Instead, their value is directly linked to their distribution mechanism and underlying blockchain network.
It’s important to note that just because a token is designed for a specific purpose doesn’t mean that users will only use the token for that intended purpose. The development team can alter the token to serve the peculiarities of their need.
Due to this flexibility, it is important to note that the value exchange of the tokens does not have to be via the exchange of cryptocurrencies but can be via the exchange of fiat currencies. Based on the programmed medium of exchange.
Tokenization & Real Estate
Blockchain has strong potential in real estate investing because it mitigates many of the asset class’s hurdles. Here’s a brief round-up of its advantages:
1. Assets Divisibility and More Liquidity
Buying and selling real estate is normally a tedious process. If a property were to be tokenized, it would essentially cut out the middleman and allow buyers and sellers to transfer ownership directly. These transfers would be as easy as buying and selling any item on the internet.
One of the significant benefits of tokenization in the blockchain is that it opens up the underlying assets to a broad audience. The divisibility of assets helps to achieve it. We can now take part in investments that have a high investment threshold. Thus, removing the liquid premium of hard-to-sell assets like prime real estate and artworks.
Tokenization also provides a broader geographic reach as blockchain is inherently global in nature. Anyone with a computer web browser can interact and keep track of the asset from any part of the world.
Asset divisibility also comes with the benefit of shared ownership. You can own a vacation home with 15 other people and agree on who will use the house during a specific time and how you will share the revenue when none of the owners is using the asset. This is just one example. There can be many more use cases.
Once tokenized, assets can be made available to a much larger audience, which increases market liquidity and removes the more difficult and time-consuming “liquidity premium” traditionally associated with selling real estate. Tokenized real estate can be designed to be freely exchangeable online and allow investors to acquire fractional ownership of a token’s underlying asset. As a result, tokens can both contribute to the liquidity of existing markets and provide a broader range of investment opportunities to more investors.
2. Removing barriers to entry
Because properties are expensive, real estate investing is typically limited to institutional investors with large amounts of capital. Individuals can gain exposure through a real estate investment trust (REIT), but these vehicles can carry high minimums and fees. Tokenization could enable individuals to buy and sell real estate in small denominations (even fractions of a token) and without traditional fees.
3. Transparency, Security & Provability
Blockchains are decentralized, digital ledgers known for their security. Tampering with a blockchain’s data is incredibly difficult because the ledger is shared and verified by all of its users. This provides investors with full transparency into the past transactions of a property, as well as undeniable proof of ownership.
In a blockchain, all of the transactions are transparent and available to any computer interacting with the chain. That means you can dig up the previous owner history of an asset, thus increasing trust among potential buyers. Moreover, blockchain tokens also benefit from being immutable as all of the transactions are verified by the nodes.
Because tokens live on the blockchain, users can easily trace their provenance and transaction history in a way that is cryptographically verifiable. Transactions can be automatically recorded on the blockchain, and the immutability and transparency enabled by blockchain technology help guarantee the authenticity of each token’s stated history. These qualities enable tokens to achieve a level of reliability that most other digital assets cannot match.
Tokens enable both information and value to be transferred, stored, and verified in a way that is both efficient and secure. And while asset tokenization has massive implications within the financial services sector, this technology is equally valuable for smaller investors and other individuals who can benefit from more market access and more effective ways to leverage their existing assets.
4. Faster and Cheaper transactions
We can bypass all the intermediaries involved in a transaction with tokens. Let us understand it with an example if we tokenize the deed of a house and put it on the blockchain. Then interested parties can directly buy the deed and the smart contract will transfer the deed to the new owner after a successful transaction.
The process eliminates the need for a lawyer, banks, an escrow account, and even brokerage commissions, just the charge of the marketplace of exchange. The process is simply cheap and efficient. Moreover, tokens are on the blockchain network which means we can trade them 24/7 all around the globe.
Tokens allow investors to bypass market intermediaries and other middlemen who are typically involved in the traditional asset management process. This effectively reduces the transaction costs and processing time of each exchange, allowing for a more streamlined, cost-efficient method of transferring value. Additionally, since tokens exist on the blockchain, they can be traded and sold 24/7 around the globe.
This article was contributed by Ellamediate. They have adopted the use of Blockchain technology to tokenize real estate assets and offer them to a large spectrum of the Nigerian populace.
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