Asset tokenization is an area of explosive growth in blockchain and many industries are starting to embrace the great potential of the token economy, not only because of its efficiency-gains but also because of the advantages of having access to a global base of investors.
However, many are still wondering what it is and why everyone is saying it will be the future of all markets. Thanks to our years of working on various tokenization projects, we can bring some light into the dark on this topic.
We are convinced this will be the future of capital markets, so let us explain why.
Future of Assets
“The financial industry is being influenced by powerful technological developments. It is slowly turning towards digital assets, coping with the increasing digital transformation.
Technology is rapidly morphing into a potent enabler of both investment experience and effective operations. Thanks to the appearance of Distributed Ledger Technology (DLT), a big part of the operational processes involved in different industries can be reduced and be done in a more efficient manner.
Given that this technology is decentralized, there is no hierarchy and all the transactions are managed by the different computers in the network acting as the ledger. This structure allows democratizing all types of asset classes through blockchain technology and peer-to-peer investment, creating a highly liquid decentralized market for i.e. property investment that is open to all.
Hence, on the basis of DLT and especially in combination with the Internet of Things (IoT) and sensor technology, blockchain technology will enable many new business models to arise in the future, especially in the primary market.
Due to the nature of some asset classes, they suffer from limited liquidity and prohibitively high economic buy-ins. Many of them, although being physically tradeable, are also restricted and can not be easily transferred nor split. That is why many of the transaction processes enforced in these markets can be improved thanks to tokenization.
With this technology, relations between participants can take place within minutes through the decentralized network. Like so, the transactional costs - in time and in money - can be reduced, supported by the distributed architecture that allows for automated processes while preventing all of the information stored from being compromised.
The projected tokenized market volume is likely to reach 24$ trillion until 2027. In other words, 10% of the world ́s GDP will be tokenized and on a blockchain. Thereby, the physical world can be displayed as a digital one, including a subset of assets and rights of the physical world.
From art to real estate, including commodities and sustainability certificates, the way we invest will change and improve thanks to the token economy. Tokenization has the potential of unlocking enormous amounts of capital that are being kept in illiquid assets from the traditional systems.
Now, knowing all this potential, it is time to get down to the nitty-gritty.
Firstly, for a thorough understanding of asset tokenization, it is inevitable to define the term itself as well as to explain it in more depth.
In simple terms, a token has to be imagined as a container, which can be either filled with a certain right or asset. Thereby a token holds a right, for example, the right of a real tradable asset or object.
In accordance with the Token Container Model (TCM), which is defined in the Liechtenstein Blockchain Act, a token is the representation of a right on a blockchain system. From January 2020 onwards, it is possible to transform almost every asset or right into a token.
Thereby it is crucial to differentiate between different types of tokens as they fulfill various functions:
A utility token provides access to a certain product/service using distributed ledger technology (DLT). A utility token can be seen as an operating resource, giving the owner access to a platform’s functionalities.
Security Tokens are tokenized investments that are intended to comply with applicable regulations for securities. They are therefore officially approved securities in token form.
These are the classical cryptocurrencies, for instance, Bitcoin, Litecoin or Monero. Most of the payment tokens have their own blockchain where the account balances/ transaction history is reflected.
All of these are digital assets currently used. Hence, tokenization is already a reality. Both newcomers and traditional players are rapidly adapting to this new economic improvement, and we are sure that, if you are reading this, you want to do it too.
What is “Tokenization”?
Tokenization of existing assets refers to the process of assigning digital value to a physical object, an intellectual work or a financial asset. So for example, through decentralized technology, one can convert property rights into a digital token. Here, tokenization offers earlier liquidity, a broader fundraising base and far lower issuing costs than traditional systems.
However, it’s not just that. The concept of “tokenization of assets” refers to the process of issuing a Security Token, where the tokens that are created, representing a real tradable asset digitally, can be offered publicly to investors. With this, previously illiquid assets are being tokenized, unlocking trillions of euros.
Furthermore, given that physical indivisible assets can be represented by multiple Security Tokens, one property can have fractional ownership. Through the fractional ownership resulting from the tokenization process, issuers can automate many of the middlemen functions and bring more liquidity.
Overall, tokenization brings liquidity, transparency and peer-to-peer investment in major commercial assets without the need for expensive and time-consuming intermediaries.
But, how does it works?
If an issuer tokenizes a real tradable asset, it will be digitally represented on a blockchain. In a so-called smart contract (a programmable contract, which follows an “if/then”-logic), the conditions, functions, and characteristics of the digital asset are written into the code of the smart contract.
STOs enable an atomic swap between the issuer/ corporate and investor. Thereby the delivery of a certain digital asset will be directly transferred and simultaneously the investor paid. If a fiat currency will be put on the blockchain, referred to cash on the ledger, the atomic swap (DVP - delivery versus payment) can be realized.
In this manner, the Tokenization process built on DLT will drastically reshape existing market structures and lead to new opportunities as well as threats.
We are certain that only those that engage with this revolutionary technology will thrive in the future capital markets.
If you are interested in knowing more and how you can seize this once in a lifetime opportunity, get in touch!
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