Tokenization, in simple words, is representing an asset in the form of a token so as to make it easy to trade. Ever heard of tokenized articles in a game? Or did you ever wonder how celebrities can sell their music as NFTs? These are all examples of tokenization.
Through tokenization, real world assets can be digitized, and their digital ownership rights can be sold in exchange for fiat currency or through crypto trading.
Investing in real world commodities like shares, real estate or even gold has its own transactional challenges. There is a long waiting time for the transactions to get completed. The lack of liquidity for the real world assets poses another investment issue as well.
Tokenization brought by decentralized finance solves these issues. As per a recent report from the analytics firm CoinMetrics, the tokenization of real-world assets or RWA is all set to be one of the sectors to witness major growth in 2023.
What are Tokenized Real World Assets?
Let’s get into the technical explanation of what tokenization stands for in terms of real world assets. You might have heard that shares provide part ownership of a company to whoever holds them. Well you can think of digital tokens as a mediator of digital ownership to some asset. Tokenization stands for the conversion of ownership of a real world asset like land, music record, gold or anything, into a digital token. The blockchain technology works as a support for this tokenization. The details related to the concerned asset can be uploaded over the blockchain and converted to a digital token. It then acts as a transferable unit and therefore represents the real world asset on digital platforms.
With the tokenization of real world assets, the trading market is flourishing with liquid assets that can be easily transferred and are secured by the blockchain technology. Tokenization offers security, promotes crowdfunding, and makes for higher returns for the investors. Tokenization also offers a chance at getting crypto gains through trading of these assets. A lot of people have earned a significant amount of profit by selling tokenized assets in the form of NFTs.
How Does Asset Tokenization Work?
You might be wondering how can anyone convert real world assets into digital tokens without actually modifying the asset in any way. Well, the process has been made possible by blockchain technology and smart contracts. Real world assets that are converted to digital tokens are all controlled through smart contracts: agreements put in code of the blockchain in the form of self enforcing and self executing contracts. An asset information is stored on a block and lines of codes are enforced upon this block to make the asset transferrable. As soon as all the conditions set by smart contracts are met, the tokenized assets are delivered to the investor. It offers higher participant transparency, accuracy and efficiency by making contractual terms public.
Through tokenization, smart contracts make interaction with the digital assets possible from anywhere in the world, and makes them transferable and open for trading.
Essentials of Asset Tokenization
While converting real world assets into digital tokens, there are some essentials that are needed to be kept in mind. In order to convert real world assets into digital tokens, the first requirement is of choosing a proper asset representation model. Before creating any token, the fundamental properties like whether it will be fungible or not are needed to be decided. Some token standards like ERC 20, ERC 721 and ERC 1400 are frequently used for the tokenization of real world assets.
These standards differ in terms of purpose, authoritative rights and the fundamental properties. After choosing appropriate token representation, the deployment of informatics code needs to be kept in mind. You will need to conduct a smart contract audit and check whether the token is getting transferred upon meeting the contract conditions or not.
For higher efficiency, coders even ask third party experts to assess and certify the informatic code. Also, choosing which data related to the token and the asset needs to be kept on chain and off chain has to be fed to the code. Lastly, post token management related to the distribution of gains on crypto trading and the distribution of the dividend needs to be assessed as well.
Benefits of Real World Asset Tokenization
Source / Benefits of Tokenization
Tokenization of real world assets has brought several benefits to the trading market. The decentralized finance world has made it possible to have greater liquidity in the market by having these tokens be compatible with crypto exchange platforms. Some of the benefits associated with tokenized real world assets are:
- The transactions related to such digital tokens are completely private and secure.
- The transaction costs are much lowered due to the tokenization, as the crypto trading based on blockchains is pretty cost-effective.
- Fractions of assets get sold rapidly which increases the liquidity in the market.
- Even small scale investors can buy digital tokens of fractional ownership to large assets like real estate.
- The trade is completely streamlined and there is no mediator in between.
- Tokenized assets offer higher accessibility to the trade, and therefore reaching prospective buyers and sellers becomes easier.
As the growth of the crypto and blockchain sectors continues, a large number of projects are experimenting with tokenized real world assets. One example would be a group of twelve banks (including the Bank of America and Citi) trying out tokenizing liabilities, aiming for gains in instantaneous settlements.
The DeFi platform MakerDAO is also exploring tokenized real world assets through a partnership with the Huntingdon Valley Bank (HVB). they’re looking to allow mortgage loans on commercial real estate, marking the first collaboration in terms of commercial loans between a traditional US-based financial institution and a virtual asset. As CoinMetrics noted: “RWA-backed loans have also seen a surge, reaching up to $140M. This indicates the growing demand for RWA tokens as a means of financing real world assets.”
Conclusion
Converting real world assets into digital tokens has been helpful for the investors as well as the sellers. People can now sell digital rights to their real world assets in a simple and fast manner. Tokenized real world assets further adds to the security and transparency involved in trades, and of course, brings the potential to trade practically any real world asset through blockchains and crypto trading.